Under Section 242(b)(1), such an amendment to a corporation’s charter requires the approval of the holders of a majority of the outstanding voting power of all issued and outstanding capital stock of the corporation.
In August 2022, a number of amendments to the provisions of the Delaware General Corporation Law (DGCL) went into effect. One amendment of note is the extension of Section 102(b)(7)’s exculpation provisions, which now permit corporations to eliminate or limit the personal liability of specified officers for direct claims of breach of the fiduciary duty of care. As a result, several Delaware corporations have amended their charters to extend the Section 102(b)(7) clauses to those senior corporate officers specified under the newly amended statute. Naturally, these actions bring a new issue for the courts to determine: What is the requisite stockholder approval to implement these charter amendments?
This issue came to a head in March 2023. Vice Chancellor J. Travis Laster issued a lengthy bench ruling in two cases involving challenges to charter amendments, one by Fox Corporation and the other by Snap Inc. Stockholders of each company alleged that their respective board of directors failed to seek required separate class votes to implement charter amendments extending DGCL Section 102(b)(7)’s exculpation provisions to senior corporate officers. In seeking stockholder approval, neither company sought approval by the holders of its non-voting common stock, as a separate class, allegedly in violation of DGCL Section 242(b)(2)’s mandatory class vote requirement. See Electrical Workers Pension Fund, Local 103, IBEW v. Fox Corp., C.A. No. 2022-1007-JTL (Del. Ch. Mar. 29, 2023) (TRANSCRIPT) (Tr. Ruling).
Constrained by precedent, the court granted summary judgment in favor of the defendants, concluding that the charter amendments extending an exculpation provision to senior corporate officers did not “require a [separate] class vote of the defendants’ non-voting stock because the officer exculpation amendment d[id] not affect a power, preference, or special right that appear[ed] expressly in the charter.” Tr. Ruling at 69:4-14. Vice Chancellor Laster did note, however, that had he not been constrained by precedent, he could have ruled the opposite as he found the plaintiffs’ arguments compelling. The ruling is described in more detail below.
So Whose Approval Is Required?
Under DGCL Section 242(b)(1), such an amendment to a corporation’s charter requires the approval of the holders of a majority of the outstanding voting power of all issued and outstanding capital stock of the corporation.
To determine whether any additional stockholder vote would be required, one first would need to review the express provisions of a company’s charter. In addition, Section 242(b)(2) provides that, to the extent an amendment to a corporation’s certificate of incorporation would “alter or change the powers, preferences, or special rights of the shares of [a specified] class [of stock of a corporation] so as to affect them adversely,” then a separate vote of that specified class is required regardless of whether a separate class vote is expressly required by the terms of the corporation’s charter. (Emphasis added.)
The Power to Sue
Neither of the companies in the Fox and In re Snap cases sought a class vote of the holders of their non-voting shares to approve their respective company’s charter amendments extending existing exculpation provisions to their senior corporate officers. See Tr. Ruling at 5:11-6:6. The holders of each company’s non-voting shares requested that the Court of Chancery declare its charter amendments void, arguing that the amendments adversely affected the non-voting stockholders’ fundamental power to sue, thereby triggering Section 242(b)(2)’s mandatory class vote requirement. See Electrical Workers Pension Fund, Local 103, IBEW v. Fox Corp., C.A. 2022-1007-JTL (Del. Ch.); In re Snap Inc. Section 242 Litigation, 2022-1032-JTL (Del. Ch.).
As detailed by Vice Chancellor Laster in his bench ruling, there are three well-established fundamental stockholder rights (or powers) to vote, sell and sue. See Tr. Ruling at 8:2-9:12, 21:10-26:12 (discussing the debate of whether the ability to sue is a right, power or privilege, and recognizing that a shareholder’s ability to sue “is a baseline power or right.”) The question before the court was not whether it is lawful to take from a stockholder one of these fundamental rights (in these cases, the right to sue). Rather, the court considered whether DGCL Section 242(b)(2) requires a separate class vote of the holders of each affected class of stock to take away such a right, even when doing so affects all stockholders in the same manner. Counsel for the plaintiffs argued that the plain language of the statute required a class vote when a charter amendment alters or changes the powers, preferences or special rights of a specified stockholder class. Here, counsel for the plaintiffs argued, the officer exculpation amendment adversely altered the non-voting stockholders’ power to sue while the statute plainly reads that such power could not be taken away without a separate class vote. But counsel for the companies countered that Section 242(b)(2) only applies to powers, preferences and special rights set forth expressly in a company’s charter. Given Delaware’s long-standing interpretation on the issue, Vice Chancellor Laster was bound to agree with the defendants. See Ruling Tr. at 4:10-5:5, 61:21-23. See also Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Manufacturing Co., 24 A.2d 315 (Del. 1942); Orban v. Field, 1993 WL 547187 (Del. Ch. Dec. 30, 1993).
Vice Chancellor Laster noted that the plaintiffs’ statutory plain-meaning arguments caused him to second-guess his previous understanding that an exculpation amendment did not require a separate class vote. The court explained that the issue with the plaintiffs’ plain-meaning theory, however, is how Section 242(b)(2) has evolved throughout time and been interpreted not to extend the statute to any rights or powers not expressly set forth in the charter itself. See Tr. Ruling at 27:15-19, 62:5-63:30.
Since neither Snap nor Fox’s pre-amended charters expressly set forth the stockholders’ right to sue, the charter amendments could not adversely affect the same. Thus, keeping in line with this “deeply settled” Delaware interpretation, the court granted summary judgment in favor of the defendants, concluding that the charter amendments extending an exculpation provision to senior corporate officers did not “require a class vote of the defendants’ non-voting stock because the officer exculpation amendment d[id] not affect a power, preference, or special right that appear[ed] expressly in the charter.” Tr. Ruling at 69:4-14.
Vice Chancellor Laster nevertheless found many of the plaintiffs’ arguments compelling. In framing the broader issue, he posited whether relying solely on the express provisions of a corporation’s charter could provide a subset of stockholders who hold a majority of the voting power, an ability to implement a “midstream amendment” to “enable both permanent and temporary majorities to impose their will on minority classes of stock and potentially reallocate value through amendments.” Tr. Ruling at 57:8-16. Due to these potential implications, the court speculated whether the intention of Section 242(b)(2) was to protect against just that. See id. at 59:9-11. Furthermore, the vice chancellor noted that, as a basic concept, “the General Corporation Law is a part of the certificate of incorporation of every Delaware company” even if not expressly set forth in the company’s charter itself. Therefore, he theorized, only requiring a class vote for those powers, preferences or special rights that appear expressly in the charter is tenuous at best. Tr. Ruling at 63:1-3. See id. at 63:9-65:20.
This issue, however, appears unfinished as the vice chancellor both began and ended his ruling by making clear that, given its theoretical and practical implications, this ruling is final and ripe for appeal. See Tr. Ruling at 3:23-4:5, 69:24-70:3. As of the date of this Alert, no notice of appeal has been docketed by the plaintiffs in either case―but the window remains open.
For More Information
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