March 8, 2018

Stockholders’ Agreements: The Delaware Chancery Speaks!

Stockholders’ agreements are usually the cornerstone of governance arrangements between private company investors, but cases involving them don’t happen every day.  So, when the Chancery Court issues opinions interpreting them, it’s newsworthy. Here’s the intro to this Wilson Sonsini memo:

The Delaware Court of Chancery recently issued two important decisions addressing the interpretation and effects of stockholders’ agreements. In Schroeder v. Buhannic, the Court of Chancery refused to interpret a stockholders’ agreement in a manner that would allow a corporation’s common stockholders to remove the chief executive officer. In Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings, Inc., the Court of Chancery held that a corporation’s purported restricted stock issuances were invalid, where the corporation failed to comply with provisions governing stock issuances in a stockholders’ agreement to which the corporation was a party.

These two decisions are noteworthy statements of both the potential limitations and potency of stockholders’ agreements. As often occurs, these decisions also both arose in the context of disputes between factions of stockholders over control of the company—an important reminder about the implications of these issues.

John Jenkins