DealLawyers.com Blog

Yesterday, in Gunderson v. The Trade Desk, (Del. Ch.; 11/24), the Chancery Court granted summary judgment to the defendants in a case involving claims that a Delaware corporation’s migration to Nevada required a supermajority vote under the terms of its charter. In rejecting those claims, Vice Chancellor Fioravanti invoked the “independent legal significance doctrine in support of his conclusion that the proposed reincorporation could be effected with the approval of a majority of the outstanding shares under Section 266 of the DGCL rather than the two-thirds vote specified in its charter for certain amendments.

The case arose out of the efforts of The Trade Desk, a digital advertising company, to move to Nevada. The plaintiff contended that the supermajority vote requirement applied because the conversion would result in the adoption of a Nevada charter containing provisions inconsistent with those which could only be amended by a two-thirds vote under the company’s Delaware charter. The company’s position was that the charter provision was limited to amendments effected under Section 242, and that the statutory default voting provision set forth in Section 266 applied to the vote on the Nevada conversion.

The Vice Chancellor rejected the plaintiffs’ arguments that the supermajority vote requirement extended beyond formal charter amendments under Section 242, and that the reincorporation could be accomplished with a simple majority vote as provided under Section 266.  He responded to the plaintiff’s argument that Delaware law required the Court to consider the substance over the form of a corporate action by citing the doctrine of independent legal significance. In essence, that doctrine holds that the various statutory provisions of the DGCL are of “equal dignity”, and companies may structure corporate actions in conformity with the specific statutory section that they choose. This excerpt from Vice Chancellor Fioravanti’s opinion notes that the doctrine presents a formidable obstacle to form over substance arguments like the one made by the plaintiff:

The doctrine of independent legal significance is a bedrock of Delaware corporate law and should not easily be displaced. “An open-ended inquiry into substantively equivalent outcomes, devoid of attention to the formal means by which they are reached, is inconsistent with the manner in which Delaware law approaches issues of transactional validity and compliance with the applicable business entity statute and operative entity documents.” Kinder Morgan, 2014 WL 5667334, at *9; see Avatex, 715 A.2d at 855 (explaining that it is important to provide “results [that] are uniform, predictable and consistent with existing law”).

The Vice Chancellor went on to observe that the Delaware Supreme Court’s decision in Elliott Associates v. Avatex, 715 A.2d 843 (Del. 1998), provided a roadmap for drafters who wanted to extend special voting rights beyond amendments adopted under Section 242, but that the drafters of the Trade Desk charter opted not to do that.  He pointed to that decision in concluding that the plaintiff’s “substance over form” argument was unpersuasive under the circumstances of this case.

Enjoy the Veterans Day holiday, and thanks to all who served! Our blog will be back on Tuesday.

– John Jenkins