Shareholder Agreements and Corporate Charters

Vice Chancellor Laster recently requested information from litigants in Seavitt v. N-able, Inc. with this letter.  According to the complaint:

Plaintiff brings this action because N-able is presently flouting this foundational principle of Delaware law through a contractual arrangement designed to entrench and perpetuate certain favored stockholders’ control over N-able’s business and affairs. Specifically, in violation of DGCL Section 141(a), N-able has provided certain favored stockholders—affiliates of the private equity firms Silver Lake Group, LLC (“Silver Lake”) and Thoma Bravo, LLC (“Thoma Bravo,” and together with Silver Lake, the “PE Investors”)—with a contractual power to control the most important decisions and functions properly entrusted to the Company’s Board under our corporate system.  

. . . 

Third, in violation of DGCL Section 141(k) and in further derogation of the stockholder franchise, N-able has adopted an invalid provision in its operative Amended and Restated Certificate of Incorporation (the “Certificate”), purporting to provide that as long as the PE Investors own in the aggregate 30% of the voting power of the Company’s outstanding shares, “directors may be removed with or without cause upon the affirmative vote of the [PE Investors]. . .” This provision violates DGCL Section 141(k), which governs the removal of directors and provides that directors may be removed only by a majority stockholder vote (or, in some cases, a higher vote pursuant to DGCL Section 102(b)(4)). N-able’s Certificate, by contrast, allows a favored minority of stockholders to remove duly-elected directors who continue to maintain the support of a stockholder majority

This may seem familiar to readers because Prof. Lipton recently blogged about a similar issue in Moelis.  This case has some different wrinkles because the court has to consider both shareholder agreement and corporate charter provisions.  The Moelis decision found that many of the shareholder agreement provisions would have been permissible if they had been included in a corporate charter.

This brings me to the letter.  It asks about a few issues:  (i) whether Delaware corporations can incorporate stockholder agreements by reference into their charters in order to give them the same effect as charter provisions; (ii) whether bylaws can incorporate stockholder agreements by reference and give them the same effect as bylaw provisions; and (iii) whether the charter and bylaws at issue adequately did the job here. The letter asked the parties to brief the issues and gave some specific questions.

Of particular interest to me is number 7 an "extremes case." It asks whether a Delaware charter could include a provision saying that the corporation would be governed by Nevada law with the proviso that if there were "any conflict with a mandatory provision of the Delaware General Corporation Law, Delaware shall control."  In non-mandatory cases, the charter would swap Delaware defaults for Nevada defaults.

I don't expect corporations to actually do this.  It probably makes more sense to just reincorporate into Nevada if you want to be bound by Nevada law.  You'd probably save a lot of money that way.  Our local newspaper, the Review Journal, recently covered this issue.  It highlighted one recent mover's cost calculation:

Laird Superfood, a plant-based food producer physically headquartered in Boulder, Colorado, reincorporated in Nevada on Dec. 31. In a filing with the U.S. Securities and Exchange Commission before the shareholder vote, it told investors that it expected to pay about $200,000 in Delaware taxes for that fiscal year. By contrast, Laird’s Nevada annual fees are expected to be about $700, according to the filing. Nevada doesn’t have corporate taxes.

It'll be interesting to watch the briefs on this one as they come in.