A 122(18) Research Agenda

A mentor of mine once sighed and remarked to me, it's hard to be a corporate law professor since all the interesting questions were asked in the 80s. True enough. But, with the passage of §122(18) there's a bright side for law profs looking for research projects. I guess we can make hay from the Delaware legislature's missteps. I mean, I already pay a sales tax in Massachusetts, so what do I care what happens to the price of beer in Rehoboth.

Things to look for after Aug 1 when §122(18) goes into effect as part of a research agenda:

• How many S-1's get filed with Stockholder Agreements listed in their exhibit list?
• How many Stockholder Agreements in S-1's have arbitration provisions?
• What is the law/forum of these arbitration provisions (NY/DE)? 
• How many and what kind of internal governance decisions get outsourced to the shareholder? (A catalog of sorts.)
• Do VC-backed IPOs use these Agreements to replace the dual class structure (I suggested as much last week: Here's your Hat, What's Your Hurry 141(a).)
• Do these Agreements include "fiduciary outs"? (I know Rep. Griffith assured us all that "fiduciary duty trumps contract" but that line of thinking didn't work in Van Gorkom all those years ago, so will planners agree with Griffith and include fiduciary outs as a matter of course in these agreements? [Spoiler Alert: no, they won't. Shocker, I know.])

A year or two from now, we might start to look for answers to the following questions:

• Do institutional shareholders balk at Delaware incorporations for IPO companies and push to incorporate in home states to protect minority investors ? So, is there a discernible decline in the DE IPOs? 
• Wither the DE premium?  
• Is there a discernible shift in the types of cases in DE Chancery? Are fiduciary disputes involving companies with these agreements ending up elsewhere? Either in arbitration or the DE Superior Court to resolve the question of whether the arbitration provision is effective?
• Do we see existing dual-class corporations (eg. Meta, Google and the like) abandoning their dual class structures as incumbent controllers shift to stockholder agreements to cement control and then liquidate their majority voting positions? 

I suspect very few IPOs will let the opportunity go, and they will begin to adopt these agreements prior to going public. Mike Klausner's piece on staggered boards at IPOs suggests the IPO is the point of maximum leverage to extract entrenching governance structures. So, the IPO will be the time/place to entrench managers/founders.

Also, my guess, the median agreement will have an arbitration provision. I mean, why not? The legislature told them to do it. The language is right there in §122(18) giving transactional planners the idea if they didn't already have it. If you're a transaction planner and you haven't already thought of adding confidential arbitration provisions to your form of stockholder agreement, well here's some free advice: add it. It's totally fine. Delaware wants you to add it.   

If you are a VC-backed firm that might otherwise rely on dual-class stock structures to entrench your founder, these agreements will be very attractive. The company gets to keep a single class structure, and the founder can sell off the majority of their equity position while maintaining control. At least with the dual class structure, founders had to hang on to enough stock to justify their voting control, but beginning Aug 1, that's a thing of the past. Your IPO company can have a single class of stock and you can control it without owning many shares. You can play with other people's money. No problem.    

-bjmq