May 13, 2024

Proposed 2024 DGCL Amendments: Revisions Pare Back Moelis Fix

In March, the Delaware Bar proposed DGCL amendments designed to addresses the issues created by the Chancery Court’s CrispoMoelis, and Activision Blizzard decisions. However, some of the proposed changes, particularly a proposed amendment to Section 122 of the DGCL, attracted a lot of criticism. That amendment would have overruled Moelis by permitting a Delaware corporation to enter into governance agreements with stockholders that would restrict it from taking action, require specific approvals before it takes action, and require the board, stockholders and others to take, or refrain from taking, contractually specified actions.

Critics of the proposed revision pointed out that it would undo some pretty fundamental propositions of Delaware law:

On its face, the Amendment seemingly authorizes corporations to enter any contract changing any aspect of corporate governance. But that cannot be its intended effect. Do the Amendments intend, for example, to empower a corporation to promise its directors that it will never sue them, even for an intentional tort or bad faith act? Do the Amendments intend to empower a board to cede 100 percent of its decisionmaking power to a single person? The answers to these questions cannot be yes.

The Amendments would also conflict with other parts of the statute. DGCL 141(b) provides that only natural persons can serve on a board, but the Amendments would enable a corporation to contractually cede one or more seats to an outside entity. Is this an intended consequence? If so, then far more is at stake than the agreement rejected in Moelis.

In response, the Delaware Bar tweaked the language of the proposed amendments to Section 122. In a recent blog, Prof. Ann Lipton summarized the effect of the revisions:

The new amendments are a little different, in that they do not permit contracts that would confer governance powers beyond what could be included in the charter, or would be contrary to Delaware law.  In other words, if there are certain core powers that must remain with the board and can’t be visited in someone else via the charter, then, these amendments to the amendments would not allow those powers to be transferred via stockholder contracts.  The new language provides:

no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State … if included in the certificate of incorporation.

But also, in determining what these “core” board powers are, courts can’t rely on the fact that the power is one that is statutorily conferred on the board.  As the amendments put it, “a restriction, prohibition or covenant in any such contract that relates to any specified action shall not be deemed contrary to the laws of this State or the certificate of incorporation by reason of a provision of this title or the certificate of incorporation that authorizes or empowers the board of directors (or any one or more directors) to take such action.”

So anyway, that’s where we are now.  When I was at Tulane’s Corporate Law Institute a few months ago, the Delaware justices in attendance indirectly addressed the ongoing “let’s get out of here and move to Nevada or Texas!” kerfuffle. The justices strongly defended Delaware’s judiciary, but I came away feeling that this whole controversy has caused some real alarm. The lightning speed with which the Delaware Bar responded to these decisions and the scope of the changes it proposed – and now this rapid backpedaling – has kind of left me with the same feeling.

John Jenkins