Corporate & Securities Blog

Proposed Amendments to the Delaware General Corporation Law: A Response to Moelis and Activision

By: Lori S. SmithJeremy M. Miller and Katherine M. Pfingsten

A series of recent decisions from the Delaware Court of Chancery has muddied the waters for dealmakers and lawyers, raising questions about the legality of certain longstanding market practices relating to stockholders’ agreements and the approval process for mergers. In deciding these recent cases, the court made clear that in construing the language of the Delaware General Corporation Law (DGCL), the court will apply a strict reading of the express language of the statute.

In response to the uncertainties caused by the court’s recent decisions in Moelis and Activision, on March 28, the Council of the Corporation Law Section of the Delaware State Bar Association proposed certain amendments to the DGCL. These proposals are intended to conform the statute with customary market practice.

Implications to Stockholder Agreements

In West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.,1 the court cast a shadow over the enforceability of provisions in agreements between a corporation and its stockholders that provide such stockholders with veto powers or protective voting rights that could be viewed as impinging on the authority and discretion of the board to manage the corporation. These types of agreements are widely used, especially in private equity and venture capital deal structures. At issue in Moelis were certain “Pre-Approval Requirements” in the stockholders’ agreement requiring the board to obtain the prior written consent of a founder stockholder (the founder) prior to taking virtually any meaningful corporate action, including, among others: (1) the issuance of common and preferred stock; (2) the appointment or removal of certain officers, such as the CEO, which was an office held by the founder; (3) entering into or amending any material contract; (4) adoption of a stockholder rights plan; and (5) any equity or debt commitment in an amount greater than $20 million.

Read the full article here.

¹ West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., No. 2023-0309-JTL (Del. Ch. February 23, 2024).

 

Meet the Authors

Lori S. Smith

Lori Smith is chair of the emerging companies & venture capital practice and is an active participant in the firm’s health law and mergers and acquisitions groups. Lori has been a trusted adviser to foreign and domestic companies for over 30 years, ranging from startups to large corporations, including entrepreneurs and angel, venture capital, and private equity investors. She represents public and private companies in the negotiation of mergers and acquisitions, leveraged buyouts, equity and debt financings, private placements, strategic alliances, partnerships and joint ventures.

lsmith@stradley.com | 212.404.0637

Jeremy M. Miller

Jeremy M. Miller is a member of the firm’s business department and counsels investors, entrepreneurs and public and private companies in all aspects of their business needs. He represents established and emerging businesses on general corporate, transactional and securities law matters. Jeremy advises clients on transactions related to mergers and acquisitions, sales, financings, restructurings and franchises. He has experience representing companies in a variety of industries, including financial services, health care, technology and gaming.

jmiller@stradley.com | 212.404.0642

Katherine M. Pfingsten

Katherine Pfingsten focuses her practice on corporate law, representing public and private companies in a range of matters, including mergers and acquisitions, entity formation and corporate governance issues.

kpfingsten@stradley.com |  215.564.8793

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