In the context of explaining why certain challenges to a stockholders’ agreement were not barred by laches and were otherwise timely, the Delaware Court of Chancery recently recited several enduring fundamental principles of Delaware corporate law and corporate governance in the gem of a decision styled: West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, C.A. No. 2023-0309-JTL (Del. Ch. Feb. 12, 2024).
In support of its reasoning for rejecting arguments that challenges to a stockholders’ agreement were barred by laches and ripeness defenses, the Court of Chancery, in a restatement of sorts, recited several basic tenets of Delaware law that have widespread applicability to those who practice or follow Delaware corporate and commercial litigation.
Selected Fundamental Principles and Mandatory Provisions of the Delaware General Corporation Law (DGCL):
The DGCL contains a number of mandatory provisions. The court provided examples of certain mandatory provisions of the DGCL that could be enforced, even after the normal three-years statute of limitations, assuming the corporation managed to avoid suit for that length of time. For example:
- Section 141(a) should be recognized by readers as providing that: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” The court observed that over a dozen decisions have invalidated governance arrangements that violated Section 141(a). See cases cited in footnotes 98 to 105.
- Section 220. The court described the thought experiment in which a Delaware corporation attempted to include a provision in its chapter or bylaws that purported to bar stockholders from inspecting books and records in the manner provided by Section 220. The court cited at footnote 32, a decision from almost a century ago that held even a charter provision cannot eliminate Section 220 rights.
- Notwithstanding Sections 211 and 231, allowing a corporation to evade a challenge to these mandatory provisions by including a hypothetical provision in its charter or bylaws purporting to only require stockholders’ meetings every five years, or to do away with a requirement to appoint inspectors of election—would not be upheld.
- Section 102(b)(7) authorizes exculpation subject to specified statutory limitations. A corporation should not be able to evade a challenge if no one sued after three years to challenge a charter provision that purported to insulate directors and officers from monetary damages for any breach of fiduciary duty. See Slip op. at 13.
- The court referred to DGCL Section 327, the contemporaneous ownership requirement, as another example of a mandatory provision that cannot be waived. Slip op. at 22. But see footnotes 63 to 67 and related text, where the court discussed the policy reasons why that requirement should be reconsidered.
- As a final example, the court considered a hypothetical similar to the facts of this case: If a Delaware corporation entered into a stockholders’ agreement stating that the elected board of directors shall have a purely advisory role, the court rejected the logic that a facial challenge would be impossible if no suit were filed to contest the provision within the first three years.
Ineffective Defenses to Challenged Void Acts:
- Disclosures about legally non-compliant conduct cannot insulate conduct from challenge based on the same reasoning that applies to governing structures and agreements that violate mandatory features of the DGCL. See footnote 62 and accompanying text.
- This decision explains why an equitable defense like laches cannot validate a void act.
- Estoppel is not a defense to challenge a void act. See Slip op. at 21 and n. 61.
- Likewise, acquiescence cannot validate a void act.
See generally footnote 11 (cases addressing contracts void as offending public policy).
When Laches or a Statute of Limitations Apply:
The court explained the two conceptual frameworks for analyzing timeliness through an application of the statute of limitations, and the doctrine of laches, and why a court of equity may apply either doctrine.
The court noted that Delaware corporate law relies on the vigilance, of sorts, of private litigants to enforce legal norms and provide fiduciary accountability. See footnotes 27 to 29.
There are Three Methods to Determine When a Claim Accrues:
- The discrete act method applies when a claim arises at a distinct point;
- The continuing wrong method; and,
- The accrual method.
Noteworthy Corporate Law Principle:
A fiduciary does not owe fiduciary duties when exercising contractual rights, even if a counterparty is the fiduciary’s beneficiary. Slip op. at 39. See also footnote 115 and accompanying text. See also the 100-plus page Sears opinion of last month authored by Vice Chancellor Laster which discussed the duties of a controlling stockholder in the context of either maintaining the status quo, or challenging the status quo, as well as the applicable standard of review. In Re Sears Hometown & Outlet Stores, Inc. S’holder Litig., 2024 W: 262322 (Del. Ch., Jan. 24, 2024). The Vice Chancellor also provided insights on the topic generally from a seminar in Miami that he participated in and that His Honor highlighted on LinkedIn.
Venerable Twice-Tested Doctrine For Review of Corporate Acts:
In what the decision called “Berle I and Berle II” parts of the two-part test, referring to an iconic article by Professor Adolf Berle cited in footnote 72, Delaware corporate action is twice-tested:
“First, by the technical rules having to do with the existence and proper exercise of the powers; second, by equitable rules somewhat analogous to those which apply in favor of a cestue que trust for the trustee’s exercise of wide powers granted to him in the instrument making him a fiduciary.”
Slip op. at 26 (citing article). See also footnotes 72, 73 and 75.