In a masterpiece of contract interpretation and statutory analysis, the Delaware Court of Chancery recently reconciled juxtaposed provisions in the Delaware General Corporation Law and a Certificate of Incorporation to allow a reincorporation of a Delaware company in Nevada with a majority vote—as compared to requiring a supermajority vote. Gunderson v. The Trade Desk, Inc., C.A. No. 2024-1029-PAF (Del. Ch., Nov. 6, 2024).

Brief Overview

Naturally, the detailed facts of this case are important but, in essence, the company involved proposed to effect its reincorporation pursuant to a conversion under Section 266 of the Delaware General Corporation Law. Section 266 allows a conversion by a majority of the outstanding shares of stock of the corporation entitled to vote upon the proposal. Article X of the corporation’s Certificate of Incorporation, however, requires the approval of 66 2/3rds of the outstanding voting power of the corporation’s stock, voting as a single class, to “amend or repeal, or adopt any provision” of the certificate inconsistent with certain enumerated articles of the certificate.

A stockholder alleged that the conversion resulted in an amendment of the Certificate of Incorporation and, therefore, triggered the supermajority requirement. The court disagreed.

Key Holding

Relying on the doctrine of independent legal significance, and a long line of cases upholding that doctrine, the court reasoned that the conversion was not subject to the supermajority vote requirement in the charter or certificate of incorporation.

In order for that supermajority provision to have applied, among other reasons, the charter would have needed to include additional language required to specify that the provisions of the charter applied outside of Section 242 of the DGCL, which governs amendments to a charter.

Highlights of the Court’s Analysis and Decision

  • A key principle that is a bedrock of Delaware corporate jurisprudence is that actions of a director are “twice-tested”: first for legal authorization, and second by equity. See footnote 23.
  • A keystone of the court’s analysis was the well-established doctrine of independent legal significance which holds that “legal action authorized under one section of the corporation law is not invalid because it causes a result that would not be achievable if pursued through other action under other provisions of the statute.” Slip op. at 16.
  • The court discussed at length a multitude of cases discussing the doctrine of independent legal significance, beginning with a case that was decided about 90 years ago. Slip op. at 16-26.
  • A few eminently quotable statements of law buttress the court’s reasoning, including the following:

“General language alone granting preferred stockholders a class vote on certain changes to the corporate charter (such as authorization of a senior series of stock) will not be read to require a class vote on a merger and its integral and accompanying modifications to the corporate charter and the corporation’s capital structure.”

Slip op. at 24 -25 (citations omitted).

  • Delaware has long adhered to: “application of the doctrine of independent legal significance and refused to extend charter-based voting requirements to mergers and consolidations absent clear language . . ..” Slip op. at 25 (citations omitted).
  • The court underscored that: “. . . it is well-established that, like the preferences of preferred stock, ‘high vote requirements’ ‘must be clear and unambiguous,’ leaving ‘no doubt that the shareholders intended that a supermajority would be required.”’ (citations omitted). Slip op. at 27.
  • “Delaware decisions have made clear that: if a party wants a consent right that applies to mergers generally, or which applies to mergers that have the effect of altering, amending or eliminating the special right that the party possesses, then the consent right must refer specifically to a merger.” Footnote 31.
  • In addition to the basic contract interpretation principles that apply to interpretation of a certificate of incorporation, the court emphasized a consequential principle of interpreting a charter that is an essential tool for the toolbox of corporate litigators: “When it comes to the construction and interpretation of a certificate of incorporation, ‘the agreement as a whole’ includes the DGCL and all of its amendments, which the Delaware legislature has determined ‘shall be a part of the charter, or certificate of incorporation of every corporation except so far as the same are inapplicable and inappropriate to the objects of the corporation….’” Slip op. at 28-29. See 8 Del. C. § 394. Also included are cases interpreting the DGCL.
  • The court noted that the doctrine of contra proferentem was not applicable when a contract was not ambiguous. Slip op. at 42.
  • In closing, the court explained that it would enter a partial final judgment pursuant to Rule 54(b) to allow an expedited appeal if any of the parties so chose.