Friday, May 24, 2024

What is the value of the corporate charter, a reprise

I previously posted about the proposed changes to Delaware law, the latest version of which would allow shareholder agreements insofar as they don’t go further than what a charter – including a preferred share issuance – could allow (except for the exemption from DGCL 115)

One thing I should have mentioned, though, highlighted by Marcel Kahan and Edward Rock here, is that the difference between a share issuance/charter provision, and a contract, is highly salient for purposes of an exchange listing.  Exchanges define control in terms of voting power, not contractual power; moreover, they prohibit corporate actions that would limit shareholder voting power after listing; dual class shares are fine, they just need to be established prior to listing rather than taking away shareholder voting power mid-stream.  What they don’t address, though, is power through shareholder agreements.  Which means, if the DGCL is amended as proposed, a public company could hand over additional governance powers to particular shareholders through contract, without affecting the formal voting power of existing shareholders, and very possibly remain compliant with Exchange rules.

To put it concretely: Elon Musk has vocally demanded 25% voting power of Tesla so that he can control the development of AI. He’s also admitted he can’t get that through a switch to dual-class shares, because of the listing rules.  If the DGCL changes go through, though, there is no reason the board couldn’t “contract” with him to give him outsized influence over Tesla’s governance, regardless of how existing shareholders vote. 

And that leads to the elephant in the room.  Delaware law is all about shareholder wealth – full stop.  My paper on Twitter v. Musk (which is now published and the final version is on SSRN, by the way /plug) is all about the fallacy of relying on Delaware law to advance any value other than shareholder wealth maximization.  But corporate governance does, in fact, matter to the rest of us; it matters whether single individuals wield nearly unchecked power over how corporations behave. 

Back in the 1930s, Congress actually legislated to discourage the use of holding companies, precisely in order to limit the power that individuals could wield over large corporate structures with only a small slice of equity interest.

More recently, as I talk about in my paper Beyond Internal and External, the FTC settled with Mark Zuckerberg to prevent him from exercising his rights as a shareholder to interfere with Facebook’s compliance with a privacy settlement.  Zuckerberg’s unchecked power in his shareholder capacity threatened Facebook’s ability to comply with the law.

So these proposed DGCL changes have very far reaching social consequences that simply have not been explored by Delaware lawmakers, let alone The Rest of Society.

Anyhoo, links to a recent news article here and a collection of Chancery Daily links here.

Ann Lipton | Permalink


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