The decision provides critical defenses for companies defending against a shareholder’s challenge to a corporate act.

On Jan. 20, 2026, the Delaware Supreme Court issued an opinion in Moelis & Company v. West Palm Beach Firefighters’ Pension Fund that clarified the distinction between void and voidable corporate acts, only the latter of which are subject to equitable defenses, as well as the appropriate application of the equitable defense of laches to a shareholder’s facial challenge to a voidable act. The decision makes clear that unless the challenged act could not have been accomplished by any lawful means, its contravention of certain legal requirements renders it, at most, voidable. The decision also makes clear that a shareholder’s challenge to a voidable corporate action accrues when the action—in Moelis, the execution of a stockholder agreement—is taken, rejecting the Delaware Court of Chancery’s application of the “continuing wrong” doctrine where the act has ongoing effects or implications, without more. The decision provides critical defenses for companies defending against a shareholder’s challenge to a corporate act.

Background

• The Stockholders Agreement

A day before its initial public offering in April 2014, Moelis & Company (Moelis) entered into a stockholders agreement (the stockholders agreement) with Partner Holdings, an affiliate of its controlling shareholder, Kenneth Moelis. The stockholders agreement prohibited the Moelis board from taking a number of actions without the consent of Partner Holdings, including incurring debt over $20 million; issuing more than a small amount of equity; issuing preferred stock; adopting a stockholder rights plan; amending the certificate of incorporation or bylaws; entering into a merger, consolidation, recapitalization, liquidation, or sale of the company; removing or appointing officers; issuing or paying dividends; and adopting the company’s annual budget. The stockholders agreement also gave Partner Holdings extensive control over Moelis’s board and committee composition.

• The Stockholder Challenge

In March 2023, a plaintiff (a Class A stockholder since November 2014) sued Moelis in the Court of Chancery, alleging that the stockholders agreement’s allocation of governance rights to Partner Holdings was facially invalid under Section 141 of the Delaware General Corporation Law (the DGCL). In response, Moelis argued that the stockholders agreement complied with Section 141 and that, in any event, the plaintiff’s challenge was time-barred under the equitable defense of laches given its nine-year delay in filing suit. Because no facts were in dispute, the parties filed cross-motions for summary judgment.

• The Court of Chancery’s Opinion

The Court of Chancery resolved the cross-motion in two opinions.

The first rejected Moelis’ laches defense. It held that if the challenged provisions of the stockholders agreement violate Section 141(a), then they are void and thus not subject to any equitable defense, including laches. The court also held that, even if laches were available, the alleged wrong constituted an ongoing statutory violation and, therefore, the “continuing wrong” doctrine rendered the claim timely.

The court’s second opinion addressed plaintiff’s challenge on the merits. It held that the stockholders agreement constituted an “internal governance arrangement” (as opposed to an “external commercial agreement”) that limited the managerial freedom of the Moelis board “in a substantial way,” and thus was facially invalid under Section 141. The court later awarded plaintiff $6 million in attorney fees.

Moelis appealed, arguing, among other things, that the Court of Chancery erred in concluding both that the challenged provisions were facially void and that the plaintiff’s claims were not time-barred by laches.

• Amendment to the Delaware General Corporation Law

Within three months after the Court of Chancery issued its merits opinion, the Delaware Legislature passed a bill amending Section 122(18) of the DGCL to “mitigate … if not annul” the effects of the court’s opinion. The bill, which expressly authorized certain contractual restrictions on a board’s governance, even if such restrictions are not contained in the company’s certificate of incorporation, was signed by the governor and had an effective date of Aug. 1, 2024. The amendment did not have retroactive effect, however, and therefore did not moot Moelis’ appeal.

The Delaware Supreme Court’s Reversal

Without assessing the validity of the Stockholders agreement under Section 141, the Delaware Supreme Court reversed the Court of Chancery’s judgment, finding that the court erred in failing to address the distinction between void and voidable corporate acts and in rejecting Moelis’ laches defense.

• Void Versus Voidable

The Delaware Supreme Court first found error in the Court of Chancery’s conclusion that transgression of Section 141 necessarily rendered the Stockholders Agreement void, as opposed to voidable. The Court explained that not all contracts that conflict with positive law are void. Whether a contract is void, as ultra vires or against public policy, depends on whether there is any lawful means to accomplish the challenged act. In other words, voidable acts are those susceptible to cure by shareholder approval (because they are within the interest of the corporation but beyond the authority of management), whereas void acts (e.g., waste of corporate assets) are not.

Under this framework, the court analyzed not whether the Moelis board’s chosen method to implement the challenged provisions was valid under Section 141, but rather whether the plaintiff had demonstrated that there were “no lawful means by which Moelis could accomplish its desired governance arrangements.” Should the plaintiff fail to meet that burden, then, per the court, the challenged provisions of the Stockholders Agreement would be voidable, not void. The court noted that even the Court of Chancery had recognized that Moelis could lawfully have accomplished the allocation of governance rights through the company’s certificate of incorporation or through the board’s “blank check authority,” under which it could have issued “preferred stock conveying voting and director-appointment rights.” Because “the plaintiff failed to identify any mandatory provision of the DGCL or other Delaware law that would stand in the way of the adoption of the challenged provisions by charter amendment or other method,” the Delaware Supreme Court found that the plaintiff failed to “carr[y] its burden of establishing that the challenged provisions are void,” not voidable.

• Laches and the “Continuing Wrong” Method of Claim Accrual

The Delaware Supreme Court next found error in the Court of Chancery’s conclusion that, even if the stockholders agreement were merely voidable, and thus subject to a laches defense, the plaintiff’s challenge nevertheless was timely. Although there was no dispute that the analogous, three-year statutory limitations period applied, the parties disagreed as to whether the claim accrued in 2014, when the Stockholders Agreement was executed, or, as the Court of Chancery had held, at a later date on the grounds that the challenged provisions in the Stockholders Agreement constituted a “continuing wrong” because the company continued to be managed pursuant to the stockholders agreement.

The Delaware Supreme Court rejected the Court of Chancery’s application of the “continuing wrong” theory, holding that the plaintiff’s claim arose at a “distinct point in time” (i.e., when Moelis entered into the stockholders agreement) and was “effectively complete as of that date, even if the challenged provisions of the stockholders agreement have ongoing effects or implication.” The court explained that a continuing violation is occasioned by continual unlawful acts, not continual ill effects from an original unlawful act. It held that the Court of Chancery should have focused on the gravamen of the claim, which was the manner in which the challenged provisions were adopted rather than acts taken pursuant to those provisions within the three-year limitations period, and on the fact that “complete and adequate relief” was available to the plaintiff in the three-year period following execution of the stockholders agreement.

The Delaware Supreme Court also rejected the Court of Chancery’s conclusion that Moelis could not establish prejudice from the plaintiff’s delay in filing suit, which is generally required to establish a laches defense. The Court held that, in requiring a showing that the defense would be “hampered by loss of evidence, faded memories, or some substantive change in the situation of the parties or property at issue,” the Court of Chancery failed to apply the presumption of prejudice triggered by a plaintiff’s untimely filing. “The presence of a complete record,” the court explained, does not preclude a laches defense. The court made clear that the presumption of prejudice is rebutted only under “unusual conditions and extraordinary circumstances,” including, for example, where the plaintiff had been pursuing the claim during the relevant period, where there has been “a material change in the plaintiff’s personal or financial circumstance,” or where “ongoing legal proceedings in other jurisdictions prevented the plaintiff from bringing suit within the limitations period.” Because the court found no evidence of “unusual conditions [or] extraordinary circumstances,” the presumption of prejudice applied. The court also found that no other tolling doctrine applied because the plaintiff was on notice of its rights before purchasing Moelis stock, and the plaintiff had not alleged that Moelis acted affirmatively to conceal the facts of its governance structure.

• Viability of Future As-Applied Challenges

The Delaware Supreme Court also pushed back on the Court of Chancery’s concern that applying the laches defense would “insulate illegality from review,” explaining that corporate acts are not immune from facial challenges within the applicable limitations period. Moreover, per the court, its ruling did not prevent Moelis stockholders from bringing “as-applied” claims against the companies or fiduciaries after expiration of the period for bringing facial challenges.

Takeaways

The Delaware Supreme Court’s defense-friendly decision provides companies defending against challenges to corporate acts with significant leeway to manage their affairs and a bevy of powerful arguments, especially when facing challenges to stockholders agreements and other governance documents. The decision makes clear that just because a corporate act may have transgressed a particular legal requirement, such act is nevertheless voidable, not void, if it could have been accomplished by some other legal means. The decision further establishes that a stockholder’s challenge to a voidable act is subject to equitable defenses, and articulates a clear guideline for assessing the timeliness of such challenge. It also significantly restricts the circumstances in which a plaintiff can successfully rebut the presumption of prejudice under a laches analysis in the event of an untimely claim.

Going forward, corporate defendants would be wise to rely on these arguments when facing facial challenges to corporate governance documents. When confronted with such challenges, particularly those that are potentially untimely or subject to other equitable defenses, corporate defendants (and their counsel) should carefully analyze whether the challenged governance arrangement could be accomplished by an alternative mechanism.

Finally, Delaware corporations should remain cognizant of the Legislature’s post-Chancery Court-decision amendment to the DGCL adding Section 122(18), which expressly authorizes certain contractual restrictions on the board’s governance, even if such restrictions are not contained in the company’s certificate of incorporation.

Michael A. Cabin is a partner in Duane Morris’ New York office and a member of the Securities Litigation and appellate divisions of the firm’s trial practice group. His practice focuses on complex securities, fiduciary-duty and deal litigation, as well as other complex commercial matters, in forums throughout the United States, and his experience spans a wide range of industries.

Brad D. Feldman is a partner in the firm’s southern New Jersey office, practicing in the area of complex commercial litigation. His experience spans a wide range of industries and matters, including, among others, securities litigation, merger litigation, real estate disputes, contract disputes, joint venture and partnership disputes, environmental litigation, and government and internal investigations.

Gregory D. Herrold is a senior associate in the firm’s southern New Jersey office, practicing in the area of litigation. He has represented a range of clients, from individuals to companies, in all stages of complex civil disputes.

Reprinted with permission of Delaware Business Court Insider.