In a lightning-fast response to the recent ruling in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.[1], the Delaware State Bar Association’s Council of the Corporate Law Section has proposed an amendment to the Delaware General Corporation Law (DGCL) that would bring the DGCL in line with common corporate practices.

The Council notes in its synopsis to the amendment that the amendment provides certain types of provisions that may be included in contracts between a corporation and its current or prospective stockholders or beneficial owners of its stock, even if those provisions are not set forth in, or referenced as a fact ascertainable in, the certificate of incorporation pursuant to Section 141(a). Additionally, the Council notes that “a corporation may limit these default powers if a limitation is provided for, or referenced as a fact ascertainable in, the certificate of incorporation, in accordance with §§ 102(b)(1), 102(b)(4) and 102(d).”[3] This grants Delaware-chartered corporations the power to incorporate the restrictions in a stockholder agreement by reference in the certificate of incorporation.

The amendment provides a nonexclusive list of provisions that corporations may include in such contracts, including (i) restricting or prohibiting a corporation from taking actions specified in a contract, whether or not the taking of such action would require approval of the board under the DGCL; (ii) requiring the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (including directors, stockholders or beneficial owners); and (iii) covenanting that the corporation or one or more persons or bodies will take, or refrain from taking, actions specified in the contract (including directors, stockholders or beneficial owners).[4]

Notably, corporations must receive some form of consideration for entering into such a contract, and the board of directors must determine the amount of such consideration. The consideration may include requiring stockholders to take, or refrain from taking, one or more actions, such as restrictions on transfer or granting the corporation a power-of-attorney in drag-along transactions. By requiring consideration, the amendment complies with existing case law regarding the validity of governance documents entered into without consideration.[5]

The recent Moelis ruling (read our previous alert) had sent shockwaves through the corporate governance world by striking down provisions in stockholder agreements that effectively limited the board of directors’ ability to use its own best judgment in management matters.

At issue were stockholder preapproval and board composition rights in the Moelis & Co. stockholder agreement, which provided Moelis & Co.’s founder, CEO and Chairman, Ken Moelis, with expansive preapproval rights with respect to key corporate decisions, including decisions regarding dividend payments, senior officer appointments, financing, stock issuances and litigation.

The Moelis court held that such provisions restricted the board of directors from effectively exercising its judgment in managing the corporation in violation of Section 141(a) of the DGCL, which provides that “the business and affairs of every corporation organized [in Delaware] shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in [the corporation’s] charter.”[6]

However, the Moelis court expressly noted that the stockholders’ rights granted in the challenged provisions would not violate Section 141(a) if such rights were provided in the corporation’s certificate of incorporation.[7]

This meant the issue with the challenged provisions was a matter of “where” as opposed to “what.”

If adopted, the amendment will effectively reverse the chaos that ensued following the Moelis ruling. We will continue to monitor the amendment as it undergoes the approval process and provide updates accordingly.

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