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Our recent Client Alert discusses a February 23, 2024, decision issued by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery concluding that some provisions of a stockholder agreement purporting to give a large stockholder various governance rights—here, in the public company and investment bank Moelis—violated the Delaware statute by infringing upon the authority of the board of directors and were therefore invalid. Reviewing Delaware case law on board authority dating back to the early twentieth century, the court determined that the offending provisions—set forth in a stockholder agreement and not in the certificate of incorporation—operated as an improper constraint on board authority in violation of Section 141(a) of the Delaware General Corporation Law and interfered with the board’s authority to use its best judgment on management matters and policy. At the same time, the court concluded that some of the rights in question—particularly, the requirement to nominate the founder’s nominees for election and to use reasonable efforts for such nominees to be elected and to continue to serve as directors—were not facially invalid because they could operate legitimately under Delaware law. In particular, the court noted that stockholders have a fundamental right to nominate directors and that the corporation could appropriately take efforts, such as including the nominees in its proxy materials and on its proxy card, to cause the founder’s nominees to be elected and to serve on the board.

In assessing the impact of this case on current and future governance arrangements involving contracts outside of the certificate of incorporation, the details of the arrangements will matter—including the specific governance rights and obligations in question, whether they are referenced in the company’s certificate of incorporation, and potentially whether contractual provisions have fiduciary outs.