Delaware’s new corporate law amendments taking effect Thursday reinforce common practices vulnerable to litigation, after a landmark court order invalidating a billionaire founder’s veto rights over board decisions, corporate attorneys say.
Companies can now use private contracts to grant stockholders the types of control that previously required a charter provision or a special class of stock. The state bar committee that drafted the amendments in response to a Feb. 23 Chancery Court decision invalidating extensive veto rights in a pact between Moelis & Co. and its founder called them a “routine” update by the state that effectively writes the rules for corporate America.
Whether they resolve claims the Chancery Court stirs up too much “uncertainty” for corporations and investors to want to stay in Delaware remains unclear. Some attorneys worry the amendments may embolden boards or controlling stockholders seeking greater power, and that the rebukes of sitting Chancery Court judges during the legislative process undermined Delaware’s reputation more than any ruling.
William Regner, a partner at Debevoise & Plimpton, said the amendments will allow clients to be “a bit more relaxed about putting something in an agreement rather than in a charter.”
The new law is “trying to create fewer targets for plaintiffs,” he said. “That’s been something that Delaware’s been very focused on—trying to tamp down vexatious litigation.”
Guardrails on what boards can do with core management powers remain in place, said Larry Hamermesh, a retired University of Pennsylvania law professor who specializes in Delaware corporate disputes. “They still are subject to their fiduciary duties when they exercise the authority to grant powers like that by contract or by charter amendment or through issuing blank-check preferred stock,” he said.
Jonathan Lazarow of Ambrose, Mills & Lazarow questioned whether private equity firms will be more aggressive as buyers in M&A transactions and write up agreements under the new law that give them a controlling vote on every issue that comes before the board. “And I’d be interested to see if sellers push back on some of these agreements—if it makes it harder to get a deal done,” he said.
Typically, a firm’s goal in any deal is closing, then parlaying that success into multiple deals down the line, Lazarow said, adding that just because an agreement is legal doesn’t always mean it’s the best way to return capital to investors.
“We could spend all day long talking about whether the statute provides security—and it does, it gives some certainty that we know how the courts are going to rule—but in private equity and venture capital transactions, it doesn’t matter. It’s your reputation that matters,” he said. “If you get a reputation for putting a deal together that’s not friendly, or makes it hard, it’s harder for you to get deal numbers two, three, and four.”
Law professors, open government advocates, and two sitting Chancery Court judges publicly questioned the speed with which the amendments were drafted. The legislation, which received little pushback from lawmakers before being signed into law July 17, doesn’t apply to contracts challenged in court before Thursday.
The provisions the Chancery Court struck down in the Moelis case were common practice, and their dubious legality was common knowledge, said Ann Lipton, a Tulane University Law School professor. “There has been a trend of investors forming these contracts anyway, even though they were counseled” that they may not be enforceable, Lipton said.
Renee Zaytsev, a Boies Schiller Flexner partner, said the amendments push beyond the specific provisions highlighted by Moelis and could potentially allow the resurrection of board entrenchment moves previously squashed by the court.
“Are these things going to come back in a slightly different form, because now you can enter into a stockholder agreement where you’re giving this stockholder the right to veto or have control over when a poison pill is redeemed?” she said. “There’s lots of creative ways that boards can use these new amendments to not just give into stockholder demands but also to proactively protect their board seats and ward off activist threats.”
Zaytsev also questioned the new law’s language allowing contracts to specify that an agreement may include a provision requiring adjudicationunder another state’s laws. “That’s something very new and creates a lot of uncertainty,” she said. “Is someone going to specify that Texas’s business courts are going to be interpreting Delaware law? It’s very strange.”
The Delaware House’s discussion of the amendments featured rare public tension between the state bar and Chancery Court. In response to public criticism of the amendments from two sitting Chancery Court judges, former Chancery Court Chief Judge William Chandler testified that “judges need to stay in their own lane” and “don’t need to intrude upon the process of making law.”
That testimony was “unjust,” and its focus on “uncertainty” in Delaware suggests the amendments form a political response to unpopular judicial opinions as well as a statutory change, Joel Friedlander of Friedlander & Gorris said in a recent paper.
“This political attack on the judiciary is unjust, a danger to judicial independence, and potentially damaging to Delaware’s authority in the realm of corporate law,” Friedlander said.
He argued no legislators explained why the ruling against Moelis was wrong, and “the drafting of Senate Bill 313 suggests that sophisticated lawyers were not sanguine about the prospects of an appeal.”
It’s political moves like the new amendments, not court decisions, that erode Delaware’s reputation, Lipton said. The swift passage of the new amendments make it clear that “if you don’t like the decision out of Chancery, you can just run to the legislature,” she said.
Continue ReadingTo contact the reporter on this story: Jennifer Kay in Philadelphia at jkay@bloomberglaw.com
To contact the editors responsible for this story: Alex Clearfield at aclearfield@bloombergindustry.com; Stephanie Gleason at sgleason@bloombergindustry.com
AI-powered legal analytics, workflow tools and premium legal & business news.
Log in to keep reading or access research tools.
