West Palm Beach Firefighters Pension Fund v. Moelis & Co. is a new Delaware Chancery Court opinion by VC Travis Laster. The case involves what VC Laster calls "new wave" stockholder agreements: "The new wave of stockholder agreements does not involve stockholders contracting among themselves to address how they will exercise their stockholder-level rights. The new-wave agreements contain extensive veto rights and other restrictions on corporate action."
These sort of arrangements are very old school in the close corporate context. Think of such corporate law chestnuts as Clark v. Dodge, 269 N.Y. 410, 199 N.E. 641 (1936). I discuss these cases in my book Corporate Law at pp. 528-35.
What gives the new wave versions their newness is that these purport to apply to public corporations:
Moelis & Company (the “Company”) is a global investment bank. Ken Moelis is its eponymous founder, CEO, and Chairman of the Board. After years of success operating the investment bank as a private entity, Moelis decided to raise capital from the public markets. He created the Company as a new holding company and reorganized the bank’s underlying entity structure. One day before the Company’s shares began trading publicly, Moelis, three of his affiliates, and the Company entered into a stockholder agreement (the “Stockholder Agreement”).
The Stockholder Agreement is a new-wave agreement. Under its terms, the Company’s board of directors (the “Board”) must obtain Moelis’ prior written consent before taking eighteen different categories of action (the “Pre-Approval Requirements”). The Pre-Approval Requirements encompass virtually everything the Board can do. Because of the Pre-Approval Requirements, the Board can only act if Moelis signs off in advance.
Other provisions in the agreement are intended to ensure Moelis will still be able to select a majority of the board of directors and to populate board committees with Moelis nominees in the same proportion that they represent on the full board.
The statutory provision that comes immediately to mind is DGCL 141(a). As Laster explains: "That provision famously states that 'the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.'" Private ordering of the board's functions thus must be effected through the articles of incorporation not in a mere shareholder agreement.
A whopping 132 pages later VC Laster concludes that Section 141(a) trumps most of the provisions of the agreement:
When market practice meets a statute, the statute prevails. Market participants must conform their conduct to legal requirements, not the other way around. Of course, the General Assembly could enact a provision stating what stockholder agreements can do. Unless and until it does, the statute controls.
I note that the MBCA has a statutory provision that allows shareholder agreements sweeping ability to limit board powers. But even if Moelis were incorporated in an MCA state, the statute would not apply. Under the MBCA statute, the agreement must be unanimous with all shareholders being a party to it. Secondly, the agreement is voided by operation of law when the company has a class of stock registered with the SEC.
Speaking purely in my capacity as a casebook editor, this is yet another example of an important Delaware opinion I would very much like to include in my Business Associations casebook, but that I see no way to edit down to a manageable length--say 20 pages at max.
But I am grateful to VC Laster who cites my work in footnotes 15, 286, 297, 298, and 299.
My good friend and leading Delaware corporate law litigator Francis Pileggi has a new blog post that digs into an earlier decision in the case. As always, he does a brilliant job.
