Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.
The Delaware Court of Chancery, in a guidepost ruling on the power to bestow super-voting stock, has dismissed a shareholder’s “identity-based voting” suit over Bumble Inc.’s decision to designate ten-votes-per-share only for the stock of the relationship-nurturing software company’s CEO/founder and his financial backer in Colon v. Bumble Inc. et al., C.A. No. 2022-0824-JTL (Del. Ch. Sept. 12, 2023).
Vice Chancellor Travis Laster’s September 12 summary judgment opinion dismissed breach-of duty charges against Bumble and its CEO, finding that granting the allegedly discriminatory 10X-power voting stock did not conflict with either key provisions or rulings governing that action. He ruled that the defendants had the right to designate a super voting stock class under the certificate of incorporation — or they could give the directors the right to make that designation at some future time.
The vice chancellor said the challenged action was not invalid because it did not violate Sections 212(a) and 151(a) of the Delaware General Corporation Law and had properly structured a dual-voting class “Up-C” company/partnership entity to enable two insiders to validly gain the control benefit of 10 votes per-share and a tax benefit.
An Up-C structure enables insiders to gain the benefits associated with a public listing without giving up the benefits associated with pass-through tax treatment. To eat that cake and still have it requires two entities: an umbrella partnership and a C corporation. It also requires that the C corporation issue two classes of stock.
Defendant CEO Whitney Herd founded Bumble in 2014 as a web software company that enabled internet clients to cultivate business, friendship and romantic relationships and took it public in 2021 with the financial backing of Blackstone Inc. Kyrstyn Colon filed suit in 2022 on behalf of all common shareholders claiming that an action that bestowed ten votes per-share on Herd and Blackstone, as the only “principal shareholders” was invalid “identity-based voting.”
Both parties sought summary judgment and Vice Chancellor Laster granted the defendants’ motion—which resulted in a decision that the vote grant was valid and the challenge must be dismissed.
A comprehensive review
The court used the occasion to comprehensively review the scope of the applicable sections of the DGCL and the parameters of the UP-C dual voting class entity structure.
The court reasoned that if the corporation will issue stock that has special attributes, then Section 102(a)(4) provides two alternatives for memorializing the special attributes in the certificate of incorporation. One alternative is to specify the special attributes directly. The other is to empower the board of directors to bestow super-voting stock at a future time.
8 Del. C. § 151(a) generally authorizes a corporation to issue multiple classes of stock and makes clear that they may either carry default rights by implication, have some or all the default rights specified expressly in the charter, or have whatever special rights are allowed.
Section 212(a) provides that if the certificate of incorporation is otherwise silent, then each share of stock carries one vote by default. Section 212(c) also provides that if the certificate of incorporation calls for greater or lesser voting power, then references in the DGCL refer to that level of voting power.
A trio of key decisions
The Delaware Supreme Court and the Court of Chancery have approved charter provisions that allocate voting power using a formula or procedure, and the Delaware Supreme Court upheld a scaled voting structure in which the number of votes appurtenant to a share varied depending upon the total number of shares that the owner held, he said.
The vice chancellor said, “the Delaware Supreme Court and this court have approved charter provisions that allocate voting power using a formula or procedure. In Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977), the Delaware Supreme Court upheld a scaled voting structure in which the number of votes appurtenant to a share varied depending upon the total number of shares that the owner held.”
In Williams v. Geier, 1987 WL 11285 (Del. Ch. May 20, 1987), this court dismissed a challenge to a tenured voting mechanism, holding that it complied with the DGCL, the Vice Chancellor said.
And he noted that in Sagusa v. Magellan Petroleum Corp., 1993 WL 512487 (Del. Ch. Dec. 1, 1993), aff’d, 650 A.2d 1306 (Del. 1994) (TABLE), this court dismissed a challenge to a per capita voting provision that gave each stockholder a single vote, regardless of how many shares the stockholder held, and the Delaware Supreme Court upheld the dismissal. Framed using the language of this decision, the certificate of incorporation used a mechanic conceptually similar to Providence.
“A strange move”
Contrary to the preceding analysis, the court said, plaintiff argued that the challenged provisions violate Section 212(a) of the DGCL, but the plaintiff did not rely on the text of the provision, but rather on language from the Providence decision. The plaintiff asserts that under Providence, a corporation cannot create a mechanism in which shares of the same class differ in their share-based voting power depending on who holds them.
Relying primarily on Section 212(a) was a “strange move”, because that section does not authorize or restrict anything, the vice chancellor said. “Section 212(a) creates a default right of one vote per share, and it provides that if a charter departs from the default right, then any voting calculations required by the DGCL—such as the amount of voting power that would constitute a majority of the voting power outstanding—must use the voting power as determined by the charter.
The plaintiff views identity-based voting as an entrenched hierarchy and wants all stockholders to have equality of opportunity, the court said, noting that, “In many areas of the law, those noble sentiments could carry weight. They cannot overcome the plain language of the DGCL.” Nothing in Section 151(a) prohibits a provision that creates a closed set of holders who can exercise certain rights, the court ruled.