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Securities Regulation Daily Wrap Up, CORPORATE GOVERNANCE—Delaware should wait and see on stockholder-agreement fallout, CII argues, (May 17, 2024)

Organizations Mentioned:Council of Institutional Investors

By Anne Sherry, J.D.

There’s no need to rush overturning a Chancery decision holding some stockholder agreements to be invalid.

The Council of Institutional Investors (CII) is urging the Delaware State Bar Association to hit pause on recommending that the state leg ...

By Anne Sherry, J.D.

There’s no need to rush overturning a Chancery decision holding some stockholder agreements to be invalid.

The Council of Institutional Investors (CII) is urging the Delaware State Bar Association to hit pause on recommending that the state legislature overturn a judicial decision. CII said the decision earlier this year reflected a reasoned analysis whereby the Court of Chancery struck down parts of a stockholder agreement that constrained the board’s authority to act, but left in place other restrictions that were consistent with state law. But the industry group’s main issue with the proposed legislation is that there is no need to rush a law through without full analysis and debate.

The basis for the holding in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024), is that as a matter of Delaware corporate law, a corporation is managed by the board. The court accordingly struck down provisions of a stockholder agreement that compelled the board to recommend the stockholder’s designees for election; compelled filling a vacancy created by a departing designee with another designee; and enabled the stockholder to prevent the board from increasing the number of director seats.

Too soon? CII is now urging the Delaware State Bar Association (DSBA) not to rush through a legislative fix for a case that isn’t even final, especially given a lack of consensus that Moelis presents a problem that needs fixing. The opinion is still subject to review by the state Supreme Court, which may or may not agree with chancery, CII writes. There is no immediate need to move a bill through the legislature, which is scheduled to adjourn next month. This compressed timeline would not allow full analysis and debate, especially with all the other business lawmakers must address prior to adjournment.

No limits. CII asserts Moelis raises important questions about the balance between allowing the board to manage the company and preserving stockholders’ voice. Adherence to the statutory principle at the heart of Moelis gives the board this flexibility. In contrast, the proposed legislation contains no limits on a stockholder agreement’s ability to change a company’s governance. One letter to the DSBA posited that under the draft law, some agreements that are currently illegal would be allowed, such as a company’s agreeing never to sue a controlling stockholder for breach of fiduciary duty.

An existential crisis? Furthermore, the Moelis opinion reflects the kind of careful analysis—and detailed explanation—that is a hallmark of Delaware’s corporate jurisprudence. “Delaware’s preeminence in corporate law against the ever-present threat of federal preemption is dependent on the law being almost entirely ‘judge-made,’” CII argues.

Elon Musk’s push to leave Delaware and bring other companies with him does not persuade CII otherwise, nor do arguments that Moelis has upset existing practices in the marketplace. On the contrary, Delaware’s reputation for maintaining a careful balance between boards’ decision-making and their accountability to stockholders “could be seriously impaired by a perception that influential actors can easily change the law whenever a court has the temerity to rule against them.”

Citing another commenter, CII raises the example of options backdating, which used to be a common practice until the courts reined it in. There was no rush to create a legislative fix there, and this case is no different, the group concluded.

LegislativeActivity: CorporateGovernance DirectorsOfficers FiduciaryDuties DelawareNews