The 2024 amendments to the Delaware General Corporation Law (“DGCL”) were born from an atypical period of acrimony and controversy among the corporate bar, stockholder advocates, and corporate law academics, including harsh public criticism of members of the Court of Chancery.  Just when we hoped the Delaware waters would calm, an amicus brief filed with the Delaware Supreme Court signals more turbulence ahead.

Moelis and the 2024 Amendments

The drama began with several recent Court of Chancery opinions – including, in particular, West Palm Beach Firefighters’ Pension Fund v. Moelis & Company (“Moelis”) – indicating that many corporate law firms had given their clients incorrect advice on various governance matters.[1]

The Moelis lawsuit challenged the statutory validity of a stockholder agreement through which the Moelis board of directors contractually delegated core fiduciary decisions to the company’s founder.  The Moelis ruling, applying DGCL Section 141(a), created doubt about the validity of dozens if not hundreds of similar agreements.  The plaintiffs’ bar moved quicker than contracting parties could re-negotiate potentially invalid terms, filing numerous suits seeking to invalidate those agreements.

Barely a month after the Moelis decision and long before any appeal, members of the Delaware corporate bar proposed amending the DGCL to make the law conform to “market practices” reflecting their prior advice.  The newly enacted Section 122(18) effectively lets corporate boards delegate nearly all their traditional powers to any current or prospective stockholder.

The new law’s proponents justified their haste by saying the recent opinions contravened “market practice” and would trigger unacceptable instability.  The law’s opponents insisted that Section 122(18) itself destabilized the board-centric model at the heart of Delaware’s corporation law.

Revisiting Reasons for the Corporate Bar’s Aggression, and a Proposed Solution

With the ink on the DGCL amendments drying, I wrote an article asserting that “the sky is falling” rhetoric from both sides was overblown and suggesting how the new law may alter corporate practice and litigation.  Entitled “Soap Opera Summer:  Five Predictions About Delaware Law’s Response to New DGCL 122(18)” (“SOS”), the article suggests explanations for the corporate bar’s aggressive reaction to Moelis and proposes a focused and effective solution to the “copycat” lawsuit dynamic (summarized below) that likely exacerbated the bar’s haste.[2]

Section 122(18) did not apply retroactively to the Moelis agreement itself.  Thus, there remains an appeal of the merits and fee award.  As explained below, a recently filed amicus brief supporting the Moelis appeal argues for a justiciability standard that, if accepted, would drastically narrow the ability of stockholders to challenge unlawful corporate practices.  This summer’s drama may pale in comparison with the coming doctrinal battle.

Moelis was hardly the first judicial opinion to invalidate a market practice or otherwise trigger “instability” in Delaware law.  Most recently, in Williams,[3] the Chancery Court invalidated anti-activism poison pills that numerous companies had adopted.  The opinion was affirmed on appeal without triggering major corporate uproar.  Smith v. Van Gorkomprompted an outcry by imposing personal liability on outside directors for duty-of-care violations,[4] yet the corporate bar spent over a year working with the legislature to enact Section 102(b)(7).  In its 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, the Supreme Court endorsed fee-shifting bylaws,[5] potentially opening the door to mandatory arbitration and an end to stockholder litigation, regardless of merit.  Yet Section 109(b) and other amendments that cured the ATP problem also took over a year to enact.

Moelis held that when market practice conflicts with the law, the law prevails.  This rule seems uncontroversial.  What made the 2024 corporate bar quickly rewrite the statute instead of just adjusting advice about stockholder agreements while urging the courts to modify (or overrule) Moelis’ reasoning?

As discussed in SOS, one exacerbating factor for the corporate firms who created this “market practice” was the speed with which the plaintiffs’ bar filed lawsuits “copycatting” the theory recognized by Moelis.[6]  Thus, law firms faced reputational and financial risk, given that clients might bristle at paying for advice about stockholder agreements the court found invalid and would resent being sued and having to cough up more money to cover fee awards to plaintiffs’ lawyers who forced those agreements into compliance.

Arguing that piling on repetitive suits challenging a common market practice quickly becomes wasteful, SOS proposes that the Court of Chancery can mitigate the risk of the “copycat” litigation problem in the future by adjusting the way it compensates plaintiffs’ counsel.  The court should continue to reward stockholder counsel who bring novel claims that further the development of good governance and ensure that corporate practices remain within legal limits (e.g., the claim first pursued in Moelis itself).  The court should also deter (or at least not generously reward) “copycat” lawsuits that simply replicate a claim that a prior suit already vindicated.

Importantly, SOS never suggests eliminating the ability of stockholders to bring the first novel challenge to a widespread yet unlawful governance practice.  However, broad insulation of common market practices – even those that violate the DGCL – is precisely what is being sought through the Moelis appeal.  The amicus brief asks the Delaware Supreme Court to curtail the ability of stockholders to challenge invalid corporate practices that become common practice as law firms copy each other’s forms without independently reconsidering the legal defects creating the practice at issue.

The Moelis Appeal Seeks to Eliminate a Common (and Valuable) Type of Stockholder Litigation

Whether or not Section 122(18) is a wise change in the law, no court would have decided how far stockholder agreements can go in delegating board-level decisions but for a stockholder lawsuit seeking to invalidate the Moelis agreement.  Judicial review to stop unlawful market practices from becoming widespread is a critical component of Delaware’s legal system.  Unless a stockholder plaintiff challenges unlawful corporate activity or a corporate attorney advises a client not to pursue a common but invalid practice, unlawful market behaviors will proliferate.

On Halloween, the Moelis appellants filed their opening brief, and four prominent corporate law academics filed an amicus brief.  Amici’s principal argument for reversing Moelis is that the entire question was unripe for judicial review and the Court of Chancery thus never had authority to assess the statutory validity of the Moelis stockholder agreement.

Amici argue that “Plaintiff alleged nothing suggesting there was any present dispute over that agreement.  Plaintiff’s claim was entirely academic, and therefore not justiciable.”[7] The amici do not explain what facts would create a “present dispute” over an agreement that transfers to a single stockholder – on a day-to-day basis – powers that were statutorily delegated to the board itself.[8]

Treating statutory violations as an ongoing and actionable matter is well-grounded in Delaware policy and precedent.  Stockholder litigations routinely correct and improve widespread but improper corporate governance practices.[9]  Nevertheless, the Moelis appeal asks the Delaware Supreme Court to apply a ripeness standard that would have prevented suits challenging each of those common market practices. 

Delaware Supreme Court’s Potential Approach to Moelis

The Moelis appeal gives the Supreme Court an opportunity to make clear that the continued development of the law and correcting unlawful conduct are more important than preserving market practice.  The Supreme Court can do so by confirming two points.

First, every day a corporation operates in a way it has no legal power to operate is a repetition of the original ultra vires act.  Therefore, when corporate action is alleged to violate the applicable corporate statute, an ongoing (and therefore justiciable) dispute exists.

Second, while Section 122(18) validates stockholder agreements like the one at issue inMoelis, too many law firms allowed their clients to enter invalid agreements before the statute changed.  The corporate bar plays an important role in the Delaware legal system.  That includes identifying legal problems with common corporate practices and advising clients to fix problems whether or not they are sued for them.  Affirming the Moelis analysis confirms that the DGCL controls market practice (not the other way around) and reminds the corporate bar of its responsibility to apply the law as written, not as some wish it to be.

ENDNOTES

[1] 311 A.3d 809 (Del. Ch. Feb. 23, 2024).

[2] The full article can be found at https://journals.law.harvard.edu/hblr/volume-15-2024-2025/ or in Volume 15 of the publication, located at https://journals.law.harvard.edu/hblr/.

[3] Williams Cos. S’holder Litig., 2021 WL 754593, at *30 (Del. Ch. Feb. 26, 2021), aff’d sub. nom. Williams Cos., Inc. v. Wolosky, 264 A.3d 641 (Del. 2021).

[4] 488 A.2d 858 (Del. Jan.29, 1985).

[5] 91 A.3d 554 (Del. 2014).

[6] When a judicial opinion corrects an improper but widespread governance practice, the corporate bar moves quickly to correct clients’ problem.  The most obvious way for contracting parties to cure a potential Moelis problem may have been to add a “fiduciary out” provision, thus confirming that a board can conclude that its fiduciary duties warrant taking action otherwise contrary to the contract’s terms.  Why didn’t this happen here?  My best guess is that a loose remark at the end of a TRO transcript barely two weeks after Moelis, in which the court questioned whether a fiduciary out would suffice to moot a similar claim, may have left contracting parties struggling to identify the best fix for their Moelis-problem contracts.

[7] Amicus brief at 4.

[8] I suppose one scenario is if the board itself concludes that the contract it signed unlawfully constrains its authority under Section 141.  Directors rarely sue to absolve themselves of complying with contracts they willingly signed.  As for stockholders, it is unclear how one might learn of a “dispute” regarding the delegation of a board-level decision to a non-fiduciary investor, particularly when that investor uses veto rights to restrain the board from taking action in the first place.

[9] See SOS at Section II.D (describing stockholder lawsuits that challenge unlawful proxy puts, poison pills, and charter and bylaw provisions.

This post comes to us from Mark Lebovitch, a lecturer in law at Columbia Law School.