Amendments to Delaware’s General Corporation Law Offer Statutory Guidance Regarding Stockholder Agreements

On July 17, 2024, Senate Bill 313, which amended Delaware’s General Corporation Law (the “DGCL”), was signed into law by Delaware Governor John Carney, and will be incorporated into the DGCL. The amendments (among other things) inserted Section 122(18) into the DGCL, which sets forth certain types of provisions that may be included in contracts made by a corporation, and all agreements, instruments, or documents that may be approved by the board of directors (which includes merger and consolidation agreements) entered into by a corporation. The amendments are prospective and retroactive and take effect on August 1, 2024, applying to the contract, agreement, instrument, or document whether or not the contract, agreement, instrument, or document is made, approved, or entered into on or before August 1, 2024. The amendments, however, will not apply to or affect any civil action or proceeding completed or pending on or before August 1, 2024. The law predating the amendments will apply to such civil action or proceeding.

These amendments address some of the potential ramifications created by decisions of the Delaware Court of Chancery, including West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.¹ (“Moelis”). In Moelis, the Court held that certain contract provisions in a stockholder agreement were facially invalid because the provisions unlawfully limited the discretion of a corporation’s board of directors in violation of Section 141(a) of the DGCL. In so holding, Vice Chancellor Laster observed that “[t]he expansive use of stockholder agreements suggests that greater statutory guidance may be beneficial[,]” and stated that he “would welcome additional statutory guidance.” The amendments offer the statutory guidance as noted by the Court.

a) Subsection 122(18) creates a default rule that explicitly authorizes a corporation, regardless of whether such actions are listed in the corporation’s certificate of incorporation, to enter into certain contractual arrangements with its stockholders and beneficial owners. These contractual arrangements may include (restricting or prohibiting future corporate actions specified in the contract

b) requiring the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract

c) covenants that the corporation or one or more persons or bodies will take, or refrain from taking, future actions specified in the contract

Such contractual arrangements require consideration in a minimum amount determined and approved by the corporation’s board of directors. This default rule does not apply to any contractual provision, and will not be enforceable against the corporation, to the extent such contract provision is contrary to the certificate of incorporation or the laws of Delaware (other than Section 115 of the DGCL)² if included in the certificate of incorporation. A corporation may limit or restrict application of Subsection 122(18) by expressly stating in its certificate of incorporation that the corporation lacks authority to enter into the contractual arrangements authorized by Subsection 122(18).

Subsection 122(18) only provides statutory authorization of restrictive agreements between a corporation and its stockholders or beneficial owners. Moreover, to address the possibility of “over-delegation” by the board of directors, Subsection 122(5) was amended to clarify that agreements with officers and agents appointing or delegating authority to the officers and agents remain subject to Section 141(a) of the DGCL. Finally, although the language of Subsection 122(18) only addresses contractual arrangements with a corporation’s stockholders or beneficial owners, the Synopsis to Senate Bill 313 provides that corporations may continue to rely upon Subsection 122(13) to make contracts, including contracts containing the types of provisions addressed by Subsection 122(18), with counterparties that are not contracting with the corporation in their capacities as current or prospective stockholders and beneficial owners of stock.

The Synopsis to Senate Bill 313 clarifies several additional points:

• Notwithstanding any choice of law provision in the contract, the reference in the last sentence of Subsection 122(18) to the law “governing” the contract shall be deemed to refer to the laws of Delaware if and to the extent choice of law principles (such as the internal affairs doctrine) so require.
• A general recitation in the certificate of incorporation of the default provisions of Subsection 141(a) of the DGCL would not be sufficient to render inoperable the provisions of Subsection 122(18). Instead, to limit the authority granted to the board of directors under Subsection 122(18), the certificate of incorporation may state that the corporation lacks the power and authority to authorize specific contracts, or types of contracts, that would otherwise be authorized by Subsection 122(18).
• Subsection 122(18) does not authorize a corporation to enter contracts with stockholders or beneficial owners of stock that impose remedies or other consequences against directors if they take, or fail to take, specified actions as required by the contract—or that purport to bind the board or individual directors as parties to the contract. Contracts providing for such remedies would be evaluated under existing law. Instead, Subsection 122(18) authorizes contracts that impose remedies only against the corporation, including as a result of any failure by the corporation, its board of directors, or its current or future directors, stockholders, or beneficial owners of stock to take, or refrain from taking, actions specified in the contract.
• If an action addressed in a covenant by the corporation requires director or stockholder approval under the DGCL, then that approval must still be obtained to effect the action pursuant to the DGCL. For example, the lack of stockholder approval of an action under the DGCL requiring such approval would render specific performance of the covenant unavailable.
• Subsection 122(18) does not relieve any directors, officers, or controlling stockholders of any fiduciary duties they owe to the corporation and its stockholders, including with respect to deciding to cause the corporation to enter into a contract with a stockholder or beneficial owner of stock, and with respect to deciding whether to perform, cause the corporation to perform, or to breach the contract, whether in connection with their management of the corporation’s business and affairs in the ordinary course, or their approval of extraordinary transactions, such as a sale of the corporation.

Although the intent of the amendments was to address some of the potential ramifications created by Moelis, so long as “pending” civil actions or proceedings involving issues similar to the issues in Moelis continue to be litigated, the issues created by Moelis continue to remain in certain situations. The continuation of Moelis was recently recognized by Vice Chancellor Laster in Seavitt et al, v. N-Able Inc. (“N-Able”).³ In N-Able, stockholders challenged certain contract provisions in a stockholder agreement that were similar to the provisions challenged in Moelis. The civil action in N-Able will be “pending” as of the effective date of the amendments, and, thus, the law predating the amendments was applied by the Court.

In applying the relevant law, the Court held that, with certain fact-specific exceptions, the contract provisions were facially invalid based on the rationale applied by the Court in Moelis. In so holding, the Court questioned the wisdom of the amendments creating a “stub timeline,” or “donut hole,” that obliges the Court to apply prior law to “pending” civil actions or proceedings involving stockholder agreements pending before August 1, 2024. The Court recognized that the contract provisions at issue have the effect of introducing “the DNA of a purely private agreement into a foundational and public document”—a certificate of incorporation. “Rather than man or bull, it spawns a corporate minotaur.”

The amendments attempt to address the relationship between Section 141(a) and this “corporate minotaur.” As the Court observed, however, in addressing this relationship, the amendments created a “donut hole,” which is “a science fiction plot device where a timeline splits in two.” After August 1, 2024, the Court “will live in a world where” the amendments are the law; however, “because of the donut hole, there is a stub timeline” where the Court applies “the old law” to civil actions or proceedings that are pending on August 1, 2024. Noting that the amendments “didn’t have to” create a donut hole, and “wish[ing] they hadn’t,” the Court concluded by stating, “[s]plit timelines make for good movies, but not for good law,” and “polite[ly] request[ed]” that future amendments “skip the donut hole.” Accordingly, as recognized by the Court in N-Able, although the amendments address the issues created by the decision in Moelis in certain contexts, the amendments do not address the issues in all contexts, and the potential ramifications created by Moelis remain in the context of pending civil actions or proceedings.

To obtain more information, please contact the Barnes & Thornburg attorney with whom you work or Michael J. Maimone at 302-300-3471 or mmaimone@btlaw.com or Gabriella Mouriz at 302-300-3449 or gmouriz@btlaw.com.

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(1) 2024 WL 747180 (Del. Ch. Feb. 23, 2024); see also Wagner v. BRP Group, Inc., 316 A.3d 826 (2024).

(2) The amendments exclude Section 115 (which contains the forum selection provisions of the DGCL), permitting a corporation to enter into contracts under Subsection 122(18) with exclusive forum and arbitration provisions that do not select the courts of Delaware to adjudicate claims under the contracts.

(3) 2024 WL 3534476 (Del. Ch. July 25, 2024).