Delaware Supreme Court Reverses Moelis

The case arose from a stockholders agreement between a company ("Moelis"), its founder, CEO, and then-majority stockholder, and three of his affiliates that was entered into on the eve of Moelis' IPO. Nearly nine years later, a stockholder challenged the agreement, arguing that three sets of provisions were facially invalid under § 141(a): (i) provisions giving the founder consent rights over 18 categories of corporate action (including issuing preferred stock, incurring debt over $20 million, and adopting a stockholder rights plan); (ii) provisions affecting board composition, including board size, director designation and nomination rights, and board vacancies; and (iii) a provision ensuring the founder's designees would comprise a majority of any board committee.

The Court of Chancery Invalidates the Stockholders Agreement

The Court of Chancery granted the plaintiff's motion for summary judgment as to almost all the challenged provisions in the stockholders agreement. In reaching its conclusion, the court fashioned a two-part test to determine whether a contract is an "internal governance arrangement" subject to § 141(a) or an "external commercial agreement" not covered by the statute. The court concluded that the stockholders agreement was an "internal governance arrangement." The court found that, because five of the eight challenged provisions directly limited the board's managerial freedom, they facially violated § 141(a) and thus were void.

In a separate opinion, the Court of Chancery denied Moelis' motion for summary judgment on the basis of laches and ripeness. The court concluded that laches did not apply because equitable defenses (such as laches) do not apply to void acts. Even if laches applied, the court reasoned, the plaintiff's claims were timely because the alleged illegality of the challenged provisions was an ongoing statutory violation. The court later awarded the plaintiff $6 million in attorneys' fees.

The Delaware Legislature Steps In

The Moelis decision called into question the validity of many existing stockholder governance agreements, leading to significant market uncertainty. In response, the Delaware legislature amended § 122, which specifies powers of a corporation. Under § 122(18), a corporation may enter into contracts with current or prospective stockholders with a variety of provisions, notwithstanding § 141(a). Consideration for such contracts is to be determined by the board and may include the stockholders taking or not taking action.

The amendments to § 122 did not affect the pending appeal in Moelis or any other actions that had been completed before the amendment took effect on August 1, 2024.

The Delaware Supreme Court Reverses

The Delaware Supreme Court reversed the Court of Chancery's decision, finding that the plaintiff's claims were untimely. It held that the provisions were voidable (and not void) because no mandatory provision of the Delaware General Corporation Law or other Delaware law would have prevented the adoption of the challenged provisions through alternative methods (i.e., a charter amendment). Because the provisions were voidable, the plaintiff's claims challenging the facial validity of the provisions were subject to the equitable defense of laches.

Next, the Delaware Supreme Court rejected the Chancery Court's conclusion that the plaintiff's claims were timely, holding that the claims accrued when Moelis entered into the stockholders agreement in 2014. Because the plaintiff did not sue until nine years later, it delayed unreasonably and the company was presumptively prejudiced by the plaintiff's untimely claims.

Having determined that the plaintiff's claims were barred by laches, the Delaware Supreme Court had no occasion to decide the facial validity of the challenged provisions in the stockholders agreement. Because the Delaware Supreme Court's decision reversed the purported corporate benefit upon which the plaintiff's fee award had been based, the $6 million fee award was vacated.