Delaware Chancery Court Issues Two Stark Reminders: "When Market Practice Meets A Statute, The Statute Prevails"

• Published date: 21 March 2024
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate Governance
• Law Firm: Hughes Hubbard & Reed LLP
• Author: Alexander H. Rahn, Charles Samuelson, Shahzeb Lari, Gerold Niggemann and Michael Traube

March 13, 2024 - The Delaware Chancery Court has issued two decisions insisting that market practice does not trump specific requirements of the Delaware General Corporation Law (the "DGCL"). The first decision declared invalid and unenforceable large portions of the governance rights contained in the "new-wave" public company stockholder agreement of Moelis & Company ("Moelis & Co."). The second decision, which cited the first, declared invalid the approval by the board of directors and stockholders of Activision Blizzard, Inc. ("Activision") of its merger with Microsoft Corporation ("Microsoft").

New-Wave Stockholder Agreements: "The Seemingly Irresistible Force of Market Practice Meets the Traditionally Immovable Object of Statutory Law"

In an opinion delivered on February 23, 2024, Vice Chancellor J. Travis Laster granted summary judgment declaring invalid several of a controlling stockholder's governance rights in what he described as Moelis & Co.'s "new-wave" stockholder agreement (the "Stockholder Agreement") for violation of Section 141(a) of the DGCL.¹ The court defined a "new-wave" stockholder agreement as one that does not involve stockholders merely contracting among themselves to address how they will exercise their stockholder-level rights (as contemplated by Section 218(c) of the DGCL), but that in addition binds the corporation and contains veto rights and other restrictions on corporate action.

Moelis & Co. entered into the Stockholder Agreement with its eponymous founder, Ken Moelis, who was also its CEO and Chairman of the Board, and three of his affiliates (collectively, the "Founder"), one day before its shares began trading following its initial public offering in 2014. The Stockholder Agreement provided that as long as the Founder, among other things, owned at least five percent of the Company's shares of Class A common stock (including certain securities convertible into Class A common stock):

1. Pre-Approval Requirements: The board of directors of Moelis & Co. (the "Moelis Board") had to obtain the Founder's prior written consent before engaging in 18 different categories of transactions These categories included some commonly negotiated in a "new-wave" stockholder agreement, such as the incurrence of indebtedness or the issuance of equity above a certain threshold, and others that were more unusual, such as the removal or appointment of officers (i.e., including Ken Moelis himself) or the adoption of the annual budget.
2. Board Composition Provisions: The Founder had the right to designate director candidates to fill a majority of the seats on the Moelis Board. The Moelis Board was obligated to (i) not increase its size beyond eleven directorships (the "Size Requirement"), (ii) nominate the Founder designees as candidates for election, (iii) recommend that stockholders vote in favor of the Founder designees (the "Recommendation Requirement"), (iv) use reasonable efforts to enable the Founder designees to be elected and continue to serve...