Corporate lawyers in Canada tend to follow decisions of the Delaware Courts involving corporate governance and shareholder matters, as decisions of the Delaware Courts are often a bellwether as to how certain aspects of corporate law may evolve in Canada, or at least be considered. The recent Decision of the Delaware Court of Chancery, West Palm Beach Firefighter's Pension Fund v. Moelis & Company, is a rare example of the opposite where, as a result, the Delaware Senate proposed changes to the Delaware General Corporate Law ("DGCL"), which will amend the DGCL to follow Canadian corporate law in terms of shareholders' agreements.
Moelis & Company ("MoelisCo") is a well-known global investment bank founded by Ken Moelis, who continues as its CEO and Chairman of the Board.
Prior to the completion of the MoelisCo initial public offering and the trading of its shares, Mr. Moelis, 3 of his affiliates, and MoelisCo entered into a Stockholders' Agreement, which the Delaware Court referred to as a "new wave agreement." Such Stockholders' Agreement was fully disclosed prior to the IPO. The Stockholders' Agreement contained pre-approval rights requiring Mr. Moelis's written consent to proposed conduct of the corporation, provisions that empowered Mr. Moelis to elect a certain number of directors, and provisions requiring that every committee of the Board of Directors was required to include a certain number of Mr. Moelis's elected directors. Overall, the Stockholders' Agreement permitted Mr. Moelis to retain significant control over the governance of the corporation following the IPO.
Such a form of Stockholders' Agreement is, of course, quite common in Canada, especially in public companies that do not have significant shareholder control by way of multiple voting shares, or in private companies, especially those getting investment from private equity or venture capital funds or family offices.
Prior to our reading the Decision, we wondered why U.S.-based investors in Canadian corporations sought to have a target investment company's Articles amended to provide such types of rights. We would have to convince such U.S.-based investors that they could get the same protection by way of a stockholders' agreement without the necessity of inserting such rights into a publically available document like Articles, or that required a shareholders meeting to amend, should the background situation change.
The plaintiff in the Moelis litigation was a shareholder who argued that the provisions in the Stockholders' Agreement improperly detracted from the powers and duties of the Board, and was, accordingly, inconsistent with the DGCL.
The relevant provision of the DGCL is Section 141(a), which provides 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. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the Board of Directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation."
Section 141(a) is the source of Delaware's Board-centric model of corporate governance. The Delaware Supreme Court has cited Section 141(a) repeatedly as the foundation of its juris prudence.
A basic concept of the DGCL is that directors, rather than shareholders, manage the business and affairs of the corporation. As provided in the Decision, "the presence of a stockholder who controls the corporation does not alter the Board-centric framework. Director primacy remains the centerpiece of Delaware law, even when a controlling stockholder is present."
In its judgement, the Court distinguished between provisions and agreements that respect external contacts (i.e., commercial agreements) and agreements that impact the internal governance of the corporation.
Based on the usual analysis in claims involving Section 141(a) scrutiny, the Court invalidated the MoelisCo Stockholders' Agreement, citing concerns that the Agreement impermissibly detracted from the Board's authority and duty to manage the business and affairs of the corporation.
Our initial concern that arose from learning of the Moelis Decision invalidating Stockholders' Agreement, before having an opportunity to read the Decision, was that if it made its way up to Canada it could vitiate shareholder rights under shareholders' agreements in favour of directors rights, and compel us to start having to include such shareholder rights in constating documents of corporations.
However, upon reading the Decision, it quickly became apparent that the provisions in Canadian corporate statutes, like Section 108(1) of the Ontario Business Corporations Act, which provides for agreements between shareholders, did not exist in the DGCL, nor did the DGCL include provisions such as those that exist in the various Canadian corporate law statutes that limit the liability of directors where the powers of directors are affected or usurped by shareholders' agreements.
Section 218(c) of the DGCL provides that an agreement between 2 or more stockholders, if in writing and signed by the parties thereto, may provide that in exercising any voting rights, the shares held by them shall be voted as provided by the agreement, or as the parties may agree, or as determined in accordance with the procedure agreed upon by them. However, this is a much narrower set of rights under a shareholders' agreement than what is available under the various Canadian corporate law statutes. Overall, the Canadian statutes emphasize shareholder primacy, whereas the DGCL emphasizes Board primacy.
Interestingly, as a direct response to the Decision, proposed amendments to the DGCL were introduced and passed in the Delaware General Assembly as part of Senate Bill 313 on June 20, 2024, and will come into effect on August 1st of this year. The Bill serves to enact Section 122(18) of the DGCL, which will permit corporations to enter into agreements with current or prospective stockholders to govern the internal affairs of the corporation, notwithstanding Section 141(a). The text of the Bill explicitly permits such agreements to:
- Restrict or prohibit future corporate actions specified in the contracts;
- Require the approval or consent of one or more shareholders before the corporation may take action; and
- Covenant that the corporation or one or more persons or bodies will take, or refrain from taking, future actions.
Overall, these amendments significantly restrain the holding in Moelis, which will hopefully quell the concerns of investors that had been raised following the Decision.
While section 122(18) generally mimics Canadian corporate law provisions, we noticed that it does not contain a provision relieving directors of their duties and liabilities to the extent that such duties and responsibilities are adopted by shareholders through a stockholders' agreement, such as section 108(5) of the Ontario Business Corporations Act.
The legislative response to the Moelis Decision is a most refreshing example of another jurisdiction that we generally admire for corporate law following Canadian corporate statute provisions.
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