Wednesday, June 5, 2024
Buh-bye 141(a), here's your hat, what's your hurry?
I wonder what poor § 141(a) did to deserve such an ignoble end. It's served the state and the corporate law well. Same with certificates of incorporation and bylaws. They did a pretty good job. They could be amended easily enough when necessary to tailor governance desires. But now, they are on the verge of basically being shown the door.
Proposed § 122(18) threatens to gut § 141(a) and concept of board centric corporate governance that has been at the center of the Delaware corporate law.
Too much? Is that an exaggeration? Unfortunately, it's not really. By authorizing the board, notwithstanding § 141(a), to enter into agreements with stockholders about the internal governance of the corporation, this proposed amendment radically shifts the balance of power in favor of controlling shareholders and against the board and minority shareholders.
How is this proposed provision going to get deployed? The most likely scenario will be like the facts in the Moelis case. A founder wants to maintain control of the corporation post-IPO, but doesn't want to have to maintain a large equity position. It's an IPO, he wants to cash out! But, he also wants to continue to play out his vision. What to do, what to do. Dual class shares can get you there. But, there's a limit to how much you can cash out without putting your control in jeopardy (the boys at Google and Zuck know all about that). Then, your lawyers come to you and say, "It's okay. You can cash out most your shares. All you need to do is sign an agreement with the board that grants you personally (among other things) a veto right over selection of the company's CEO going forward." Assured of the ability to select any future CEO for the company, you now have control - or at least significant influence over the business into the future.
With the passage of § 122(18) a board will be able to outsource perhaps its most important internal governance decision (selection of a CEO) to a stockholder (or even a "prospective stockholder" whatever that is!). Well, isn't this a good thing that stockholders get to have a voice over selection of the CEO. Well, I guess, one could have put those veto rights into the certificate, but at least then a majority of the shareholders would have had a voice in making the decision to amend the certificate. But, stockholder agreements envisioned by 122(18) don't require other stockholders to have a voice in the adoption of the stockholder agreement - they don't even have a right to know that the board has entered into such an agreement with another stockholder! What non-controlling stockholders can't do is amend such an agreement in the same way they can amend governance bylaws. So, the stockholder agreement is an internal governance document that provide special rights, rights not found in the certificate or the bylaws, to certain favored stockholders at the expense of the board and other stockholders.
Of course, the proposed provision has some hand waiving language at fiduciary duties (raising the issue of how to manage vested contractual rights vs fiduciary duties), as well as the right to opt out (like that's going to happen). Don't let any of that fool you. Once 122(18) passes, I bet stockholder agreements will proliferate on IPOs (much in the same way there was a proliferation of dual class stock, and staggered boards on IPOs). No doubt, legal advisors will push the envelope granting ever more powers to founders through stockholder agreements. When that happens that will be the effective end of 141(a).
The Delaware legislature is running towards this cliff. And for what reason? I don't know. It's perplexing to me.
-bjmq
"Some folks back home decided they wanted a law passed
So they called their local Congressman, and he said You're right, there oughta be a law. Then he sat down And wrote me out and introduced me to Congress. And I became a bill, and I'll remain a bill Until they decide to make me a law. ..."https://lawprofessors.typepad.com/mergers/2024/06/corporate-power-amendment.html