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Stop me if you’ve heard this one before – a founding stockholder enters into a stockholders agreement containing governance provisions that allow him to veto a laundry list of corporate actions that the board could otherwise take.  A stockholder plaintiff objects to those provisions and files a lawsuit in Chancery Court seeking to invalidate them. Sounds familiar, doesn’t it?  In any event, that’s the situation Vice Chancellor Laster addressed earlier this week in Wagner v. BRP Group, (Del. Ch.; 5/24).

Not surprisingly, the Vice Chancellor’s decision in this case was very similar to his earlier decision in Moelis. This excerpt from his opinion summarizes VC Laster’s conclusions:

On the merits, the plaintiff’s attacks on the Challenged Provisions succeed— at least for purposes of those provisions as they existed when the plaintiff filed this lawsuit. First, the plaintiff objects to the requirement that the corporation obtain the founder’s prior written approval before permitting the occurrence of, agreeing to, or committing to any significant decision regarding any senior officer (the “Officer Pre-Approval Requirement”). That provision is invalid because it contravenes Section 141(a) of the Delaware General Corporation Law (the “DGCL”). It is also invalid because it contravenes Sections 142(a) and (e).

Next, the plaintiff challenges a requirement that the corporation obtain the founders’ prior written approval before permitting the occurrence of, agreeing to, or committing to any charter amendment (the “Charter Pre-Approval Requirement”). That provision likewise contravenes Section 141(a) of the DGCL. It also contravenes Section 242 of the DGCL.

Last, the plaintiff challenges a requirement that the corporation obtain the founders’ prior written approval before permitting the occurrence of, agreeing to, or committing to an array of significant transactions (the “Transaction Pre-Approval Requirement”). While that provision or versions of it could well be valid in a commercial agreement, as a feature in a governance agreement, it violates Section 141(a).

In addition to detailing the reasons why he concluded that the challenged provisions violated the various statutory sections noted above, the Vice Chancellor rejected a litany of equitable and legal arguments raised by the defendants in support of their validity.  He also addressed the governance agreement v. commercial agreement distinction that, as in Moelis, played an important role in the outcome of the case.

– John Jenkins