Wagner v. BRP Group, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

RUBY WAGNER, on behalf of herself )
and all other similarly situated )
stockholders of BRP GROUP, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2023-0150-JTL
)
BRP GROUP, INC., )
)
Defendant. )

OPINION ADDRESSING THE VALIDITY OF PROVISIONS IN A
GOVERNANCE AGREEMENT

Date Submitted: February 8, 2024
Date Decided: May 28, 2024

Peter B. Andrews, Craig J. Springer, David M. Sborz, Andrew J. Peach, Jackson E.
Warren, Jacob D. Jeifa, ANDREWS & SPRINGER LLC, Wilmington, Delaware;
Steven J. Purcell, Robert H. Lefkowitz, PURCELL & LEFKOWITZ LLP, New York,
New York; Counsel for Plaintiff.

S. Mark Hurd, Lauren K. Neal, Alec F. Hoeschel, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Counsel for Defendant.

LASTER, V.C.
The founder of a business sought to access the public markets. He wanted the

freedom to sell the vast bulk of his equity stake while still maintaining control over

the business. To achieve that goal, the founder entered into a contract with the

corporation. Although it bore the title of “Stockholders Agreement,” that document is

not an agreement among stockholders regarding the exercise of their stockholder-

level rights. It is really a governance agreement in which the corporation confers

control rights on the founder.

Among other things, the governance agreement provides that as long as the

founder and his affiliates beneficially own at least 10% of the outstanding shares,

then the corporation must obtain the founder’s prior written approval before it can

engage in a lengthy list of actions (the “Pre-Approval Requirements”). A stockholder

plaintiff contends that three of the Pre-Approval Requirements are facially invalid

(the “Challenged Provisions”).

Before defending the Challenged Provisions on the merits, the corporation

argues that the plaintiff waited too long to sue. The corporation also argues that

because the Stockholders Agreement pre-dated the corporation’s IPO and was

disclosed when the corporation went public, the plaintiff constructively accepted its

terms by buying shares. In legal lingo, the Company relies on the equitable defenses

of laches and acquiescence. But if the plaintiff’s claims are correct, and the court must

assume so when evaluating equitable defenses at the pleading stage, then the

Challenged Provisions are void. Equitable defenses cannot validate void acts. The

equitable defenses of laches and acquiescence therefore cannot carry the day.
The corporation next asserts that an agreement entered into after the litigation

was filed rendered the plaintiff’s claims moot. In that agreement, the founder agreed

to consent to any action that a newly established independent committee of directors

approved unanimously. The standard for mootness, however, requires a showing that

an adjudication would no longer have any practical effect. The corporation modified

the Challenged Provisions, but it did not eliminate them. An adjudication can still

have a practical effect, either by validating or invaliding the Challenged Provisions

as modified by the subsequent agreement. The plaintiff’s claims are therefore not

moot.

On the merits, the plaintiff’s attacks on the Challenged Provisions succeed—

at least for purposes of those provisions as they existed when the plaintiff filed this

lawsuit. First, the plaintiff objects to the requirement that the corporation obtain the

founder’s prior written approval before permitting the occurrence of, agreeing to, or

committing to any significant decision regarding any senior officer (the “Officer Pre-

Approval Requirement”). That provision is invalid because it contravenes Section

141(a) of the Delaware General Corporation Law (the “DGCL”). It is also invalid

because it contravenes Sections 142(a) and (e).

Next, the plaintiff challenges a requirement that the corporation obtain the

founders’ prior written approval before permitting the occurrence of, agreeing to, or

committing to any charter amendment (the “Charter Pre-Approval Requirement”).

That provision likewise contravenes Section 141(a) of the DGCL. It also contravenes

Section 242 of the DGCL.

2
Last, the plaintiff challenges a requirement that the corporation obtain the

founders’ prior written approval before permitting the occurrence of, agreeing to, or

committing to an array of significant transactions (the “Transaction Pre-Approval

Requirement”). While that provision or versions of it could well be valid in a

commercial agreement, as a feature in a governance agreement, it violates Section

141(a).

As a general matter, the corporation disputes the plaintiff’s ability to mount a

facial challenge to the Challenged Provisions. Delaware courts have regularly

entertained facial challenges, and this case is no different.

But the analysis does not stop there, because the agreement that the

corporation and the founder entered into after the litigation added an additional

contractual overlay. Under that additional agreement, the founder bound himself to

consent to any action that required his pre-approval if the members of a board

committee determined that the action was in the best interests of the corporation.

The members of the committee comprise all eight of the corporation’s independent

directors, and the committee must vote unanimously in favor of the proposed action

at a meeting at which all of the members of the committee are present.

Those procedural limitations mean that any one committee member can block

the determination and permit the founder to withhold his approval. But when

determining whether a provision violates Section 141(a), the Delaware Supreme

Court has distinguished between substantive and procedural restrictions. The

committee mechanism is therefore sufficient to defeat the plaintiff’s attacks on the

3
Challenged Provisions under Section 141(a). The committee mechanism does not

affect the violations of Sections 142 or 242.

The Officer Pre-Approval Requirement is facially invalid under Section 142.

The Charter Pre-Approval Requirement is facially invalid under Section 242. The

plaintiff’s motion for judgment on the pleadings is granted as to those provisions on

those grounds. Otherwise, the plaintiff’s motion for judgment on the pleadings is

denied. The Company’s cross motion for judgment on the pleadings is granted in part

and denied in part to a reciprocal degree.

I. FACTUAL BACKGROUND

The facts are drawn from the parties’ cross-motions for judgment on the

pleadings. 1 The pertinent facts are undisputed.

A. The Company And Its Up-C IPO

In 2011, Lowry Baldwin co-founded an insurance business with his son Trevor

Baldwin and two other partners. 2 From the outset, Lowry controlled a majority of the

equity and served as Chairman and CEO. At some point, the business began

operating as a limited liability company named Baldwin Risk Partners, LLC (the

“LLC”).

1 Citations in the form “PX __” refer to exhibits that the plaintiff submitted with its

opening brief or reply brief. Citations in the form “DX__” refer to exhibits that the Company
submitted with its opening brief and reply brief. Citations in the form “Tr.__” refer to the oral
argument transcript. Dkt. 34.

2 To avoid confusion, this decision uses the Baldwins’ first names without implying

familiarity or intending disrespect.

4
In 2019, the firm prepared to sell equity to the public through an Up-C IPO. 3

That complex piece of legal and financial engineering enables an entity taxed as a

partnership to access the public capital markets while maintaining a single level of

taxation for the pre-IPO equity holders.

At the time, Lowry owned a majority of the LLC’s equity through Baldwin

Insurance Group Holdings, LLC (“Holdings”), an entity he still controls. His son, the

two partners, several executives, and the former owners of various companies that

the firm had acquired held the balance of the equity. Together, they owned 100% of

the pre-IPO equity interest in the LLC (collectively, the “Holders”).

Lowry and the Holders formed BRP Group, Inc. (the “Company”) to serve as

the publicly listed vehicle for the IPO. The Company’s certificate of incorporation (the

“Charter”) authorizes two classes of common stock. 4 The Class A common stock

carries one vote per share and represents a proportionate ownership interest in the

economic value of the Company. The Class B common stock carries one vote per share

but has no claim on the Company’s economic value; it is purely a governance

instrument.

3 Other decisions discuss the standard elements of an Up-C structure. See, e.g., City

of Pittsburgh Comprehensive Mun. Pension Tr. Fund v. Conway, 2024 WL 1752419, at *3
(Del. Ch. Apr. 24, 2024) (comparing Up-C structure with standard IPO structures); Colon v.
Bumble, Inc., 305 A.3d 352, 355–58 (Del. Ch. 2023) (discussing a standard Up-C structure
and the benefits it confers); Williams Field Servs. Gp., LLC v. Caiman Energy II, LLC, 2019
WL 4668350, at *12 (Del. Ch. Sept. 25, 2019) (discussing the basic steps involved in an Up-C
IPO). See generally Victor Fleischer & Nancy Staudt, The Supercharged IPO, 67 Vand. L.
Rev. 307, 319–22 (2014) (discussing various Up-C structures and the attendant benefits).

4 See PX 1.

5
In October 2019, the Company raised capital by issuing Class A shares to the

public. The Company used the IPO proceeds to acquire a combination of newly issued

LLC units plus additional LLC units from certain Holders. Through those purchases,

the Company came to own a number of LLC units that corresponded to the number

of issued and outstanding Class A shares.

Meanwhile, the Company issued Class B shares to the Holders that matched

the number of LLC units each owned after the IPO. The resulting hybrid equity

structure means the Holders participate in the governance and economic fortunes of

the business through two separate securities. They participate in governance at the

Company level through their Class B shares. They participate in the economic

fortunes of the business through their LLC units. Public investors, by contrast,

participate in both governance and the economic fortunes of the business through

their Class A shares.

Under this framework, the combination of one LLC unit and one Class B share

equates to one Class A share. One of the rights that the Holders enjoy enables them

to tender matched combinations of LLC units and Class B shares to the Company in

exchange for Class A shares, which the Holders can sell on the open market.

After the IPO, the Holders owned Class B shares representing approximately

70% of the Company’s outstanding voting power, along with LLC units representing

approximately 70% of the economic interest in the LLC. Since the IPO, the Holders

have steadily converted their LLC units and Class B shares into Class A shares,

which they have sold into the market. When the plaintiff filed the complaint, the

6
Holders owned 23% of the Company’s outstanding voting power, which translates to

23% of the economics.

B. The Pre-Approval Requirements

In connection with the IPO, the Company and the Holders entered into a

governance agreement (the “Stockholders Agreement”). 5 That agreement sought to

confer various rights on the Holders that would permit them to exercise control over

the Company even after they sold off their shares. The IPO planners could have built

those rights into the Charter. They chose instead to put them in the Stockholders

Agreement.

The control rights included the Pre-Approval Requirements. The operative

provision states:

Approval for Certain Corporate Actions. Until the Substantial
Ownership Requirement is no longer met, [the Company] shall not
permit the occurrence of the following matters relating to [the Company]
or [the LLC] without first receiving the approval of the Holders holding
a majority of the shares of Class B Common Stock held by the Holders
as evidenced by a written resolution or consent in lieu thereof:

(a) any transaction or series of related transactions resulting in the
merger, consolidation or sale of all, or substantially all, of the assets of
[the LLC] and its subsidiaries; any dissolution, liquidation or
reorganization (including filing for bankruptcy) of [the LLC] and its
subsidiaries or any acquisition or disposition of any asset for
consideration in excess of 5% of the Total Assets (as defined below) of
[the Company] and its subsidiaries;

(b) any transaction or series of related transactions resulting in the
issuance of equity securities, or any other ownership interests, of [the
Company], [the LLC] or any of their subsidiaries for consideration

5 PX 3 (cited as “SA”).

7
exceeding $10 million, other than under any equity incentive plan that
has received the prior approval of the Board of Directors;

(c) any amendments to the certificate of incorporation or bylaws of [the
Company], or to the certificate of formation or operating agreement of
[the LLC];

(d) the incurrence, guarantee, assumption or refinancing of
indebtedness, or grant of a security interest, in each case in excess of
10% of Total Assets (or that would cause aggregate indebtedness or
guarantees thereof to exceed 10% of Total Assets);

(e) the establishment or amendment of any equity, purchase or bonus
plan for the benefit of employees, consultants, officers or directors;

(f) any capital or other expenditure in excess of 5% of Total Assets;

(g) the declaration or payment of dividends on Class A Common Stock,
or distributions by [the LLC] on LLC Units other than Tax Distributions
as defined in the Third Amended and Restated Limited Liability
Company Agreement of [the LLC];

(h) any change in the size of the Board of Directors;

(i) any change to the location of headquarters, jurisdiction of
incorporation, name or fiscal year end of [the Company] or [the LLC] or
any change to the designated registered public accounting firm of [the
Company];

(j) the adoption of any “poison pill” or similar shareholder rights plan;

(k) any hiring, termination, or replacement of, or establishing the
compensation or benefits payable to, or making any other significant
decisions relating to the Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer, Chief Partnership Officer or any other senior
management or key employee of [the Company] or [the LLC], including
entering into new employment agreements or modifying existing
employment agreements, adopting or modifying any plans relating to
any incentive securities or employee benefit plans or granting incentive
securities or benefits to any such individuals under any existing plans;
or

8
(l) any agreement or commitment with respect to any of the foregoing. 6

Those twelve provisions cover most of the significant actions a board can take.

The lead-in to the Pre-Approval Requirements states that the Company cannot

take any of the listed actions without “first receiving the approval of the Holders

holding a majority of the shares of Class B Common Stock held by the Holders.” 7

Through a separate voting agreement, certain Holders committed to vote as Lowry

directed, giving him control over their shares as well. Lowry therefore controls the

exercise of the Pre-Approval Requirements.

The Pre-Approval Requirements remain in effect until the Holders’ collective

beneficial ownership falls below the Substantial Ownership Requirement. The

Stockholders Agreement defines that term to mean ten percent of the Company’s

outstanding common stock. 8 The Company cannot terminate the Stockholders

Agreement, and its terms cannot be modified without the Holders’ prior written

consent (which means without Lowry’s prior written consent). The Pre-Approval

Requirements therefore will remain in effect until the Holders’ ownership drops

below 10%, unless Lowry voluntarily gives up his rights earlier.

6 Id. § 1.01(a)–(l).

7 Id.

8 Id. at § 4.02(d).

9
C. The Challenged Provisions

The plaintiff owns Class A shares that she purchased in December 2020. She

filed the complaint in this action on February 8, 2023. She only attacks the

Challenged Provisions. At oral argument, the plaintiff’s counsel confirmed that they

were not conceding the validity of any other aspects of the Pre-Approval

Requirements. The plaintiff simply decided to target what his lawyer regarded as

low-hanging fruit. 9

The first Challenged Provision is the Officer Pre-Approval Requirement. It

requires that the Company obtain Lowry’s prior written approval before permitting

the occurrence of, entering into any agreement regarding, or making any commitment

with respect to

any hiring, termination, or replacement of, or establishing the
compensation or benefits payable to, or making any other significant
decisions relating to the Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer, Chief Partnership Officer or any other senior
management or key employee of [the Company] or [the LLC], including
entering into new employment agreements or modifying existing
employment agreements, adopting or modifying any plans relating to
any incentive securities or employee benefit plans or granting incentive
securities or benefits to any such individuals under any existing plans 10

The Officer Pre-Approval Requirement has particular salience given that Trevor

Baldwin, Lowry’s son, serves as CEO. In light of the Officer Pre-Approval

Requirement, the Board must retain Trevor as CEO indefinitely and cannot make

9 Tr. at 62–63.

10 SA § 1.01(k).

10
any “significant decision” relating to his employment unless Lowry gives his prior

written approval.

The Charter Pre-Approval Requirement requires the Company to obtain

Lowry’s prior written approval before permitting the occurrence of, entering into any

agreement regarding, or making any commitment with respect to “any amendments

to the certificate of incorporation” of the Company. 11 That phrase appears within a

larger provision that applies to “any amendments to the certificate of incorporation

or bylaws of [the Company], or to the certificate of formation or operating agreement

of [the LLC].” 12 The plaintiff only challenges the aspect that applies to a charter

amendment.

The Transaction Pre-Approval Requirement requires the Company to obtain

Lowry’s prior written consent before permitting the occurrence of, entering into any

agreement regarding, or making any commitment with respect to:

any transaction or series of related transactions resulting in the merger,
consolidation or sale of all, or substantially all, of the assets of [the LLC]
and its subsidiaries; any dissolution, liquidation or reorganization
(including filing for bankruptcy) of [the LLC] and its subsidiaries or any
acquisition or disposition of any asset for consideration in excess of 5%
of the Total Assets (as defined below) of [the Company] and its
subsidiaries[.] 13

11 Id. § 1.01(c).

12 Id.

13 Id. § 1.01(a).

11
The Transaction Pre-Approval Requirement thus addresses a range of transactions

at the LLC level. It also prohibits any acquisition or disposition of any material

amount of assets (5% or greater) by the Company.

D. The Consent Agreement

In May 2023, in response to this litigation, the Company and Holdings entered

into a Consent and Defense Agreement (the “Consent Agreement”). 14 In that

agreement, Holdings committed to approve any matter requiring consent under the

Stockholders Agreement if the matter received unanimous approval from all of the

members of a committee comprising all of the Company’s independent directors (the

“Independent Committee”). The pertinent language states:

[Holdings], by executing this Agreement, irrevocably consents to and
approves, on behalf of itself and the other Holders, any Specified Matter
that the Independent Committee determines in good faith is in the best
interests of [the Company] and its stockholders in their capacity as such,
and irrevocably agrees, on behalf of itself and the other Holders, that
this consent shall satisfy the [Pre-Approval Requirements] with respect
to such Specified Matter; provided, however, that the consent set forth
in this paragraph 1 shall be inoperative and of no further force and effect
upon the termination of this Agreement in accordance with its terms. 15

The Consent Agreement thus ensures that the Pre-Approval Requirements do not

apply if the Independent Committee “determines in good faith [that an action] is in

14 DX D (cited as “CA”).

15 CA § 1. Under the Committee Provision, “Independent Director” means “a director

who the Board determines both: (i) qualifies as an independent director under the corporate
governance standards of Nasdaq and (ii) has no relationship with the Corporation or any
Holder that would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.” DX E §4.02 (the “Committee Provision”).

12
the best interests of [the Company] and its stockholders in their capacity as such”

(the “Committee Waiver”).

Contemporaneously, the Company’s board of directors (the “Board”) amended

the bylaws. 16 The amendment states:

A committee of the Board (the “Independent Committee”) is designated
by the adoption by the Board of this Section 4.02 of these By-laws. The
Independent Committee shall be composed of all of the Independent
Directors (as defined below) then in office . . . . The Independent
Committee shall have the full power and authority of the Board to make,
solely for purposes of the [Consent Agreement], any determination
contemplated by Paragraphs 1 and 2 thereof, and with respect to
amending, waiving or enforcing any term of the [Consent Agreement],
and to take any action and engage any such advisors or counsel as it
deems necessary in connection therewith. 17

The Committee Provision thus empowers the Independent Committee with the full

power and authority of the Board for purposes of any Committee Waiver.

The Committee Provision does not, however, authorize the Independent

Committee to exercise all of the authority that the DGCL would permit. The relevant

language states that:

Notwithstanding anything to the contrary in the General Corporation
Law or these By-laws:

(a) . . . the member or members present at any meeting and not
disqualified from voting may not appoint another member of the Board
to act at the meeting in the place of any such absent or disqualified
member;

16 PX 2 (the “Bylaws”).

17 DX E § 4.02.

13
(b) the Independent Committee may not create any
subcommittees;

(c) all of the members then serving on the Independent
Committee shall be required to constitute a quorum for the transaction
of business of the Independent Committee;

(d) the affirmative vote of all members of the Independent
Committee shall be the act of the Independent Committee;

(e) the Independent Committee may, but is not required to, elect
a chairperson from among its members; and

(f) the Independent Committee may make, alter and repeal rules
and procedures for the conduct of its business so long as such rules and
procedures are not inconsistent with this Section 4.02. 18

The Committee Provision also mandates that the Independent Committee act

unanimously at a meeting at which all of its members are present.

Under this suite of provisions, a lone Independent Director can block a

Committee Waiver, either by voting no, by abstaining from a vote, or by failing to

appear and preventing the existence of a quorum. If any one Independent Director

does any of those things, then Lowry can exercise the applicable Pre-Approval

Requirement.

According to the Company’s April 2023 proxy statement, eight of the eleven

members of the Board qualify as Independent Directors. 19 Only Lowry, Trevor, and

Kris Wiebeck, the Company’s Chief Strategy Officer, are considered non-

18 Id. (formatting added).

19 DX P at 11.

14
independent. Thus, the Consent Agreement only authorizes a Committee Waiver if

all eight Independent Directors vote unanimously to approve a Committee Waiver.

The Consent Agreement also obligates the Company to indemnify the Holders

for any liabilities incurred in connection with the Stockholders Agreement and the

Consent Agreement (the “Indemnity Provision”). 20 If litigation arises over either,

then the Company must pay Lowry’s fees and expenses in addition to the Company’s

own.

II. LEGAL ANALYSIS

The parties have filed cross-motions for judgment on the pleadings. Under

Court of Chancery Rule 12(c), “[a] motion for judgment on the pleadings may be

granted only when no material issue of fact exists and the movant is entitled to

judgment as a matter of law.” 21 When ruling on dueling Rule 12(c) motions, the court

must “view the facts pleaded and the inferences to be drawn from such facts . . . in a

light most favorable to the non-moving party.” 22 Here, the parties agree on the facts.

They only disagree about issues of law.

This decision proceeds in four parts. First, it addresses the Company’s reliance

on the equitable defenses of laches and acquiescence. Next, it considers whether the

Consent Agreement mooted the plaintiff’s claims. Having dealt with those

20 CA § 3.

21 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d

1199, 1205 (Del. 1993).

22 Id.

15
preliminary issues, it evaluates the facial challenge to the Challenged Provisions.

Finally, it considers the implications of the Consent Agreement.

A. The Equitable Defenses

The Company argues at the outset that the plaintiff cannot assert her claims

because the doctrines of laches and acquiescence bar any challenge. This court

addressed virtually identical arguments in a recent decision. 23 The same analysis

applies here. Because the analysis carries over, this decision does not repeat all of the

points that the prior decision made.

1. Equitable Defenses Cannot Validate Void Acts.

The Company’s equitable defenses fail out of the gate because equitable

defenses cannot validate void acts. If the plaintiff’s theories are correct—and the

court must assume they are when analyzing whether equitable defenses can prevail

at the pleading stage—then the Challenged Provisions are void. Equitable defenses

therefore do not apply.

The Company advances one new argument that the Moelis Preliminary Issues

decision did not address. According to the Company, language from Chancellor

Allen’s decision in Grimes I supports viewing the Challenged Provisions as “voidable

in equity” rather than void. 24 That is not correct.

23 See W. Palm Beach Firefighters Pension Fund v. Moelis & Co. (Moelis Preliminary

Issues), 310 A.3d 985, 993–1010 (Del. Ch. 2024).

24 Def.’s Opening Br. at 24–25 (discussing Grimes v. Donald (Grimes I), 1995 WL
54441 (Del. Ch. Jan. 11, 1995), aff’d, 673 A.2d 1207 (Del. 1996)).

16
Properly understanding the Grimes I decision requires starting with Professor

Berle’s famous formulation:

[I]n every case, corporate action must be twice tested: first, by the
technical rules having to do with the existence and proper exercise of
the power; second, by equitable rules somewhat analogous to those
which apply in favor of a cestui que trust to the trustee’s exercise of wide
powers granted to him in the instrument making him a fiduciary. 25

Delaware follows the twice-testing formula. 26

The first test—Berle I—asks whether corporate action complied with “the

hierarchical components of the entity-specific corporate contract, comprising (i) the

Delaware General Corporation Law, (ii) the corporation’s charter, (iii) its bylaws, and

(iv) other entity-specific contractual agreements . . . .” 27 That analysis turns on an

objective comparison of the challenged arrangement with more senior components of

the entity-specific corporate contract, including the DGCL.

The second test—Berle II—asks whether the directors who took the corporate

action breached their fiduciary duties of loyalty and care by failing to act in good faith,

by making decisions when they were self-interested or not independent, or by acting

in a grossly negligent manner. That analysis turns primarily on (i) what the directors

knew, believed, and intended at the time when they acted, (ii) any conflicts of interest

25 Adolf A. Berle, Jr., Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049,

1049 (1931).

26 Coster v. UIP Cos., Inc., 255 A.3d 952, 960 (Del. 2021).

27 Quadrant Structured Prods. Co., Ltd. v. Vertin (Quadrant II), 2014 WL 5465535, at

*3 (Del. Ch. Oct. 28, 2014).

17
that the directors labored under when acting, and (iii) the process the directors

followed.

The two tests are distinct. Conduct can be legal (passing Berle I) but

inequitable (failing Berle II). 28 Conduct also can be illegal (failing Berle I) and yet

there could be situations where it would be equitable (passing Berle II). 29 The vast

majority of corporate actions satisfy both Berle I and Berle II. Some, such as a

deferred redemption provision in a stockholder rights plan, violate both Berle I and

Berle II. 30

In Grimes I, Chancellor Allen emphasized the distinctive nature of the two

types of challenges. There, a plaintiff contended that a CEO’s employment agreement

violated Section 141(a) by preventing the board from overseeing and, if necessary,

terminating him. 31 The defendants tried to recharacterize the claim as a derivative

28 Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971) (“[I]nequitable

action does not become permissible simply because it is legally possible.”).

29 Compare Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 958 (Del. 1985), with

Securities Exchange Act of 1934, 17 C.F.R. § 240.14d-10.

30 Compare Mentor Graphics Corp. v. Quickturn Design Sys., Inc. (Quickturn I), 728

A.2d 25, 44 (Del. Ch. 1998) (enjoining deferred redemption provision as a breach of fiduciary
duty), with Quickturn Design Sys., Inc. v. Shapiro (Quickturn II), 721 A.2d 1281, 1283 (Del.
1998) (affirming Quickturn I on other grounds; holding that deferred redemption provision
conflicted with Section 141(a)).

31 Grimes I, 1995 WL 54441, at *1. There were actually three interrelated agreements,

but it is easier to frame the issue as if they were all part of a single employment agreement.

18
action for breach of fiduciary duty that should be dismissed under Rule 23.1. 32

Chancellor Allen rejected that characterization:

Whether these contracts do violate Section 141 is a question of law
directly concerning the legal character of the contract and its effect upon
the directors. The question whether these contracts are valid or not does
not fall into the realm of business judgment; it cannot be definitively
determined by the informed, good faith judgment of the board. It must
be determined by the court. 33

By contrast, Chancellor Allen agreed that the fiduciary duty challenges to the

agreement were subject to Rule 23.1, and he dismissed them on that basis. 34

As the Company correctly points out, Chancellor Allen used the words

“voidable in equity” when describing the basic issues in the case. At the outset of the

decision, he stated:

It is the alleged practical effect of these contracts that is said to
constitute the abdication of directorial responsibility. I assume for
purposes of resolving this dispute that, at least under some
circumstances, that such an effect of an employment contract would
render it voidable in equity. 35

But by using that phrase when describing an assumption he made, Chancellor Allen

did not elide the two types of claims such that he transformed a statutory Berle I

challenge into a Berle II challenge “in equity.” Nor did he hold that the statutory

32 Id. at *7.

33 Id.

34 Id. at *8.

35 Id. at *9–10 (emphasis omitted).

19
violation rendered the contract voidable such that equitable doctrines could apply. To

the contrary, as noted, he distinguished between the legal and equitable claims.

Regardless, on appeal, the Delaware Supreme Court ruled definitively.

Adopting the test that Chancellor Seitz created in his seminal decision in

Abercrombie v. Davies, 36 the justices held that “[a] court ‘cannot give legal sanction

to agreements which have the effect of removing from directors in a very substantial

way their duty to use their own best judgment on management matters.’” 37 The

Delaware Supreme Court thus made clear that the claim at issue asserted that the

employment agreement conflicted with Section 141(a) and was void. The plaintiff had

not asserted a fiduciary claim that could render the contract voidable in equity. On

the facts presented, the high court agreed with Chancellor Allen that the employment

agreement with the CEO did not create a Section 141(a) issue. 38

The Company also relies on Coinmint, where this court observed that “voidable

breaches of LLC agreements are subject to equitable defenses, including waiver,

estoppel, and laches.” 39 That precedent is inapposite because this case does not

involve an LLC agreement, and LLCs are sufficiently different from corporations that

36 Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956), rev’d on other grounds, 130

A.2d 338 (Del. 1957).

37 Grimes v. Donald (Grimes II), 673 A.2d 1207, 1214 (Del. 1996) (quoting Abercrombie,

123 A.2d at 899).

38 Grimes II, 673 A.2d 1207, 1215 n.4; Grimes I, 1995 WL 54441, at *9.

39 In re Coinmint, LLC, 261 A.3d 867, 892 (Del. Ch. 2021).

20
voidness principles do not readily translate. The LLC’s hierarchy—consisting of (i)

the Delaware Limited Liability Company Act, (ii) the certificate of formation, and (iii)

the LLC agreement—corresponds only loosely to the corporate hierarchy of (i) the

DGCL, (ii) the certificate of incorporation, and (iii) the bylaws. There are fundamental

differences between what a certificate of formation must contain (virtually nothing)

and what a certificate of incorporation must contain (six enumerated items including

the number and types of shares the corporation can issue and any special rights,

powers, privileges, qualifications, and limitations on those shares). 40 And there are

fundamental differences between what an LLC can achieve through its constitutive

document (minimally constrained) and what a corporation can achieve (moderately

constrained). Most notably, the pivotal document for an LLC (the LLC agreement)

can (i) fully eliminate any duties existing at law or in equity, including fiduciary

duties, 41 (ii) provide indemnification and advancement unconstrained by any

40 Compare 6 Del. C. § 18-201(a) with 8 Del. C. § 102(a).

41 See 6 Del. C. § 18-1101(c) (“To the extent that, at law or in equity, a member or

manager or other person has duties (including fiduciary duties) to a limited liability company
or to another member or manager or to another person that is a party to or is otherwise bound
by a limited liability company agreement, the member’s or manager’s or other person’s duties
may be expanded or restricted or eliminated by provisions in the limited liability company
agreement; provided, that the limited liability company agreement may not eliminate the
implied contractual covenant of good faith and fair dealing.”). When the General Assembly
adopted Section 18-1101(e), Delaware decisions had not yet distinguished cleanly between
the concept of good faith in fiduciary law and the role that the implied covenant of good faith
and fair dealing plays as a source of implied contractual terms. See, e.g., Gerber v. Enter.
Prods. Hldgs., LLC, 67 A.3d 400, 418–19 (Del. 2013), overruled on other grounds by Winshall
v. Viacom Int’l, Inc., 76 A.3d 808 (Del. 2013); Renco Gp., Inc. v. MacAndrews AMG Hldgs.
LLC, 2015 WL 394011, at *7 n.74 (Del. Ch. Jan. 29, 2015). The statement that an LLC
agreement “may not eliminate the implied contractual covenant of good faith and fair
dealing” seems like an attempt to preserve some form of obligation to act in good faith. Gerber,

21
statutory standards, 42 and (iii) fully eliminate any and all liabilities, except for bad

faith breaches of the implied covenant of good faith and fair dealing. 43 By contrast,

67 A.3d at 409. But in its role as a source of implied terms, the implied covenant cannot fulfill
that mission, because the implied covenant does not operate as a fiduciary substitute. Wood
v. Baum, 953 A.2d 136, 143 (Del. 2008) (“The implied covenant of good faith and fair dealing
is a creature of contract, distinct from the fiduciary duties that the plaintiff asserts here.”).
And express terms displace it, enabling alternative entity agreements to authorize a decision
maker to consider and act based on its own interests, irrespective of the entity’s interests.
See, e.g., Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354, 361 (Del. 2013) (enforcing provision
that allowed a general partner to “consider only such interests and factors as it desires”);
Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 181 (Del. Ch. 2014) (upholding
provision that “confers contractual discretion on the Conflicts Committee to balance the
competing interests of the Partnership’s various entity constituencies when determining
whether a conflict-of-interest transaction is in the best interests of the Partnership”), aff’d,
2015 WL 803053 (Del. Feb. 26, 2015) (TABLE); Paul M. Altman & Srinivas M. Raju, Delaware
Alternative Entities and the Implied Contractual Covenant of Good Faith and Fair Dealing
Under Delaware Law, 60 Bus. Law. 1469, 1484 (2005) (recommending that alternative entity
agreements provide that the decision maker be granted discretion to “consider only such
interests and factors as it desires, including its own interests,” and eliminate any “duty or
obligation to give any consideration to any interest of or factors affecting the” entity or its
investors). Nor does the statutory mandate to preserve the implied covenant provide
incremental protection, because the implied covenant of good faith and fair dealing already
inheres in every contract governed by Delaware law and cannot be eliminated. See Dunlap v.
State Farm Fire & Cas. Co., 878 A.2d 434, 442–43 (Del. 2005).

42 See 6 Del. C. § 18-108 (“Subject to such standards and restrictions, if any, as are set

forth in its limited liability company agreement, a limited liability company may, and shall
have the power to, indemnify and hold harmless any member or manager or other person
from and against any and all claims and demands whatsoever.”).

43 See 8 Del. C. § 18-1101(e) (“A limited liability company agreement may provide for

the limitation or elimination of any and all liabilities for breach of contract and breach of
duties (including fiduciary duties) of a member, manager or other person to a limited liability
company or to another member or manager or to another person that is a party to or is
otherwise bound by a limited liability company agreement; provided, that a limited liability
company agreement may not limit or eliminate liability for any act or omission that
constitutes a bad faith violation of the implied contractual covenant of good faith and fair
dealing.”). Like the statutory preservation of the implied covenant of good faith and fair
dealing in Section 18-1101(c), the statutory preservation of liability for bad faith violations
of the implied covenant was likely an attempt to retain accountability for intentional
misconduct that ran contrary to the best interests of the entity. But here again, the implied
covenant cannot fulfill its mission, because it is not a fiduciary substitute. See Wood, 953
A.2d at 143. It is also wickedly difficult under Delaware law to prove a claim for breach of

22
the constitutive documents of a corporation (the charter and bylaws) (i) can shape

fiduciary duties but cannot eliminate them, 44 (ii) cannot eliminate monetary liability

for breach of fiduciary duty except for breaches of the duty of care, 45 (iii) cannot

provide indemnification or advancement that goes beyond statutory standards, 46 and

(iv) cannot constrain liability for breach of the implied covenant of good faith and fair

dealing. 47 For purposes of voidness doctrine, corporate acts that violate the charter

are void, although potentially subject to validation under Sections 204 and 205. 48

Violations of an LLC agreement are typically voidable, but the LLC agreement can

make violative actions incurably void as a matter of contract. 49 In its assessment of

the implied covenant, and all the more so to prove a bad faith breach of an implied term.
“Rather than preserving a measure of accountability by imposing a meaningful floor, the
statutory limit on exculpation sets the bar at the band sill.” Bamford v. Penfold, L.P., 2022
WL 2278867, at *33 n.18 (Del. Ch. June 24, 2022).

44 See New Enter. Assocs. 14, L.P. v. Rich, 295 A.3d 520, 544–74 (Del. Ch. 2023).

45 See 8 Del. C. § 102(b)(7).

46 See 8 Del. C. § 145.

47 See, e.g., In re Delphi Fin. Gp. S’holder Litig., 2012 WL 729232, at *17 (Del. Ch.

Mar. 6, 2012) (explaining that implied covenant of good faith and fair dealing inhered in
charter and bylaws); Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1032 (Del. Ch. 2004)
(deploying implied covenant of good faith and fair dealing when interpreting certificate of
incorporation), aff’d, 872 A.2d 559 (Del. 2005).

48 See 8 Del C. §§ 204, 205.

49 See Holifield v. XRI Inv. Hldgs. LLC, 304 A.3d 896, 932 (Del. 2023); CompoSecure,

L.L.C. v. CardUX, LLC, 206 A.3d 807, 818 (Del. 2018).

23
the law, Coinmint states accurately that “void acts are ultra vires and generally

cannot be ratified.” 50 Otherwise, Coinmint is not pertinent to this case.

When the General Assembly enacts a statute, that statute embodies

Delaware’s public policy. 51 “Under Delaware common law, contracts that offend

public policy or harm the public are deemed void as opposed to voidable.” 52 If the

Challenged Provisions violate the DGCL, then they are void. 53 Equitable defenses,

including laches, cannot validate void acts. 54 Given the theory of the complaint, the

Company cannot rely on equitable defenses to defend the Stockholders Agreement.

50 Coinmint, 261 A.3d at 890 (quoting CompoSecure, 206 A.3d at 816).

51 Edwards v. William H. Porter, Inc., 1991 WL 165877, at *8 (Del. Super. Ct. July 26,

1991), aff’d, 616 A.2d 838 (Del. 1992) (“Through the enactment of statutes, the General
Assembly declares the public policy of the State, not the courts.”) (citing Ames v. Wilm. Hous.
Auth., 233 A.2d 453, 456 (Del. 1967)).

52 PHL Variable Ins. Co. v. Price Dawe 2006 Ins. Tr., ex rel. Christiana Bank & Tr.

Co., 28 A.3d 1059, 1067 (Del. 2011).

53 See XRI Inv. Hldgs. LLC v. Holifield, 283 A.3d 581, 651 (Del. Ch. 2022) (“[T]he

Delaware Supreme Court has stated that ‘contracts that offend public policy or harm the
public are deemed void,’ . . . and the Delaware Superior Court has summarized the applicable
principles as follows: ‘As a general rule, agreements against public policy are illegal and void.
. . . [P]ublic policy may be determined from consideration of the federal and state
constitutions, the laws, the decisions of the courts, and the course of administration.’”) (first
quoting PHL, 28 A.3d at 1067, then quoting Sann v. Renal Care Ctrs. Corp., 1995 WL 161458,
at *5 (Del. Super. Ct. Mar. 28, 1995)), aff’d in pertinent part, rev’d in other part, 304 A.3d 896
(Del. 2023).

54 XRI, 283 A.3d at 641–42; Absalom Absalom Tr. v. Saint Gervais LLC, 2019 WL

2655787, at *3 (Del. Ch. June 27, 2019); see STAAR Surgical Co. v. Waggoner, 588 A.2d 1130,
1137 (Del. 1991); Waggoner v. Laster, 581 A.2d 1127, 1137 (Del. 1990). As noted, Sections 204
and 205 of the DGCL “provide mechanisms for a corporation to unilaterally ratify defective
corporate acts or seek relief from the Court of Chancery to validate any corporate act under
certain circumstances.” Holifield, 304 A.3d at 931. Those statutes can be used to validate void
acts; equitable defenses still cannot.

24
2. Additional Reasons Why The Laches Defense Fails

Assuming laches could apply, the Company cannot prevail on that defense

because the plaintiff did not delay unreasonably after the point when the claim

accrued, and the Company cannot show prejudice. The Company does not advance

any arguments that differ from those addressed in the Moelis Preliminary Issues

decision, so this decision does not repeat that analysis. 55

3. The Other Equitable Defenses Fail.

The Company also invokes the equitable defenses of waiver, acquiescence, and

estoppel. Assuming those equitable defenses could apply, they too fall short.

“Waiver is the voluntary and intentional relinquishment of a known right.” 56

In contrast, “[f]or the defense of acquiescence to apply, conscious intent to approve

the act is not required . . . .” 57 Either equitable defense may result in “‘a judicial

remedy by which a party may be precluded by its own act or omission from asserting

a right to which it otherwise would have been entitled . . . .’” 58

The Company contends that because the Company disclosed the Challenged

Provisions in connection with its IPO, the plaintiff acquiesced to the arrangement,

waived any right to challenge the Challenged Provisions, and is estopped from

55 Moelis Preliminary Issues, 310 A.3d at 994–1000.

56 Realty Growth Invs v. Council of Unit Owners, 453 A.2d 450, 456 (Del. 1982).

57 Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1047 (Del. 2014).

58 Genencor Int’l, Inc. v. Novo Nordisk A/S, 766 A.2d 8, 12 (Del. 2000) (quoting 28 Am.

Jur. 2d Estoppel and Waiver § 28, at 453 (2000)).

25
challenging them now. This argument fails because it relies upon the premise that

the Challenged Provisions are voidable, rather than void. 59 If the Challenged

Provisions violate the DGCL, then they are void, not voidable, and equitable defenses

cannot validate void acts. The Moelis Preliminary Issues decision addressed these

matters at greater length. 60

Because equitable defenses cannot validate void acts the Company cannot rely

upon waiver, acquiescence, and estoppel. Those defenses do not bar the plaintiff from

bringing the facial challenge.

B. Mootness

In addition to its equitable defenses, the Company contends that the Consent

Agreement renders the plaintiff’s claims moot. Although the Consent Agreement

changed how the Challenged Provisions operate, it did not moot the plaintiff’s claims.

The Delaware Supreme Court recently summarized the standard for mootness

as follows:

[A] party seeking to employ the mootness doctrine, typically the
defendant, bears the burden of establishing that the controversy has
become moot. The mootness doctrine addresses cases where a
controversy existed at the time the plaintiff commenced litigation but
the controversy later dissolves. Where a defendant voluntarily
discontinues their conduct in response to a complaint being filed, we
apply the mootness doctrine. In those cases, voluntary cessation does
not automatically deprive the court of jurisdiction to hear the case.

59 See Def.’s Opening Br. at 30–31.

60 Moelis Preliminary Issues, 310 A.3d at 993–94.

26
Under the mootness standard, the defendant bears the “heavy” burden
of proving the controversy has become moot. 61

“A dispute is moot only if a grant of relief cannot have any practical effect on

the existing controversy,” and “a court should not dismiss claims unless it is certain

they could have no practical effect on the parties if adjudicated.” 62 The Company

argues that the Consent Agreement rendered the plaintiff’s claims moot because

Lowry waived his right to invoke any of the Pre-Approval Requirements if the

Independent Committee unanimously determines in good faith that an action is in

the best interests of the Company and its stockholders. 63 That provision modifies the

circumstances under which Lowry can rely on the Pre-Approval Requirements, but it

does not eliminate Lowry’s ability to invoke the Pre-Approval Requirements.

The plaintiff’s claims are therefore not moot. The plaintiff can—and does—

continue to contend that the Challenged Provisions are statutorily invalid,

notwithstanding the Consent Agreement.

C. The Officer Pre-Approval Requirement

Turning to the merits, the plaintiff first challenges the Officer Pre-Approval

Requirement. As it appears in the Stockholders Agreement, that provision is invalid

61 Empls. Ins. Co. of Wausau v. First State Orthopaedics, P.A., 2024 WL 74148, at *7

(Del. Jan. 8, 2024) (footnotes omitted) (emphasis omitted).

62 Cont’l Auto. Sys., Inc. v. Nokia Corp., 2023 WL 1370523, at *11 (Del. Ch. Jan. 31,

2023) (cleaned up) (citing PPL Corp. v. Riverstone Hldgs. LLC, 2020 WL 3422397, at *3 (Del.
Ch. June 22, 2020)); see Def.’s Reply Br. at 26 (quoting Cont’l Auto. Sys., 2023 WL 1370523,
at *11).

63 CA § 1.

27
for two separate and independent reasons. It violates Section 141(a), and it also

violates Section 142(a) and (e).

1. The Section 141(a) Challenge

The plaintiff contends that the Officer Pre-Approval Requirement violates

Section 141(a) of the DGCL. That section states: “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.” 64

An extensive body of Delaware precedent dating back over a century has

analyzed claims under Section 141(a) and its predecessors. 65 In a recent decision, this

court examined those precedents and concluded that the overwhelming weight of

authority recognizes the viability of a Section 141(a) challenge to a nominally third-

party agreement that nevertheless restricts board authority. 66

Having conducted that review, the court discerned a two-part test. Initially,

the court must determine whether Section 141(a) applies. That requires evaluating

“whether the challenged provision constitutes part of the corporation’s internal

64 8 Del. C. § 141(a).

65 See W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (Moelis Merits), 311

A.3d 809, 831–861 (Del. Ch. 2024).

66 Id. at 859–62.

28
governance arrangement. If not, then the inquiry ends.” 67 A constraint that appears

in a non-governance arrangement does not give rise to a Section 141(a) issue.

If the challenged provision appears in a governance arrangement, then the

court moves to the second step. 68 At that point, the court evaluates the validity of the

provision under the test that Chancellor Seitz established in Abercrombie and the

Delaware Supreme Court adopted in Grimes II. 69 Under that test, governance

restrictions violate Section 141(a) when they “have the effect of removing from

directors in a very substantial way their duty to use their own best judgment on

management matters” or “tend[] to limit in a substantial way the freedom of director

decisions on matters of management policy . . . .” 70

The Moelis Merits decision addressed a challenge to eighteen pre-approval

requirements which, in their entirety, transferred control over the business and

affairs of the corporation to the counterparty and prevented the board from acting

like a board. 71 Here, the plaintiff might have challenged the Pre-Approval

Requirements collectively, as in the Moelis Merits decision. That likely would have

67 Id. at 828.

68 Id. at 855–56.

69 Id. at 860.

70 Abercrombie, 123 A.2d at 899.

71 Moelis Merits, 311 A.3d at 826 (“Viewed in their totality, the Pre-Approval
Requirements mean that the Board must get Moelis’ signoff in advance for virtually any
action the directors might want to take.”).

29
been an easier sell, because the plaintiff could have contended, as in Moelis Merits,

that the Pre-Approval Requirements violated Section 141(a) in their totality. Instead,

the plaintiff opted to target the three Challenged Provisions individually.

The fact that the Challenged Provisions only address specific areas of corporate

action does not enable them to evade Section 141(a) analysis. Many of the Section

141(a) precedents involved challenges to specific provisions. 72

a. The Governance Arrangement Inquiry

The first step in analyzing a Section 141(a) claim requires determining

whether the challenged provision appears in a governance arrangement addressing

internal affairs issues. A court can consider multiple factors when determining

whether an agreement qualifies as a governance arrangement addressing internal

affairs. 73

72 E.g., Abercrombie, 123 A.2d at 894–98 (holding that a voting agreement, purporting

to directly or indirectly bind the directors to vote for nominees selected by shareholder
members to the voting agreement, was invalid under Section 141(a)); Carmody v. Toll Bros.,
723 A.2d 1180, 1189–91 (Del. Ch. 1998) (invalidating a rights plan under Section 141(a)
because only the incumbent directors who adopted the plan, or their hand-picked successors,
could redeem it); ACE Ltd. v. Capital Re Corp., 747 A.2d 95, 97, 106 (Del. Ch. 1999) (holding
that a no-talk provision within a merger agreement was “likely invalid” because the provision
“involves an abdication by the board of its duty to determine what its own fiduciary
obligations require at precisely that time in the life of the company when the board’s own
judgment is most important.”); Marmon v. Arbinet-Thexchange, Inc., 2004 WL 936512 at *4
(Del. Ch. Apr. 28, 2004) (ruling that Section 141(a) did not allow a stockholder agreement to
prevent the board from providing small shareholders with responsive disclosures to a books
and records request); Gorman v. Salamone, 2015 WL 4719681 (Del. Ch. July 31, 2015)
(invalidating provision that purported to give stockholders the right to remove officers as this
“would unduly constrain the board’s ability to manage the Company.”).

73 Moelis Merits, 311 A.3d at 858–60.

30
One consideration is whether the challenged provisions appear in a contract

that the DGCL specifically authorizes. 74 The DGCL governs a corporation’s internal

affairs, so when the DGCL specifically authorizes a particular type of agreement, that

agreement is more likely to affect the corporation’s internal affairs than an

agreement that the DGCL does not contemplate. Here, the Challenged Provisions

appear in a stockholders agreement, which Section 218 of the DGCL authorizes. 75

Another consideration is whether the counterparties to the agreement hold

roles as intra-corporate actors, such as officers, directors, stockholders, or their

affiliates. 76 Delaware law governs the corporation’s internal affairs, viz. “matters

peculiar to the relationships among or between the corporation and its current

officers, directors, and shareholders.” 77 Consequently, when the counterparties to an

agreement hold those roles, the agreement is more likely to be a governance

agreement that addresses internal affairs. By contrast, in a typical commercial

contract, the counterparty is more likely to be service providers, customers, or

suppliers, including suppliers of capital.

74 Id. at 863–64.

75 8 Del. C. § 218(e).

76 Moelis Merits, 311 A.3d at 858–60.

77 Edgar v. MITE Corp., 457 U.S. 624, 645 (1982); accord McDermott Inc. v. Lewis, 531

A.2d 206, 214 (Del. 1987) (“Internal corporate affairs involve those matters which are
peculiar to the relationships among or between the corporation and its current officers,
directors, and shareholders.”).

31
Here, the Challenged Provisions appear in the Stockholders Agreement, and

the parties to that agreement are the Company and the owners of the business before

its IPO. Lowry owned a majority of the ownership interest pre-IPO, and he has the

right to vote a majority of the Class B shares under the Voting Agreement.

Effectively, therefore, the Stockholders Agreement is between the Company and

Lowry. Lowry also holds other intra-corporate roles. He co-founded the Company’s

predecessor and was Chairman and CEO until 2019. He remains Chairman and his

son, Trevor, succeeded him as CEO.

A third consideration is whether the agreement contains provisions that

actually seek to regulate how, when, or the extent to which a corporation exercises

its power. 78 The DGCL grants corporations a series of powers, 79 but because a

corporation can only act through humans, internal corporate actors determine

whether, when, and to what extent a corporation exercises its powers. 80 By contrast,

Delaware law need not govern external issues, and when determining what law

governs the corporation’s external interactions, Delaware courts use the “most

significant relationship” test. 81

78 Moelis Merits, 311 A.3d at 858–60.

79 See 8 Del. C. §§ 121–123.

80 See Applied Energetics, Inc. v. Farley, 239 A.3d 409, 439–443 (Del. Ch. 2020)
(explaining the difference between corporate power and the proper authorization and exercise
of corporate power).

81 E.g., Certain Underwriters at Lloyds, London v. Chemtura Corp., 160 A.3d 457, 464

(Del. 2017) (“Delaware follows the Second Restatement’s ‘most significant relationship’

32
The Challenged Provisions constrain the Company’s ability to exercise its

corporate powers by requiring Lowry’s prior written approval before the Company

can take action on specified internal matters, such as significant decisions relating to

senior officers, charter amendments, or material transactions. The Challenged

Provisions seek explicitly to regulate the Company’s internal affairs.

A fourth consideration is the extent to which the terms of the agreement

resemble provisions that appear in the DGCL or that might ordinarily be found in

one of the corporation’s constitutive documents, such as its certificate of incorporation

(including a certificate of designations) or bylaws. Along with the DGCL, the

certificate of incorporation and bylaws govern the internal affairs of the corporation,

so if a contract contains the types of provisions that ordinarily would appear in those

documents, that is a strong signal that the contract is really a governance agreement.

In this case, the Challenged Provisions look like the type of class voting rights that

analysis when considering choice of law in contract disputes.” (citing Restatement (Second)
of Conflicts of Laws (Am. L. Inst. 1971)) (footnote omitted) (formatting removed)); Travelers
Indem. Co. v. Lake, 594 A.2d 38, 47 (Del. 1991) (“Pursuant to Section 145 of the Second
Restatement, the local law of the state which ‘has the most significant relationship to the
occurrence and the parties under the principles stated in § 6’ will govern the rights of litigants
in a tort suit.” (quoting Restatement (Second) of Conflicts of Laws, supra, § 145)); see also 6
Del. C. § 2708 (“The parties to any contract, agreement or other undertaking, contingent or
otherwise, may agree in writing that the contract, agreement or other undertaking shall be
governed by or construed under the laws of this State, without regard to principles of conflict
of laws, or that the laws of this State shall govern, in whole or in part, any or all of their
rights, remedies, liabilities, powers and duties if the parties, either as provided by law or in
the manner specified in such writing are: (1) Subject to the jurisdiction of the courts of, or
arbitration in, Delaware and, (2) May be served with legal process. The foregoing shall
conclusively be presumed to be a significant, material and reasonable relationship with this
State and shall be enforced whether or not there are other relationships with this State.”).

33
ordinarily would appear in a certificate of incorporation or that a board might confer

on a newly created class or series established using blank check authority. 82

A fifth consideration is that a governance agreement does not readily reveal an

underlying commercial exchange. A commercial contract primarily focuses on the

exchange of goods or services, with governance rights included to protect the deal. 83

The primary purpose of a governance arrangement is to allocate control rights and

manage the internal operations of a corporation. Here, there was no apparent

commercial exchange that led the Company to confer the Pre-Approval Requirements

on Lowry. The only apparent purpose of the Stockholders Agreement was to enable

Lowry to control significant decisions at the Company for as long as he and his

affiliates owed at least 10% of the Company’s shares.

A sixth consideration involves the duration of the contract and the

corporation’s ability to terminate it. Governance arrangements are more likely to be

enduring, even indefinite, because the point of a governance agreement is to maintain

a stable governance structure that favors the counterparty. 84 That is the case here:

The Company has no ability to terminate the Stockholders Agreement, which will

82 8 Del. C. §§ 102(a)(4), 141(d), & 151(a) & (g).

83 Moelis Merits, 311 A.3d at 858–60.

84 Id. at 860, 863–66.

34
remain in effect until the Holders collectively own less than ten percent of the

Company’s shares. 85

A final consideration is the presumptive remedy for breach. In a commercial

agreement, the presumptive remedy is a damages award tied to the commercial deal.

Under a governance arrangement, the presumptive remedy is likely to be equitable

relief enforcing the underlying control rights. 86 As discussed in greater detail below,

the Pre-Approval Requirements are control rights that a court likely would enforce

through injunctive relief. 87

Viewed in light of these considerations, the Stockholders Agreement is a

paradigmatic governance agreement. It closely resembles the stockholder agreement

at issue in the Moelis Merits decision, and it provides another prototype of an

agreement that falls into that category.

b. The Improper Restriction Inquiry

Because the Stockholders Agreement forms part of the Company’s entity-

specific governance arrangement, Section 141(a) applies. To determine whether a

provision in a governance agreement violates Section 141(a), a court uses the

Abercrombie test. 88 The provision is invalid if it has “the effect of removing from [the]

85 SA § 4.14.

86 Moelis Merits, 311 A.3d at 859–60, 865.

87 See Part II.C.1.b.ii.(A), infra.

88 Moelis Merits, 311 A.3d at 860.

35
directors in a very substantial way their duty to use their own best judgment on

management matters” or “tends to limit in a substantial way the freedom of directors’

decisions on matters of management policy . . . .” 89

The Officer Pre-Approval Requirement fails that test. It addresses a core

management matter: the hiring, firing, and any other significant decision regarding

senior officers. Although Section 141(a) empowers the Board to manage the

corporation, “it is the rare corporation that is actually managed by the board; most

corporations are managed under the direction of the board.” 90 The board exercises its

authority and fulfills its responsibilities “by thoughtfully appointing officers,

establishing or approving goals and plans and monitoring performance.” 91 Thus, “[a]

primary way by which a corporate board manages a company is by exercising its

independently informed judgment regarding who should conduct the company’s daily

business.” 92 “Often it is said that a board’s most important task is to hire, monitor,

and fire the CEO.” 93

89 Abercrombie, 123 A.2d at 899; accord Quickturn II, 721 A.2d at 1292; Grimes II, 673

A.2d at 1214; see Mayer v. Adams, 141 A.2d 458, 461 (Del. 1958) (citing Abercrombie with
approval); Adams v. Clearance Corp., 121 A.2d 302, 305 (Del. 1956) (same).

90 J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder

Directors, 70 Bus. Law. 33, 36 (2015) (cleaned up).

91 Grimes I, 1995 WL 54441, at *8.

92 Gorman, 2015 WL 4719681, at *5.

93 Klaassen v. Allegro Dev. Corp., 2013 WL 5967028, at *15 (Del. Ch. Nov. 7, 2013).

See, e.g., Douglas G. Baird & Robert K. Rasmussen, The Prime Directive, 75 U. Cin. L. Rev.
921, 923 (2007) (“The challenge of hiring and firing managers is the single most important
job that directors face.”); Ira M. Millstein, The Evolution of the Certifying Board, 48 Bus. Law.

36
This court has relied on Section 141(a) to invalidate provisions in nominally

external agreements that nevertheless sought to control the inner workings of the

corporation for purposes of officer selection. In Gorman, this court relied on Section

141(a) to invalidate a bylaw that allowed stockholders to remove the incumbent CEO

and appoint his successor. 94 Section 142(b) expressly contemplates that bylaws can

govern the selection of officers. 95 The statute further provides the terms of service can

be “determined by the board of directors or other governing body.” 96 Nevertheless,

this court held a bylaw that empowered the stockholders to act as a governing body

for purposes of removing and replacing the CEO conflicted with the board’s

managerial authority under Section 141(a). The court held that stockholders “may

not directly manage the business and affairs of the corporation, at least without

specific authorization in either the statute or the certificate of incorporation.” 97 The

1485, 1494 (1993) (“[O]ne of the board’s most important functions is to evaluate the
performance of the CEO, and to replace an underperformer in a timely fashion.”); see also
Melvin Aron Eisenberg, Legal Models of Management Structure in the Modern Corporation:
Officers, Directors, and Accountants, 63 Calif. L. Rev. 375, 403 (1975) (“[The Board] is
optimally suited to . . . selecting, monitoring, and removing the members of the chief
executive’s office. It therefore follows that the primary objective of the legal rules governing
the structure of corporate management should be to ensure effective performance of that
cluster of functions . . . .” (footnote omitted)); Usha Rodrigues, A Conflict Primacy Model of
the Public Board, 2013 U. Ill. L. Rev. 1051, 1075 (2013) (“Appointing a CEO, after all, is likely
the most important decision a board will ever make.”).

94 Gorman, 2015 WL 4719681, at *4–6.

95 8 Del. C. § 142(b).

96 Id. (emphasis added).

97 Gorman, 2015 WL 4719681, at *5 (quoting CA, Inc. v. AFSCME Empls. Pension

Plan (AFSCME), 953 A.2d 227, 232 (Del. 2008)).

37
court also stated that bylaws “may not ‘mandate how the board should decide specific

substantive business decisions . . . .’” 98 The court concluded that giving the

stockholders the right to remove officers “would unduly constrain the board’s ability

to manage the Company.” 99

Subsequently, in Schroeder, this court held that a stockholder agreement,

nominally binding on the company, would be invalid under Section 141(a) if it enabled

the common stockholders to select the CEO. 100 There too the court noted that the

power to appoint the CEO was a core board function and that the company’s bylaws

empowered the board to take this action. 101

The Officer Pre-Approval Requirement limits the Board’s authority in a very

substantial way. It gives Lowry, a stockholder, control over “any hiring, termination,

or replacement of, or establishing the compensation or benefits payable to, or making

any other significant decisions relating to the Chief Executive Officer, Chief Financial

Officer, Chief Operating Officer, Chief Partnership Officer or any other senior

management or key employee of [the Company] or [the LLC] . . .” 102 Without Lowry’s

prior written approval, the Board cannot exercise any authority over those topics. Nor

98 Id. (quoting AFCSME, 953 A.2d at 232).

99 Id. at *6.

100 Schroeder v. Buhannic, 2018 WL 11264517, at *4 (Del. Ch. Jan. 10, 2018).

101 Id. at *2, *4.

102 SA § 1.01(k).

38
can the Board enter into any agreement or make any commitment with respect to any

of those topics. 103

The Officer Pre-Approval Requirement therefore has “the effect of removing

from [the] directors in a very substantial way their duty to use their own best

judgment” on a core management matter and “tends to limit in a substantial way the

freedom of directors’ decisions” on a matter management policy. 104 The provision fails

the Abercrombie test, violates Section 141(a), and is invalid.

i. “Just A Consent Right”

To try to save the Officer Pre-Approval Requirement, the Company offers a

series of arguments. First, the Company mischaracterizes the Officer Pre-Approval

Requirement as “simply . . . a contractual consent right” 105 that gives Lowry a veto

“with respect to such changes that the Board first decides to make.” 106

That is plainly untrue. The Officer Pre-Approval Requirement requires

Lowry’s prior written approval. The Stockholders Agreement frames all the Pre-

Approval Requirements as flat prohibitions: “Until the Substantial Ownership

Requirement is no longer met, [the Company] shall not permit the occurrence of the

103 SA § 1.01(l).

104 Abercrombie, 123 A.2d at 899; accord Quickturn II, 721 A.2d at 1292; Grimes II,

673 A.2d at 1214; see Mayer, 141 A.2d at 461 (citing Abercrombie with approval); Adams, 121
A.2d at 305 (same).

105 See Def.’s Opening Br. at 27.

106 Id. at 15 n.8.

39
following matters” without Lowry’s prior written approval. 107 The plain language of

the Pre-Approval Requirements thus prohibits the Company from acting. The

Company can only act if Lowry first gives his approval in the form of “a written

resolution or consent in lieu thereof . . . .” 108

That framework puts the Board in the same position as a management team

that proposes options for a board to review and approve. With Lowry holding the Pre-

Approval Requirements, the Board can only propose options. “[T]he power to review

is the power to decide.” 109 “If every decision of A is to be reviewed by B, then all we

have really is a shift in the locus of authority from A to B.” 110 Lowry has expansive

power to pre-review, which gives him the power to decide.

ii. The “No Real Restriction” Argument

Next, the Company argues that because the nominal party to the Stockholders

Agreement is the Company, the Board remains free to exercise its decision-making

authority. 111 That is not true in any meaningful sense. Under current law, Lowry is

highly likely to be able to obtain an injunction blocking the Company from acting

107 SA § 1.01.

108 Id.

109 Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary
Reflections, 55 Stan. L. Rev. 791, 815 (2002); see also id. at 807 n.92.

110 Kenneth J. Arrow, The Limits of Organization 78 (1974); accord Director
Primacy, supra, at 806–07, 815.

111 See Def.’s Opening Br. at 14–17.

40
contrary to any of the Pre-Approval Requirements. In every sense, that outcome is

functionally indistinguishable from preventing the Board from acting.

(A) The Availability Of Equitable Relief

Let’s think about what would happen if the Board sought to exercise its

decision-making authority, as the Company suggests. For purposes of the Officer Pre-

Approval Requirement, let’s assume that the Board attempts to hire, fire, or make

some other significant decision regarding a senior officer, perhaps by terminating

Trevor as CEO. Lowry could immediately file suit for breach of contract and seek a

temporary restraining order to block the Board’s decision.

To prevail on a motion for a TRO, the moving party must demonstrate that “(i)

it has a colorable claim on the merits; (ii) it will suffer irreparable harm if relief is not

granted; and (iii) the balance of hardships favors the moving party.” 112 Of the three

elements, the presence of imminent, irreparable harm is the sine qua non for the

issuance of a TRO. “That element predominates because the purpose of a TRO is to

preserve the status quo so that the court can conduct a fuller inquiry at a later stage

of the case, typically by conducting a hearing on an application for a preliminary

injunction.” 113

112 Stirling Inv. Hldgs., Inc. v. Glenoit Universal, Ltd., 1997 WL 74659, at *2 (Del. Ch.

Feb. 12, 1997).

113 In re COVID-Related Restrictions on Religious Servs., 285 A.3d 1205, 1227 (Del.

Ch. 2022).

41
Lowry would have a lay-down hand for purposes of a colorable claim of breach.

The Board would have attempted to cause the Company to do exactly what the Officer

Pre-Approval Requirement prohibited. Check that one off.

For purposes of irreparable harm, Lowry again would have a lay-down hand.

The Company and the Holders agreed in the Stockholders Agreement that

“irreparable damage” would occur if any provision was “not performed in accordance

with” its terms, and that the parties would be “entitled to specific performance of the

terms hereof in addition to any other remedy to which they are entitled at law or in

equity.” 114 The Stockholders Agreement explicitly acknowledges the availability of

equitable enforcement mechanisms, including an “injunction to prevent breaches of

this Agreement” or “specific enforcement of this Agreement.” 115 Under Delaware law,

those stipulations are sufficient to permit the issuance of injunctive relief, although

they do not force the court’s hand. 116

And Lowry would have more arrows in his quiver. Most obviously, he could

rely on authority that treats the violation of a consent right as irreparable harm.

Although there are cases that have denied injunctive relief when there appeared to

be a readily identifiable metric for calculating an award of money damages for the

114 SA § 4.13.

115 Id.

116 Martin Marietta Materials, Inc. v. Vulcan Materials Co., 68 A.3d 1208, 1226 (Del.

2012) (“Our courts have long held that contractual stipulations as to irreparable harm alone
suffice to establish that element for the purpose of issuing injunctive relief.” (cleaned up)).

42
breach, Chief Justice Strine advised while serving on this court that “consent rights

cases are better dealt with by injunctive relief if the court can act with alacrity and

give the parties a reasonable period to have the negotiation or work around the

consent rights.” 117 For the Officer Pre-Approval Requirement, Lowry also could point

out that Delaware recognizes the significance of a dispute over senior officer status

by providing an expedited statutory mechanism for resolving disputes over who holds

title to that office. 118 He could also point out that Delaware courts routinely issue

status quo orders when resolving those disputes. 119

Under those circumstances, the balancing of hardships would be unlikely to

warrant denying a TRO. The standard approach would be to issue one and expedite

the case. At the outset, therefore, Lowry would be in a position to prevent the

Company (and by virtue of that same TRO, the Board) from acting. 120

117 Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2013 WL 6327997, at *19 (Del. Ch.

Dec. 4, 2013) (Strine, C.); see id. at *1 (ruing challenge of determining “damages based on
[an] admittedly imperfect attempt to discern how a hypothetical negotiation would have
occurred between [the issuer] and [the investor] over the consent”).

118 See 8 Del. C. § 225.

119 See Arbitrium (Cayman Islands) Handels AG v. Johnson, 1994 WL 586828, at *3

(Del. Ch. Sept. 23, 1994) (“[I]t has become customary in § 225 actions to put into place, either
by agreement of the parties or court order, a status quo arrangement that precludes the
directors presently in control of the corporation from engaging in transactions outside the
ordinary course of the corporation’s business until the control issue is resolved.”); see also 1
Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the
Delaware Court of Chancery § 9.09[f] (2d ed. 2021) (collecting authorities).

120 E.g., Stirling, 1997 WL 74659, at *3 (granting TRO based on allegation that
threatened breach of a confidentiality provision gave the counterparty a veto over a bond
issuance).

43
Those same realities would persist at the preliminary injunction stage. At that

point, Lowry would have to show a reasonable likelihood of success on the merits,

irreparable harm, and a balance of hardships that favored injunctive relief. 121 The

analysis of those elements would largely track the analysis at the TRO stage. Later,

those same realities would persist for any motion for summary judgment, as well as

any post-trial effort by Lowry to obtain a decree of specific performance—which, to

repeat, the Stockholders Agreement expressly authorizes. 122 For purposes of final

relief, Lowry would not need to establish irreparable harm; he only would have to

show that a remedy at law would be inadequate. 123

Next assume that the Board resolutely refused to comply with an order

enforcing the Officer Pre-Approval Requirement. The corporate veil would not protect

them. A court can enforce its orders through coercive sanctions, including by holding

in contempt the directors and officers who cause a corporation to fail to comply. 124

121 COVID-Related Restrictions, 285 A.3d at 1227.

122 SA § 4.13.

123 COVID-Related Restrictions, 285 A.3d at 1227–32.

124 TransPerfect Glob., Inc. v. Pincus, 278 A.3d 630, 650 (Del. 2022) (subsequent
history omitted) (recognizing that a court can impose contempt sanctions on an officer or
stockholder who bears “personal responsibility for the contemptuous conduct.”); Deutsch v.
ZST Digital Networks, Inc., 2018 WL 3005822, at *10 (Del. Ch. June 14, 2018) (“[A]n order
that applies to an entity extends to directors, officers, and employees of the entity who are
acting on behalf of the entity.”); accord Wilson v. United States, 221 U.S. 361, 376 (1911) (“A
command to the corporation is in effect a command to those who are officially responsible for
the conduct of its affairs. If they, apprised of the writ directed to the corporation, prevent
compliance or fail to take appropriate action within their power for the performance of the
corporate duty, they, no less than the corporation itself, are guilty of disobedience, and may
be punished for contempt.”); Reich v. Sea Sprite Boat Co., Inc., 50 F.3d 413, 417 (7th Cir.

44
Should it become necessary, the DGCL authorizes a court to appoint a receiver with

the authority to bring the corporation into compliance. 125

Under current law, therefore, Lowry likely can obtain equitable relief enforcing

any of the Pre-Approval Requirements. When a counterparty can rely on a contract

to obtain injunctive relief blocking the challenged action from taking place, and when

a court can force the corporation to comply, it should be hard to claim with a straight

face that the Board can exercise its authority over whether to take actions that

contravene the contract.

(B) Efficient Breach

To deny the real-world reality of how litigation would unfold, the Company

argues that if Lowry sought to exercise a Pre-Approval Requirement, then “the Board

could . . . engage[] in efficient breach.” 126 But efficient breach is not a contractual

escape pod. A breach remains a breach, and the non-breaching party can pursue

equitable remedies if money damages are an inadequate remedy.

1995) (Easterbrook, J.) (“An order issued to a corporation is identical to an order issued to its
officers, for incorporeal abstractions act through agents.”).

125 8 Del. C. § 322 (“Whenever any corporation shall refuse, fail or neglect to obey any

order or decree of any court of this State within the time fixed by the court for its observance,
such refusal, failure or neglect shall be a sufficient ground for the appointment of a receiver
of the corporation by the Court of Chancery. If the corporation be a foreign corporation, such
refusal, failure or neglect shall be a sufficient ground for the appointment of a receiver of the
assets of the corporation within this State.”); see, e.g., Jafar v. Vatican Challenge 2017, 2023
WL 3884165, at *1 (Del. Ch. June 8, 2023) (noting that court had exercised its authority to
appoint receiver to bring entity into compliance with order), aff’d sub nom. Jafar v. Moen,
2024 WL 835257 (Del. Feb. 27, 2024).

126 Def.’s Opening Br. at 15 n.8.

45
The principle of efficient breach recognizes that “properly calculated

expectation damages increase economic efficiency by giving the other party an

incentive to break the contract if, but only if, he gains enough from the breach that

he can compensate the injured party for his losses and still retain some of the benefits

from the breach.” 127 “Delaware recognizes this principle of efficient breach.” 128

Efficient breach thus “provides two ‘paths’ for a contractual promisor: perform the

contract or fully compensate the promisee for non-performance.” 129 Those paths do

not limit the remedial paths available to the promisee. If damages will not fully

compensate the promisee, or if the breach will result in irreparable harm, then the

promisee can seek equitable remedies.

Those same principles apply to an agreement with a corporation. When

striving to act loyally, prudently, and in good faith to maximize the value of the

corporation for the benefit of its firm-specific stockholders, “directors must exercise

their fiduciary duties in deciding how to proceed in the face of an agreement,

understanding they are no differently situated than any other contractual

counterparty.” 130 That means that directors seeking to comply with the fiduciary

standard of conduct could decide to engage in efficient breach. But that does not mean

127 E.I. DuPont de Nemours and Co. v. Pressman, 679 A.2d 436, 445 (Del. 1996)
(cleaned up).

128 Bhole, Inc. v. Shore Invs., Inc., 67 A.3d 444, 453 n.39 (Del. 2013).

129 Leaf Invenergy Co. v. Invenergy Renewables LLC, 210 A.3d 688, 703 (Del. 2019).

130 Conway, 2024 WL 1752419, at *30.

46
that the directors’ fiduciary duties overrides the corporation’s contractual obligations.

It simply means that the directors can engage in the same type of cost-benefit

analysis as any other contractual counterparty.

Directors who cause their corporation to engage in efficient breach have not

freed the corporation from its contract. The breach is still a breach, and the

counterparty still has its full panoply of remedies available. 131 The Company’s

efficient breach argument simply leads back to the question of whether Lowry could

obtain injunctive relief or specific performance in the first place. As we have seen,

Lowry’s chances are quite good, and the concept of efficient breach doesn’t hurt them.

(C) The Severability Provision

Next, the Company asserts that a severability provision in the Stockholders

Agreement means that the Board could ignore the Pre-Approval Requirements. 132

That argument misunderstands how a severability provision works.

The Stockholders Agreement does include a severability provision, and it

provides as follows:

The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof. If any provision

131 See Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *24 (Del.

Ch. Apr. 14, 2017) (“Just like any other decision maker, a board of directors may choose to
breach if the benefits (broadly conceived) exceed the costs (again broadly conceived).”); Orban
v. Field, 1997 WL 153831, at *9 (Del. Ch. Apr. 1, 1997) (Allen, C.) (“Certainly in some
circumstances a board may elect (subject to the corporation’s answering in contract damages)
to repudiate a contractual obligation where to do so provides a net benefit to the
corporation.”).

132 Def.’s Opening Br. at 15 n.8.

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of this Agreement, or the application thereof to any person or entity or
any circumstance, is found to be invalid or unenforceable in any
jurisdiction, (a) a suitable and equitable provision shall be substituted
therefor in order to carry out, so far as may be valid and enforceable, the
intent and purpose of such invalid or unenforceable provision and (b) the
remainder of this Agreement and the application of such provision to
other persons, entities or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or
the application thereof, in any other jurisdiction. 133

The Company focuses on the portion of the Severability Provision which refers to the

possibility that “any provision of this Agreement, or the application thereof to any

person or entity or any circumstance” could be found to be “invalid or unenforceable.”

The Company seems to think that this language acknowledges that a court could hold

the Pre-Approval Requirements “invalid or unenforceable,” but that is not the

purpose of the provision. If anything, its existence favors Lowry.

A severability provision means just what is says. “A clear and unambiguous

severability clause permits the Court to sever the invalid language while enforcing

the remainder of the agreement that does not violate the law.” 134 The Severability

Provision therefore does not create a basis for invalidity; it seeks to protect against a

situation in which a provision might be held invalid for another reason. In that

eventuality, the Severability Provision seeks to achieve two outcomes: first, to

133 SA § 4.09 (the “Severability Provision”).

134 Suppi Constr., Inc. v. EC Devs. I, LLC, 2024 WL 939851, at *5 (Del. Super. Mar. 4,

2024); accord Balooshi v. GVP Global Corp., 2022 WL 576819, at *11 (Del. Super. Feb. 25,
2022) (“If the parties expressed in the contract directly’ an unambiguous severability clause
– then the Court may sever and enforce the lawful terms.” (cleaned up)).

48
preserve the validity of the rest of the agreement, and second, to give Lowry a

contractual entitlement to “a suitable and equitable” substitute provision “in order to

carry out, so far as may be valid and enforceable, the intent and purpose of such

invalid or unenforceable provision.”

For purposes of the Stockholders Agreement, the Severability Provision helps

Lowry. If one of the Pre-Approval Requirements were held invalid, he could still rely

on the others. He also could demand a “suitable and equitable” substitute, such as

the issuance of a golden share of preferred stock carrying similar pre-approval

rights. 135 The Severability Provision does not alter the Board’s predicament. The

135 That said, a golden share might not be able to replace all of the rights Lowry has

under the Stockholders Agreement. Some of the Pre-Approval Requirements might go beyond
what could be included under Sections 102(a)(4) and 151 in a certificate of designations. Even
a charter provision cannot override mandatory features of the DGCL. E.g., Rohe v. Reliance
Training Network, Inc., 2000 WL 1038190, at *10–11 (Del. Ch. July 21, 2000) (holding that
provisions in a certificate of incorporation could not specify directors in advance, provide
permanent tenure for directors, or limit the right to remove directors in ways inconsistent
with 8 Del. C. § 141(k)); Loew’s Theatres, Inc. v. Com. Credit Co., 243 A.2d 78, 81 (Del. Ch.
1968) (holding that a charter provision that limited the right to inspect the corporation’s
books and records to holders of 25% or more of the corporation’s stock violated 8 Del. C. § 220,
which gives that right to “any” stockholder). While serving on this court, Chief Justice Strine
suggested that some restrictions on board action could be invalid even if they appear in the
charter, referencing that charter-based limitations on the board’s ability to address charter
amendments or mergers could be suspect. See Jones Apparel Gp., Inc. v. Maxwell Shoe Co.,
883 A.2d 837, 852 (Del. Ch. 2004). A class-based voting right on a merger, if drafted properly,
would be viable. Elliott Assocs., L.P. v. Avatex Corp., 715 A.2d 843, 854 (Del. 1998).

A counterparty also would not be able to secure covenants that bind the board through
a preferred stock issuance. A certificate of designations can set forth “the designations and
the powers, preferences and rights, and the qualifications, limitations or restrictions” of the
class or series of stock that the board authorizes using blank check authority. 8 Del. C. §
102(a)(4). That list of features does not include imposing covenants on the board. To constrain
or mandate action by the board under Section 141(a) requires a charter provision directed to
the board, not a charter provision limited to the “the designations and the powers, preferences
and rights, and the qualifications, limitations or restrictions” of a class or series of shares.
That type of provision could appear in the original charter. It also could be implemented

49
directors remain fenced in, and the Severability Provision makes sure the fence is as

high as possible.

The Stockholders Agreement primarily imposes obligations on the Company

and confers rights on Lowry. The Severability Provision therefore primarily exists to

protect Lowry against a potential ruling invalidating one or more of his rights and to

give him a claim for substitute performance. The Severability Provision does not

provide the Board with any basis to avoid an injunction, decree of specific

performance, or other form of equitable relief enforcing the Pre-Approval

Requirements.

(D) The Board’s Fiduciary Duties

The Company elsewhere suggests that the directors could invoke their own

fiduciary duties to avoid complying with the Pre-Approval Requirements, including

the Officer Pre-Approval Requirement. 136 Under current Delaware law, that theory

would be dead on arrival, because “the fiduciary status of directors does not give them

Houdini-like powers to escape from valid contracts.” 137

through charter amendment duly approved under Section 242, or through a merger or
comparable transaction where the DGCL authorizes amendments to the charter of the
surviving corporation. A covenant binding the board could not be imposed through a
certificate of designations. Under current law, it also cannot be imposed through a
governance agreement.

136 Def.’s Opening Br. at 18 n.10.

137 Frederick Hsu, 2017 WL 1437308, at *23 (collecting authorities); see, e.g., C & J

Energy Servs., Inc. v. Miami Gen. Empls.’, 107 A.3d 1049, 1072 (Del. 2014) (instructing trial
courts not to divest third parties of their contract rights absent a sufficient showing that the
contract resulted from a fiduciary breach at the time of execution and that the counterparty
aided and abetted the breach); WaveDivision Hldgs., LLC v. Millennium Digital Sys., L.L.C.,

50
The seminal authority on this issue is Van Gorkom. 138 In that famous case, a

stockholder contended that the directors of Trans Union Corporation breached their

fiduciary duties by approving a merger agreement without adequate knowledge of

the corporation’s alternatives. The directors argued that they acted properly because

they had the right to accept a better offer at any time before the stockholder vote. 139

The Delaware Supreme Court rejected the concept of an inherent fiduciary

2010 WL 3706624, at *17 (Del. Ch. June 18, 2010) (“[D]espite the existence of some
admittedly odd authority on the subject, it remains the case that Delaware entities are free
to enter into binding contracts . . . so long as there was no breach of fiduciary duty involved
when entering into the contract in the first place.”); see also In re Sirius XM S’holder Litig.,
2013 WL 5411268, at *6 (Del. Ch. Sept. 27, 2013) (dismissing breach of fiduciary duty claim
where contract prohibited actions plaintiffs claimed directors should take); Buerger v. Apfel,
2012 WL 893163, at *3 (Del. Ch. Mar. 15, 2012) (explaining that “[b]ecause any challenge to
the initial decision to enter into the employment agreements is time-barred, the fairness
analysis must take into account the contractual rights that the Apfels possess. In other
words, the plaintiffs must litigate the fairness of the compensation in a world where the
employment agreements validly exist and where a termination decision would have
contractual consequences.”).

138 Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). This opinion omits Van Gorkom’s

subsequent history, which is convoluted and potentially misleading. Strict rules of citation
call for identifying Van Gorkom as having been overruled in part by Gantler v. Stephens, 965
A.2d 695 (Del. 2009). That case responded to Van Gorkom’s loose use of the term “ratification”
to refer to the effect of an organic stockholder vote contemplated by the DGCL. The Gantler
decision limited the use of the term “ratification” to its “classic” sense, namely situations
where one decision-maker has made a decision unilaterally. Id. at 713. Other than that
narrow point of terminology, Gantler did not overrule Van Gorkom at all. Unfortunately,
Gantler’s attempt to correct the terminology used in Van Gorkom created the misimpression
that the case had worked a broader change in Delaware law. Subsequently, the Delaware
Supreme Court confirmed that Gantler did not have that broader implication. See Corwin v.
KKR Fin. Hldgs. LLC, 125 A.3d 304, 311 (Del. 2015). It therefore muddies the waters to cite
Gantler as having overruled Van Gorkom in part, both because Gantler only sought to clarify
a point of terminology and because Corwin subsequently made clear that Gantler did not
“unsettle a long-standing body of case law.” Id.

139 Van Gorkom, 488 A.2d at 878–89.

51
termination right and looked instead at the merger agreement for language that

might have permitted the directors to terminate. The only possible provision stated:

The Board of Directors shall recommend to the stockholders of Trans
Union that they approve and adopt the Merger Agreement (‘the
stockholders’ approval’) and to use its best efforts to obtain the requisite
votes therefor. [The acquirer] acknowledges that the Trans Union
directors may have a competing fiduciary obligation to shareholders
under certain circumstances. 140

The Delaware Supreme Court held that “[c]learly, this language on its face cannot be

construed as incorporating . . . either the right to accept a better offer or the right to

distribute proprietary information to third parties.” 141 In other words, the rights the

directors claimed could not be found in a cryptic acknowledgement of the Trans Union

directors’ “competing fiduciary obligation to shareholders under certain

circumstances.” 142 The contract governed.

The directors next argued that they validly amended the merger agreement to

permit a “market test.” 143 The Delaware Supreme Court agreed that the amendment

authorized outgoing solicitation, but held that it also eliminated Trans Union’s ability

to terminate the merger agreement to pursue a competing offer. Contrary to the

directors’ belief, the amendment “imposed on Trans Union’s acceptance of a third

140 Id. at 879 (quoting merger agreement).

141 Id.

142 Id.

143 Id. at 878.

52
party offer conditions more onerous than [before],” 144 “had the clear effect of locking

Trans Union’s Board into the Pritzker Agreement,” and “foreclosed Trans Union’s

Board from negotiating any better ‘definitive’ agreement . . . .” 145 Once again, there

was no inherent fiduciary power to escape the contractual commitment.

Having held that Trans Union continued to be bound by an exclusive merger

agreement, the Delaware Supreme Court turned to the “legal question” of the options

available to the board when the directors met three months later to ratify their prior

decisions. Counsel advised that the directors had “three options: (1) to ‘continue to

recommend’ the Pritzker merger; (2) to ‘recommend that the stockholders vote

against’ the Pritzker merger; or (3) to take a noncommittal position on the merger

and ‘simply leave the decision to [the] shareholders.” 146 The Delaware Supreme Court

emphatically rejected that analysis, holding that “the Board had but two options: (1)

to proceed with the merger and the stockholder meeting, with the Board’s

recommendation of approval; or (2) to rescind its agreement with Pritzker, withdraw

its approval of the merger, and notify its stockholders that the proposed shareholder

meeting was cancelled.” 147 The second option, the Delaware Supreme Court stressed,

“would have clearly involved a substantial risk—that the Board would be faced with

144 Id. at 884.

145 Id.

146 Id. at 887–88 (emphasis and alteration in original).

147 Id. at 888.

53
suit by Pritzker for breach of contract.” 148 Referencing its prior holdings on the lack

of any fiduciary termination right, the justices reiterated that “the Board was not free

to turn down the Pritzker proposal.” 149 The notion that the Trans Union board had

some free-standing ability as fiduciaries to terminate the merger agreement was

“contrary to the provisions of § 251(b) and basic principles of contract law . . . .” 150

Van Gorkom thus made clear that if a board did not breach its fiduciary duties

when entering into a contract, that contract bound the corporation. Directors did not

have an inherent fiduciary right to escape or terminate a merger agreement that was

not the product of a breach of fiduciary duty at the time of contracting. Decisions

issued in the years immediately following Van Gorkom acknowledged that holding. 151

Nearly a decade after Van Gorkom, the Delaware Supreme Court created a

brief spell of uncertainty by failing to acknowledge the implications of that precedent

in QVC. 152 Citing QVC, creative lawyers for the Company might argue that a court

148 Id.

149 Id. (internal quotation omitted).

150 Id.

151 See Meyer v. Alco Health Servs. Corp., 1991 WL 5000, at *3 (Del. Ch. Jan. 17, 1991)

(“The Merger Agreement in this case was negotiated at arms-length and approved by the
Special Committee and a disinterested board of directors. In addition, the merger
consideration was determined to be fair by an independent investment adviser. Under these
circumstances, the individual defendants were not free to terminate the Merger Agreement
or rewrite it to provide the guarantee plaintiff desires.”); Corwin v. DeTrey, 1989 WL 146231,
at *4 (Del. Ch. Dec. 4, 1989) (“[T]he directors of the selling corporation are not free to
terminate an otherwise binding merger agreement just because they are fiduciaries and
circumstances have changed.”) (citing Van Gorkom, 488 A.2d at 888).

152 Paramount Commc’ns Inc. v. QVC Network Inc. (QVC), 637 A.2d 34 (Del. 1994).

54
could impose equitable limitations on the enforceability of the Pre-Approval

Requirements when applying the enhanced scrutiny standard. They might say that,

but that interpretation of QVC has been resoundingly rejected.

In QVC, a merger agreement contained a suite of provisions, including a no-

shop clause, that constrained the Paramount board from terminating the agreement

to secure a better deal for the company’s stockholders. 153 Viacom, the acquirer,

responded to a challenge to the no-shop provision by arguing that it constituted a

vested contract right. 154 The high court disagreed:

The No-Shop Provision could not validly define or limit the fiduciary
duties of the Paramount directors. To the extent that a contract, or a
provision thereof, purports to require a board to act or not act in such a
fashion as to limit the exercise of fiduciary duties, it is invalid and
unenforceable. Despite the arguments of Paramount and Viacom to the
contrary, the Paramount directors could not contract away their
fiduciary obligations. Since the No–Shop Provision was invalid, Viacom
never had any vested contract rights in the provision. 155

The decision as a whole evaluated whether it was reasonably probable that the

Paramount directors breached their fiduciary duties when selling the company. 156

The high court affirmed the trial court’s issuance of a preliminary injunction and

153 Id. at 39.

154 Id. at 50.

155 Id. at 51 (citation omitted).

156 Id. at 48–50.

55
expanded it to encompass the termination fee, which the trial court had not

enjoined. 157

If read broadly, the language in QVC to the effect that a contract provision

“could not validly define or limit the fiduciary duties of the Paramount directors”

might have suggested, contra Van Gorkom, that directors had the ability as

fiduciaries to override contractual obligations (or that a court could invoke the

directors’ fiduciary duties to the same end). Language elsewhere in the opinion

implied that the fiduciary override might come into being because of post-contracting

events. For example, the opinion described the Paramount board as having a

“continuing obligation” which “included the responsibility, [during a post-signing

board meeting] and thereafter, to evaluate critically both the QVC tender offers and

the Paramount–Viacom transaction.” 158 The high court also remarked that after the

emergence of the QVC overbid, “[u]nder the circumstances existing at that time, it

should have been clear to the Paramount Board that the Stock Option Agreement,

coupled with the Termination Fee and the No-Shop Clause, were impeding the

realization of the best value reasonably available to the Paramount stockholders.” 159

And in addressing the no-shop clause, the QVC decision distinguished between

whether the provision “could validly have operated here at an early stage” and

157 Id. at 37, 51.

158 Id. at 49 (emphasis added).

159 Id. at 50 (emphasis added).

56
whether it could later “prevent the Paramount directors from carrying out their

fiduciary duties in considering unsolicited bids.” 160 Likewise, in addressing the stock

option lockup, the Court held that under “[t]he circumstances existing on November

15,” the option “had become ‘draconian.’” 161 Finally, in responding to the director

defendants’ argument that “they were precluded by certain contractual provisions . .

. from negotiating with QVC or seeking alternatives,” the QVC opinion stated that

“[s]uch provisions . . . may not validly define or limit directors’ fiduciary duties under

Delaware law or prevent the Paramount directors from carrying out their fiduciary

duties under Delaware law.” 162

At first blush, QVC might seem to conflict with, even to override Van Gorkom.

To resolve the tension, one possible distinction might have been to posit that the

application of enhanced scrutiny in QVC differed from the nominal application of the

business judgment rule in Van Gorkom. Under that reading, the shift to enhanced

scrutiny gave the directors a special power to escape contracts, or at least gave the

courts a special power to invoke the directors’ obligations on their behalf.

160 Id. at 49 n.20.

161 Id. at 50. See also id. at 50 n.21 (finding that the Paramount board breached its

duties by not scheduling and holding an additional board meeting “shortly before the closing
date [of the Viacom tender offer] in order to make a final decision, based on all of the
information and circumstances then existing, whether to exempt Viacom from the Rights
Agreement . . . .”); id. at 51 (“The directors’ initial hope and expectation for a strategic alliance
with Viacom was allowed to dominate their decisionmaking process to the point where the
arsenal of defensive measures established at the outset was perpetuated (not modified or
eliminated) when the situation was dramatically altered.” (emphasis added)).

162 Id. at 48.

57
That distinction, however, could not hold water. The transaction in Van

Gorkom was a cash deal, so if Van Gorkom had not pre-dated Revlon by sixteen

months, enhanced scrutiny under Revlon would have applied. Moreover, the

Delaware Supreme Court held in 1989 that Revlon applied retroactively because the

doctrine was “derived from fundamental principles of corporate law” and “did not

produce a seismic shift in the law governing changes of corporate control.” 163 Perhaps

most definitively, a broad consensus exists that Van Gorkom was not actually a duty

of care case, but rather the Delaware Supreme Court’s initial, albeit unacknowledged

enhanced scrutiny case. 164

163 Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 n.2 (Del. 1989); accord Cede &

Co. v. Cinerama, Inc., 634 A.2d 345, 367 (Del. 1993) (applying enhanced scrutiny under
Revlon, decided in 1986, to a merger that closed in 1982).

164 In re Dollar Thrifty S’holder Litig., 14 A.3d. 573, 602 (Del. Ch. 2010) (“Van Gorkom,

after all, was really a Revlon case.” (footnotes omitted)); Gagliardi, v. TriFoods Int’l, Inc., 683
A.2d 1049, 1051 n.4 (Del. Ch. 1996) (Allen, C.) (“I count [Van Gorkom] not as a ‘negligence’
or due care case involving no loyalty issues but as an early, as of its date, not yet fully
rationalized ‘Revlon’ or ‘change of control’ case.”); William T. Allen, Jack B. Jacobs, & Leo E.
Strine, Jr., Realigning The Standard Of Review Of Director Due Care With Delaware Public
Policy: A Critique Of Van Gorkom And Its Progeny As A Standard Of Review Problem, 96 Nw.
U. L. Rev. 449, 459 n.39 (2002) (“Van Gorkom and Cede II must also be viewed as part of the
Delaware courts’ effort to grapple with the huge increase in mergers and acquisition activity
in 1980s and the new problems that posed for judicial review of director conduct. Indeed, if
decided consistent with the ‘enhanced scrutiny’ analysis mandated by Revlon, with its
emphasis upon immediate value maximization, rather than as a ‘due care’ case, Van Gorkom
would not be viewed as remarkable.” (citation omitted) (formatting added));William T. Allen,
The Corporate Director’s Fiduciary Duty of Care and the Business Judgment Rule Under U.S.
Corporate Law, in COMPARATIVE CORPORATE GOVERNANCE: STATE OF THE ART AND
EMERGING RESEARCH 307, 325 (Klaus J. Hopt et al. eds., 1998) (“In retrospect, [Van Gorkom]
can be best rationalized not as a standard duty of care case, but as the first case in which the
Delaware Supreme Court began to work out its new takeover jurisprudence.”); Bernard Black
& Reinier Kraakman, Delaware’s Takeover Law: The Uncertain Search for Hidden Value, 96
Nw. U. L. Rev. 521, 522 (2002) (“Van Gorkom should be seen not as a business judgment rule
case but as a takeover case that was the harbinger of the then newly emerging Delaware
jurisprudence on friendly and hostile takeovers, which included the almost contemporaneous

58
Rather than attempting to treat enhanced scrutiny as introducing an equitable

contractual override, Delaware commentators integrated QVC within the Van

Gorkom framework. They stressed the inadequacies of the Paramount board’s

conduct at the time of contracting, cited the statement in the QVC decision that “[i]t

is the nature of the judicial process that we decide only the case before us,” 165 and

gave a charitable reading to any contrary language in the decision. 166 The same

commentators emphasized the vitality of Van Gorkom, the inability of fiduciary

duties to override contractual obligations, and the continued viability of a legal

Unocal and Revlon decisions.”) Jonathan R. Macey & Geoffrey P. Miller, Trans Union
Reconsidered, 98 Yale L.J. 127, 128 (1988) (“Trans Union is not, at bottom, a business
judgment case. It is a takeover case.”).

165 QVC, 637 A.2d at 51.

166 See, e.g., John F. Johnston & James D. Honaker, Toys “R” Us: An About-Face from

the Deal Protection Jurisprudence that led to Omnicare, 19 Insights, No. 12, 13, 17–18 (Dec.
2005) (describing conflicting language in QVC but stating that “[d]espite the per se rules that
these passages appear to announce . . . , the opinion can be read as holding only that the
failure to adequately shop the company prior to granting the protections at issue required
their invalidation”); R. Franklin Balotti & A. Gilchrist Sparks, III, Deal-Protection Measures
and the Merger Recommendation, 96 Nw. U. L. Rev. 467, 471–72 (2002) (“Although the
Delaware Supreme Court’s fiduciary language in QVC could be read to contradict the
freedom-of-contract approach taken in Van Gorkom, commentators have reasoned that
because the QVC could specifically limited its holding to ‘the actual facts before the court,’
the holding is distinguishable from Van Gorkom.” (formatting added) (footnote omitted));
John F. Johnston, A Rubeophobic Delaware Counsel Marks Up Fiduciary–Out Forms: Part
II, 14 Insights, No. 2, 16, 21 n.10, 22 (Feb. 2000) (interpreting QVC as consistent with Van
Gorkom; explaining, “If the board is not properly informed or is otherwise in breach of its
fiduciary duties at the time it agrees to tie its hands, the provision will be invalid and
unenforceable. Hence, the stockholders will be protected. See QVC.”); John F. Johnston &
Frederick H. Alexander, Fiduciary Outs and Exclusive Merger Agreements—Delaware Law
and Practice, 11 Insights No. 2, 15, 18 (Feb. 1997) (“[W]hat the [QVC] court found to be a
breach of fiduciary duty was the perceived inadequacy of the process followed by the board
in conjunction with its entering into a merger agreement with a number of provisions
intended to protect the merger from other offers”).

59
framework under which a court measures fiduciary compliance at the time of

contracting, not based on post-contracting events. 167 Writing just three years after

QVC, then-Vice Chancellor, later-Justice Jacobs (the author of the trial court opinion

in QVC), stated flatly that “there is no Delaware case that holds that the management

of a Delaware corporation has a fiduciary duty that overrides and, therefore, permits

the corporation to breach, its contractual obligations.” 168

167 Balotti & Sparks, supra, at 468–69 (“In Smith v. Van Gorkom, the Delaware
Supreme Court established that Delaware law does not give directors, just because they are
fiduciaries, the right to accept better offers, distribute information to potential new bidders,
or change their recommendation with respect to a merger agreement even if circumstances
have changed.” (footnote omitted)); William T. Allen, Understanding Fiduciary Outs: The
What and the Why of an Anomalous Concept, 55 Bus. Law. 653, 654 (2000) (“One of the
holdings of the Delaware Supreme Court in Smith v. Van Gorkom was that corporate
directors have no fiduciary right (as opposed to power) to breach a contract.” (footnotes
omitted)); John F. Johnston, A Rubeophobic Delaware Counsel Marks Up Fiduciary-Out
Forms: Part I, 13 Insights, No. 10, 2, 2 (Nov. 1999) (“[T]he target board’s compliance with its
fiduciary duties [for purposes of the right to accept a superior proposal] will be measured at
the time it enters into the agreement.”); John F. Johnston, Recent Amendments to the Merger
Sections of the DGCL Will Eliminate Some—But Not All—Fiduciary Out Negotiation and
Drafting Issues, 1 Mergers & Acquisitions L. Rep. 20, 777, 778 (July 20, 1998) (BNA) (“[T]here
is . . . no public policy that permits fiduciaries to terminate an otherwise binding agreement
because a better deal has come along, or circumstances have changed.”); id. at 779 (“[I]n
freedom-of-contract jurisdictions like Delaware, the target board will be held to its bargain
(and the bidder will have the benefit of its bargain) only if the initial agreement to limit the
target board’s discretion can withstand scrutiny under applicable fiduciary duty principles”);
Johnston & Alexander, supra, at 15 (explaining that in Van Gorkom, “the Delaware Supreme
Court held that directors of Delaware corporations may not rely on their status as fiduciaries
as a basis for (1) terminating a merger agreement due to changed circumstances, including a
better offer; or (2) negotiating with other bidders in order to develop a competing offer.”); A.
Gilchrist Sparks, III, Merger Agreements Under Delaware Law—When Can Directors Change
Their Minds?, 51 U. Miami L. Rev. 815, 817 (1997) (“[Van Gorkom] makes it clear that under
Delaware law there is no implied fiduciary out or trump card permitting a board to terminate
a merger agreement before it is sent to a stockholder vote.”).

168 Halifax Fund, L.P. v. Response USA, Inc., 1997 WL 33173241, at *2 (Del. Ch. May

13, 1997).

60
To the extent there might have been any lingering uncertainty about the

ability of a court to rely on directors’ fiduciary duties to limit the effectiveness of

contracts, the Delaware Supreme Court’s decision in C & J Energy eliminated it.

There, the Court of Chancery enjoined the enforcement of the no-shop provision in a

merger agreement that resulted from a management-led, single-bidder process in

which the combined entity would have a controlling stockholder, but the target

company viewed itself as the acquirer and therefore its board did not make any effort

to explore strategic alternatives. 169 The Delaware Supreme Court vacated the

injunction on multiple grounds, including the primacy of the bidder’s contract rights.

The court explained that even in a setting where enhanced scrutiny applied,

[s]uch an injunction cannot strip an innocent third party of its
contractual rights while simultaneously binding that party to
consummate the transaction. To blue-pencil a contract as the Court of
Chancery did here is not an appropriate exercise of equitable authority
in a preliminary injunction order. That is especially true because the
Court of Chancery made no finding that Nabors had aided and abetted
any breach of fiduciary duty, and the Court of Chancery could not even
find that it was reasonably likely such a breach by C & J’s board would
be found after trial. 170

Later in the decision, the Delaware Supreme Court reiterated that “a judicial decision

holding a party to its contractual obligations while stripping it of bargained-for

benefits should only be undertaken on the basis that the party ordered to perform

was fairly required to do so, because it had, for example, aided and abetted a breach

169 C & J Energy, 107 A.3d at 1052–53.

170 Id. at 1054 (footnote omitted).

61
of fiduciary duty.” 171 That language indicated that establishing a sell-side breach of

fiduciary duty at the time of contracting is not enough, standing alone, to warrant

equitable relief overriding the counterparty’s contract rights. Instead, the court must

find that the counterparty aided and abetted the sell-side breach. After C & J Energy,

no one could think that the application of enhanced scrutiny, standing alone, would

give a Delaware court the power to impose equitable limitations on the enforceability

of a contract.

Those legal principles doom any effort to invoke fiduciary duties as a basis to

escape from the Officer Pre-Approval Requirements. The Hokanson v Petty 172 decision

shows how a court would likely analyze the issue. There, a board of directors entered

into a securities purchase agreement under which the buyer acquired preferred stock

in the corporation and was granted the right to force the corporation into a future go-

private transaction at a price determined by a contractual formula. 173 The agreement

left the form of the go-private transaction to the buyer’s “sole discretion.” 174 The board

granted the buyer that right in 2003, and in 2007, the buyer exercised it and specified

that the acquisition would take place via merger. 175 The contractually determined

171 Id. at 1072.

172 2008 WL 5169633 (Del. Ch. Dec. 10, 2008).

173 Id. at *2.

174 Id.

175 Id. at *4.

62
consideration partially satisfied the preferred stockholders’ liquidation preferences

and left the common stockholders with nothing. Stockholder plaintiffs sued, asserting

that the board could not simply permit the buyer to enforce the agreement, but rather

had a fiduciary duty to seek superior alternatives, including by negotiating for a

higher buyout price. The plaintiffs conceded that any attempt to challenge the

validity of the 2003 agreement was time-barred. 176

Chief Justice Strine, then serving as a Vice Chancellor, held that “[t]he change

of control occurred in 2003” and that “the material decisions about the transaction,

including the price and transaction form,” were made then. 177 Consequently, “all that

was left to do in 2007 when [the buyer] decided to exercise its Buyout Option was

apply the Contract Price Formula, sign the documents necessary to effect [the

buyer’s] chosen transaction form, and distribute the purchase money . . . .” 178 The

board had no special fiduciary ability to avoid the corporation’s contractual

obligations or their enforcement. The corporation “was contractually obligated to

enter into the Merger, and [its] board could not fail to do so without causing the

company to dishonor a contract.” 179 The plaintiffs’ assertion that the directors

176 Id.

177 Id. at *5.

178 Id.

179 Id. at *6.

63
breached their fiduciary duties by not pursuing an efficient breach of contract could

not overcome the business judgment rule. 180

Delaware cases thus demonstrate overwhelmingly that a court cannot invoke

the fiduciary duties of directors to override a counterparty’s contract rights. That is

true even when a heightened standard of review like enhanced scrutiny applies.

Under current Delaware law, any attempt by the Company to invoke its directors’

duties to defeat Lowry’s exercise of the Officer Pre-Approval Requirement would have

to overcome a multi-decade wall of precedent.

(E) Lowry’s Obligations Under The Implied
Covenant Of Good Faith And Fair Dealing

Without any contractual or fiduciary hook on the Company’s side, the

Company shifts its attention to Lowry. According to the Company, if Lowry tried to

exercise one of the Pre-Approval Requirements, then the Company could invoke the

implied covenant of good faith and fair dealing to prevent Lowry from exercising his

pre-approval right in bad faith. 181 In theory, that is true, but the Company would

have to prove that Lowry was exercising the Pre-Approval Requirement to harm the

corporation in a manner not contemplated by the Stockholders Agreement, rather

than for its intended purpose. 182

180 Id. at *7–8.

181 Def.’s Op. Br. at 17.

–05 (Del. Ch.
182 See ArchKey Intermediate Hldgs. Inc. v. Mona, 302 A.3d 975, 1004

2023) (describing that potential claim).

64
Under Delaware law, a claim under the implied covenant is difficult to prove.

The Delaware Supreme Court has summarized the implied covenant concisely as

follows:

The implied covenant is inherent in all contracts and is used to infer
contract terms to handle developments or contractual gaps that . . .
neither party anticipated. It applies when the party asserting the
implied covenant proves that the other party has acted arbitrarily or
unreasonably, thereby frustrating the fruits of the bargain that the
asserting party reasonably expected. The reasonable expectations of the
contracting parties are assessed at the time of contracting. 183

To prevail on an implied covenant claim, a plaintiff must prove “a specific implied

contractual obligation, a breach of that obligation by the defendant, and resulting

damage to the plaintiff.” 184

When determining whether to invoke the implied covenant, a court “first must

engage in the process of contract construction to determine whether there is a gap

that needs to be filled.” 185 “Through this process, a court determines whether the

language of the contract expressly covers a particular issue, in which case the implied

covenant will not apply, or whether the contract is silent on the subject, revealing a

gap that the implied covenant might fill.” 186 The court must determine whether a gap

183 Dieckman v. Regency GP LP, 155 A.3d 358, 367 (Del. 2017) (cleaned up).

184 Cantor Fitzgerald, L.P. v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998).

185 Allen v. El Paso Pipeline GP Co., L.L.C., 113 A.3d 167, 183 (Del. Ch. 2014), aff’d,

2015 WL 803053 (Del. Feb. 26, 2015) (TABLE).

186 NAMA Hldgs., LLC v. Related WMC LLC, 2014 WL 6436647, at *16 (Del. Ch. Nov.

17, 2014).

65
exists because “[t]he implied covenant will not infer language that contradicts a clear

exercise of an express contractual right.” 187 “[B]ecause the implied covenant is, by

definition, implied, and because it protects the spirit of the agreement rather than

the form, it cannot be invoked where the contract itself expressly covers the subject

at issue.” 188

“If a contractual gap exists, then the court must determine whether the implied

covenant should be used to supply a term to fill the gap. Not all gaps should be

filled.” 189 One reason a gap might exist is if the parties negotiated over a term and

rejected it. Under that scenario, the implied covenant should not be used to fill the

gap left by a rejected term because doing so would grant a contractual right or

protection that the party “failed to secure . . . at the bargaining table.” 190

But contractual gaps may exist for other reasons. “No contract, regardless of

how tightly or precisely drafted it may be, can wholly account for every possible

contingency.” 191 “In only a moderately complex or extend[ed] contractual

relationship, the cost of attempting to catalog and negotiate with respect to all

187 Nemec v. Shrader, 991 A.2d 1120, 1127 (Del. 2010).

188 Fisk Ventures, LLC v. Segal, 2008 WL 1961156, at *10 (Del. Ch. May 7, 2008), aff’d,

984 A.2d 124 (Del. 2009) (TABLE).

189 Allen, 113 A.3d at 183.

190 Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del. Ch.

2004), aff’d, 861 A.2d 1251 (Del. 2004).

191 Amirsaleh v. Bd. of Trade of City of N.Y., Inc., 2008 WL 4182998, at *1 (Del. Ch.

Sept. 11, 2008).

66
possible future states of the world would be prohibitive, if it were cognitively

possible.” 192

Equally important, “parties occasionally have understandings or expectations

that were so fundamental that they did not need to negotiate about those

expectations.” 193 “The implied covenant is well-suited to imply contractual terms that

are so obvious . . . that the drafter would not have needed to include the conditions as

express terms in the agreement.” 194

Applying these principles, the Delaware Supreme Court has made clear that

the implied covenant of good faith and fair dealing restrains a party’s exercise of

discretion under an agreement. The general rule is that the implied covenant requires

a party in a contractual relationship to refrain from arbitrary or unreasonable

conduct which has the effect of preventing the other party to the contract from

receiving the fruits of the bargain. That rule operates with special force “when a

contract confers discretion on a party.” 195 At a minimum, the implied covenant

192 Credit Lyonnais Bank Nederland, N.V. v. Pathe Commc’ns Corp., 1991 WL 277613,

at *23 (Del. Ch. Dec. 30, 1991) (Allen, C.).

193 Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986) (Allen, C.) (quoting

Corbin on Contracts § 570, at 601 (Kaufman Supp. 1984)).

194 Dieckman, 155 A.3d at 361.

195 Glaxo Grp. Ltd. v. DRIT LP, 248 A.3d 911, 920 (Del. 2021).

67
requires that the party empowered with the discretion to make a determination “use

good faith in making that determination.” 196

Those standards mean that for purposes of the Pre-Approval Requirements,

the Company would have to show that Lowry was not withholding his pre-approval

for a rational reason. A claim that Lowry withheld his pre-approval for spite might

succeed. 197 So might a claim that Lowry knew the action the Board sought to take

was in the best interests of the Company, knew the action would not harm his own

interests, but nevertheless withheld his pre-approval to extract some other, unrelated

benefit from the Company.

Absent extreme facts of that sort, the implied covenant will not come into

play. 198 If, for example, the Board thought the Company needed a new CEO, but

Lowry believed in good faith that Trevor was the best person for the job, then Lowry

could withhold his pre-approval without violating the implied covenant. The potential

existence of an implied covenant claim under extreme circumstances does not re-

establish the Board’s authority to the degree necessary to rectify the Section 141(a)

violation.

196 Gilbert v. El Paso Co., 490 A.2d 1050, 1055 (Del. Ch. 1984), aff’d, 575 A.2d 1131

(Del. 1990).

197 See Seinfeld: The Wig Master (NBC television broadcast Apr. 4, 1996).

198 Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *7 (Del.

Ch. Aug. 25, 2006) (dismissing implied covenant claim based on stockholder’s exercise of
contractual consent right over the declaration of a dividend).

68
(F) Lowry’s Fiduciary Duties

The other potential hook for preventing Lowry from exercising one of the Pre-

Approval Requirements might be Lowry’s own fiduciary duties. Perhaps, but here

again, the Company would face an uphill climb.

Lowry’s first line of defense would be to argue that he was not a controlling

stockholder. One line of Delaware cases refuses to consider contractual rights when

assessing controller status. 199 Lowry could argue with a straight face that given his

level of equity ownership, he would not owe fiduciary duties as a controller. Lowry

also could argue that when exercising an individual pre-approval right, he was not

acting as a controller. 200

Lowry’s next line of defense would be to argue that even if he was a controlling

stockholder, he did not owe fiduciary obligations when exercising contract rights. A

series of Delaware decisions assert that a fiduciary does not owe fiduciary duties

199 See, e.g., In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 995 (Del. Ch.

2014) (“Here, there are no well-pled facts from which it is reasonable to infer that KKR could
prevent the KFN board from freely exercising its independent judgment in considering the
proposed merger or, put differently, that KKR had the power to exact retribution by removing
the KFN directors from their offices if they did not bend to KKR’s will in their consideration
of the proposed merger.”), aff’d sub nom. Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del.
2015).

200 Superior Vision, 2006 WL 2521426, at *5 (rejecting argument that contractual
consent right over the declaration of a dividend gave the holder sufficient control to trigger
fiduciary review).

69
when exercising contractual rights, even if the counterparty is the fiduciary’s

beneficiary. 201

Lowry’s third line of defense would be to argue that even if he was a controlling

stockholder and owed fiduciary obligations when exercising contract rights, those

duties did not require that he engage in self-sacrifice. Delaware decisions have

repeatedly acknowledged that when parties have bargained for contractual

provisions, they can rely on them. 202

In response, the directors would have to assert that Lowry owed fiduciary

duties, including when exercising contract rights. I recently surveyed Delaware

authorities and concluded that when exercising voting rights, a controller owes a

limited set of fiduciary duties under which the controller cannot knowingly or

intentionally harm the controlled corporation or do so as a result of gross negligence

(recklessness). 203 Because voting rights are contractual, the same conceptual

framework logically would apply to a controller’s exercise of contract rights.

201 See, e.g., Odyssey P’rs, L.P. v. Fleming Cos., Inc., 735 A.2d 386, 415 (Del. Ch. 1999)

(“Chancellor Allen found that Fleming was not constrained by fiduciary duties when acting
as a creditor in relation to the foreclosure sale. . . . In my view, this rationale applies with
equal force both to the claim that Fleming was obligated to pay a fair price in the foreclosure
sale and that it (or Lawson) was obliged to disclose to ABCO’s directors its analyses of ABCO’s
value to it. Fleming was not acting in a fiduciary capacity when it bid at the foreclosure sale
and, thus, its conduct thereat is not subject to a fiduciary duty analysis.”); Superior Vision,
2006 WL 2521426 at *5 (“Here, ReliaStar is alleged to have taken advantage of its contractual
rights for its own purposes. Without more, that is not sufficient to allege that ReliaStar is a
‘controlling shareholder’ bound by fiduciary obligations.”).

202 E.g., In re Sirius XM, 2013 WL 5411268, at *2.

203 In re Sears Hometown & Outlet Stores, Inc. S’holder Litig., 309 A.3d 474, 512 (Del.

Ch. 2024).

70
Except for the addition of potential liability for recklessness, that legal

framework is not materially different than what contract law would enforce using the

implied covenant. As discussed previously, except under extreme circumstances, the

implied covenant would not constrain Lowry’s reliance on the Officer Pre-Approval

Requirement.

Under current Delaware law, therefore, a daunting array of impediments

would stand between the Company and any ability to rely on Lowry’s duties as a

controlling stockholder to limit the enforcement of the Pre-Approval Requirements.

Might the Company pull it off under extreme circumstances? Possibly. But the

Company would not start out with aces and kings. More like a pair of eights.

(G) Breaches Of Fiduciary Duty At The Time of
Contracting

As a final effort, the Company might hearken back to the time of contracting.

As noted previously, Delaware decisions consistently take the position that unless a

contract resulted from a breach of duty, and unless (per C & J Energy) the

counterparty aided and abetted that breach, then the counterparty can enforce its

rights. The Company might conceivably try to defang a Pre-Approval Requirement

by arguing that Lowry breached his fiduciary duties when entering into it.

That would be another tough sell. The directors would not be arguing that the

Pre-Approval Requirements were void under Section 141(a); they would be arguing

that equity should invalidate the Stockholders Agreement based on breaches of

fiduciary duty at the time of contracting. Equitable defenses like laches and various

forms of estoppel would apply. For the Stockholders Agreement, the analysis would

71
not have to move beyond laches, given that the directors entered into the Stockholders

Agreement in October 2019, more than three years ago. 204

The directors’ argument would also face another hurdle: The Delaware

Supreme Court has held that directors do not owe fiduciary duties to future

stockholders and, based on that principle, held that directors who caused a company

to enter into a loan agreement before a spinoff owed no duties to the public

stockholders who later received shares in the spinoff. 205 Applied to this case, that

would imply that the directors did not owe any fiduciary duties to the public

stockholders when they entered into the Stockholders Agreement. Even a time-of-

contracting argument likely goes nowhere.

iii. Summing Up

As the preceding discussion shows, the Company would have no meaningful

way to defeat the exercise of the Pre-Approval Requirements, including the Officer

Pre-Approval Requirement. That is why the Officer Pre-Approval Requirement

constitutes a Section 141(a) violation.

204 See, e.g., Levey v. Brownstone Asset Mgmt., LP, 76 A.3d 764, 768 (Del. 2013) (“It is

uncontroverted that Levey’s claim sounds in contract, and that the analogous statute of
limitations is 10 Del. C. § 8106, under which a breach of contract action must be brought
within three years from the date that the cause of action accrued.”); see also In re Sirius XM,
2013 WL 5411268, at *2 (relying on laches to dismiss claim that contract could not prevent a
board from adopting a stockholder rights plan).

205 See Anadarko Petroleum Corp. v. Panhandle E. Corp., 545 A.2d 1171, 1177 (Del.

1988) (no fiduciary relationship between directors and future stockholders).

72
2. The Section 142 Challenge

The plaintiff separately contends that the Officer Pre-Approval Requirement

violates Section 142(b) and (e). Section 142(b) states: “Officers shall be chosen in such

manner and shall hold their offices for such terms as are prescribed by the bylaws or

determined by the board of directors or other governing body.” 206 Section 142(e)

states: “Any vacancy occurring in any office of the corporation by death, resignation,

removal or otherwise, shall be filled as the bylaws provide. In the absence of such

provision, the vacancy shall be filled by the board of directors or other governing

body.” 207

By virtue of Section 102(b)(1), any provision that can appear in a bylaw can

also appear in the certificate of incorporation (although not vice versa), 208 so a

certificate of incorporation could also specify how officers shall be chosen. In this way,

Section 142(b) and (e) operate as bylaw includers, making clear that the bylaws—and

not just the certificate of incorporation—can also address those issues. Notably,

Section 142(b) does not authorize a stockholders agreement to determine how officers

are chosen or removed, nor how vacancies are filled.

In this case, neither the Charter nor the Bylaws authorizes the Officer Pre-

Approval Requirement. Echoing Section 141(a), the Charter states that that “[t]he

206 8 Del. C. § 142(b).

207 8 Del. C. § 142(e).

208 8 Del. C. § 102(b)(1).

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business and affairs of the Corporation shall be managed by, or under the direction

of, the Board.” 209 The Charter thus reinforces the Company’s board-centric

governance structure and the expectation that the Board will exercise the full

authority it possesses under Section 141(a), including over the selection and removal

of officers.

The Bylaws are more specific. They state that

[t]he Board may from time to time elect officers of the Corporation,
which may include a Chairman, Chief Executive Officer, President, Vice
Presidents, Secretary, Treasurer and any other officers as it may deem
proper or may delegate to any elected officer of the Corporation the
power to appoint and remove any such officers and to prescribe their
respective terms of office, authorities and duties. 210

The Bylaws also give the Board the power to remove officers, stating that “[a]ny

officer may be removed at any time with or without cause by the Board or, in the case

of appointed officers, by any elected officer upon whom such power of removal shall

have been conferred by the Board.” 211 The Bylaws thus implement the Company’s

board-centric governance structure by providing the Board with full authority over

the selection and removal of officers.

Nothing in Section 142, the Charter, or the Bylaws empowers a contractual

counterparty to control the hiring, firing, or the making of significant decisions

regarding senior officers. This decision need not address whether the Charter or the

209 Charter § 7.1(i).

210 Bylaws, § 5.01.

211 Id. § 5.02.

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Bylaws could empower a contractual counterparty to control those matters, because

nothing in the Charter or Bylaws purports to allow it. The Officer Pre-Approval

Requirement therefore conflicts with section 142(b) and (e). For this additional

reason, the Officer Pre-Approval Requirement is invalid.

D. The Charter Pre-Approval Requirement

The plaintiff next challenges the Charter Pre-Approval Requirement, which

requires Lowry’s prior written approval before the Company can commit to, make any

agreement regarding, or permit the occurrence of “any amendments to the certificate

of incorporation . . . of the Company.” 212 That provision is also invalid for two separate

reasons. It violates Section 141(a), and it violates Section 242. 213

1. The Section 141(a) Challenge

The plaintiff contends that the Charter Pre-Approval Requirement violates

Section 141(a) of the DGCL to the extent it requires Lowry’s prior written approval

before the Company can enter into any agreement regarding, make any commitment

regarding, or effectuate a charter amendment. This decision has already determined

212 SA § 1.01(c).

213 The plaintiff separately argues that the Charter Pre-Approval Requirement
violates Section 212(a) of the DGCL. That section states that “[u]nless otherwise provided in
the certificate of incorporation and subject to § 213 of this title, each stockholder shall be
entitled to 1 vote for each share of capital stock held by such stockholder.” 8 Del. C. § 212(a).
The plaintiff observes that the Holders are stockholders and that the Charter Pre-Approval
Requirement gives them a veto over any charter amendment. The plaintiff contends that the
Charter Pre-Approval Requirement functionally provides each Holder with sufficient votes
to defeat any charter amendment, resulting in the Holders having more than one vote per
share without that entitlement appearing in the charter. Because the Charter Pre-Approval
Requirement is invalid for other reasons, this decision does not consider that argument.

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that the Pre-Approval Requirements appear in a governance agreement and are

subject to Section 141. 214 The only question is whether the Charter Pre-Approval

Requirement has “the effect of removing from [the] directors in a very substantial

way their duty to use their own best judgment on management matters” or “tends to

limit in a substantial way the freedom of director decisions on matters of management

policy.” 215

After a corporation has issued stock, the DGCL empowers the board to

determine whether a corporation will amend its charter. 216 Only the board has the

authority to initiate that process. The board likewise has the power to decline to

initiate that process. Under the DGCL, the board is the gatekeeper for charter

amendments. The board’s authority over that topic is a matter of management policy.

With that issue addressed, it becomes easy to conclude that the Charter Pre-

Approval Requirement tends to remove from the directors in a very substantial way

their ability to use their own best judgment over whether to present a charter

amendment. In a series of opinions, this court has held that contract provisions that

inserted other parties as gatekeepers for significant board decisions resulted in a

violation of Section 141(a).

214 See Part II.C.1.a, supra.

215 Abercrombie, 123 A.2d at 899; accord Quickturn II, 721 A.2d at 1292; Grimes II,

673 A.2d at 1214; see Mayer, 141 A.2d at 461 (citing Abercrombie with approval); Adams, 121
A.2d at 305 (same).

216 8 Del. C. § 242(a).

76
For example, in ACE, a target corporation entered into a merger agreement

that prohibited the board from talking to other potential acquirers unless outside

counsel opined that the board’s fiduciary duties required engagement. 217 While

serving on this court, Chief Justice Strine held that provision was “likely invalid”

because it involved “involves an abdication by the board of its duty to determine what

its own fiduciary obligations require at precisely that time in the life of the company

when the board’s own judgment is most important.” 218

While serving on this court, Justice Berger reached a similar conclusion in

Jackson v. Turnbull. 219 There, the board of directors set a floor price for a merger but

left the final determination of the price to a valuation firm. 220 Then-Vice Chancellor

Berger held that by giving up that authority to the valuation firm, the board violated

Section 141(a) by binding itself to the valuation firm’s determination. The provision

was therefore invalid. 221 Chief Justice Strine reasoned similarly and to the same

effect in Nagy. 222

217 ACE, 747 A.2d at 96–102.

218 Id. at 97, 106.

219 1994 WL 174668 (Del. Ch. Feb. 8, 1994), aff’d, 653 A.2d 306 (Del. 1994) (TABLE).

220 Id. at *5.

221 Id.

222 Nagy v. Bistricer, 770 A.2d 43, 46, 60–62 (Del. Ch. 2000).

77
Two earlier decisions applied the same principles. In Clarke, a board

authorized a corporation to explore selling all of its assets. 223 But rather than

determining whether to sell the corporation’s assets or setting terms for the sale, the

board authorized its President and Secretary to determine whether to sell and on

what terms, as long as they secured a value in excess of a minimum price. 224 The

court granted judgment on the pleadings for the plaintiff, finding the resolution

improperly bound the board to accept the officers’ determination, when “what the

officers deem to be in the best interest of the Corporation is not necessarily what the

Board of Directors may decide is in its best interest.” 225

Finally, in Field, a board approved an agreement to issue stock to a third party

in exchange for the third party’s shares. 226 The board directed an appraiser to

determine the exchange ratio, subject to a cap. 227 Chancellor Seitz, then serving as a

Vice Chancellor, held that “the directors of a Delaware corporation may not delegate,

except in such manner as may be explicitly provided by statute, the duty to determine

the value of the property acquired as consideration for the issuance of stock.” 228 The

223 Clarke Mem’l Coll. v. Monaghan Land Co., 257 A.2d 234, 237 (Del. Ch. 1969).

224 Clarke, 257 A.2d at 240–41.

225 Id. at 241.

226 Field v. Carlisle Corp., 68 A.2d 817, 817 (Del. Ch. 1949).

227 Id. at 818.

228 Id. at 820. The General Assembly responded by amending Section 151(a). The
statute now makes clear that a board can set the consideration for a stock issuance by

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corporation argued that the directors acted properly by setting an upper bound, but

Chancellor Seitz held that the directors must have the final say. 229 The appraisal

provision violated Section 141(a) because “the directors bound their corporation even

before seeing the appraisal . . . .” 230

The Charter Pre-Approval Requirement limits the Board’s ability to proceed

with a charter amendment to an even greater degree. Through that provision, the

Board contractually designated Lowry as the gatekeeper for whether the Company

can amend its charter. Without Lowry’s prior written approval, the Board cannot

proceed. That limitation does not appear in the Charter, and it therefore violates

Section 141(a). 231

2. The Section 242 Challenge

The Charter Pre-Approval Requirement is also invalid for a separate and

independent reason. Section 242 of the DGCL governs charter amendments after a

corporation has issued stock. Under Section 242, effectuating a charter amendment

requires two steps that must occur in order. First, the board of directors must adopt

a resolution declaring the advisability of the amendment and calling for a stockholder

referring to “facts ascertainable” outside the resolution approving the issuance. See 8 Del. C.
§ 151(a).

229 Id. at 820–21.

230 Id.

231 The Company advances the same arguments it proffered in defense of the Officer

Pre-Approval Requirement. Those arguments fail for the same reasons.

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vote. Second, a majority of the outstanding stock entitled to vote must vote in favor. 232

Those “two discrete corporate events must occur, in precise sequence” for the

amendment to be effective. 233 Under this statutory sequence, “[t]he stockholders may

not act without prior board action.” 234

The Charter Pre-Approval Requirement displaces the statutory sequence by

putting Lowry at the head of the line. That violates the order established by Section

242. 235

Importantly, the Charter Pre-Approval Requirement is not an additional vote

that the corporation must obtain before a transaction can close. Transaction

agreements often provide for additional votes, such as by requiring that a transaction

can only close if, in addition to the statutorily required vote, it also receives approval

from a majority of the unaffiliated shares. The Charter Pre-Approval Requirement

does not call for a specific additional vote as an additional requirement at the end of

the line. The Charter Pre-Approval Requirement purports to introduce a threshold

232 8 Del. C. § 242(b)(1).

233 Williams v. Geier, 671 A.2d 1368, 1381 (Del. 1996).

234 Id.

235 See Blades v. Wisehart, 2010 WL 4638603, at *11 n.91 (Del. Ch. Nov. 17, 2010)

superseded by statute on other grounds, 2023 Del. Laws Ch. 98 (S.B. 114), as recognized in
Holifield, 304 A.3d at 931 n. 177; iXCore, S.A.S. v. Triton Imaging, Inc., 2005 WL 1653942,
at *1 n.7 (Del. Ch. July 8, 2005); Tansey v. Trade Show News Networks, Inc., 2001 WL
1526306, at *4 (Del. Ch. Nov. 27, 2001).

80
requirement before the statutory mechanism can proceed. That mechanism violates

Section 242.

E. The Transaction Pre-Approval Requirement

The last Challenged Provision is the Transaction Pre-Approval Requirement.

It requires Lowry’s prior written approval before the Board can make any

commitment as to, approve any agreement regarding, or permit the occurrence of any

transaction,

resulting in the merger, consolidation or sale of all, or substantially all,
of the assets of [the LLC] and its subsidiaries [or] any dissolution,
liquidation or reorganization (including filing for bankruptcy) of [the
LLC] and its subsidiaries or any acquisition or disposition of any asset
for consideration in excess of 5% of the Total Assets (as defined below)
of [the Company] and its subsidiaries. 236

That provision also seeks to regulate core areas of board power.

The plaintiff nominally challenged the Transaction Pre-Approval Requirement

as a restriction on the Company’s ability to engage in a merger or other change-of-

control transaction. The plaintiff argued that granting Lowry a pre-approval right

over Company-level mergers conflicted with both Section 141(a) and Section 251 of

the DGCL. But as the Company correctly pointed out, the Transaction Pre-Approval

Requirement does not constrain the Company’s ability to merge. It primarily governs

transactions involving the LLC, which is the Company’s sole operating subsidiary. 237

236 SA § 1.01(a).
237 Def.’s Opening. Br. at 23 n.15.

81
At the Company level, the provision only addresses “any acquisition or disposition of

any asset for consideration in excess of 5% of the Total Assets . . . .” 238

After pointing out this defect in the plaintiff’s position, the Company

nevertheless chose to defend the plaintiff’s arguments on the merits. As to the

plaintiff’s Section 251 argument, however, the absence of a Pre-Approval

Requirement governing Company-level mergers is fatal. If such a pre-approval right

existed, then the analysis would track the conflict between the Charter Pre-Approval

Requirement and Section 242. But a pre-approval requirement for Company-level

mergers does not exist.

The question that the Transaction Pre-Approval Requirement presents is

whether making Lowry the gatekeeper over (i) transactions at the LLC level and (ii)

any acquisition or disposition of any asset for consideration in excess of 5% of the

Total Assets of the Company violates Section 141(a). Those limitations would give

Lowry control over whether the Company engaged in a sales of all or substantially

all of the Company’s assets, where the operative DGCL provision has the same

structure as Section 242. 239

238 Id.

239 Compare 8 Del. C. § 271(a) & (b) with 8 Del. C. § 275(a) & (b) with 8 Del. C. § 251(b)

& (c). Dissolution can be achieved unilaterally, without board involvement, by unanimous
stockholder written consent. Id. § 275(c). A stockholder agreement could bind stockholders to
vote on a unanimous dissolution. That path is irrelevant to limitations on the board’s
authority to implement dissolution.

82
More generally, this provision allows Lowry to determine whether the

Company will engage in a broad range of material transactions, neutering the

traditional prerogative of the Board to make those decisions. By addressing such a

broad swathe of decisions regarding the Company’s sole operating subsidiary, the

Transaction Pre-Approval Requirement restricts the Board’s ability to manage the

business and affairs of the Company. Any restriction to that effect must appear in the

Charter. The attempt to impose it through the Stockholders Agreement contravenes

Section 141(a).

F. The Propriety Of The Plaintiff’s Facial Challenge

The plaintiff has framed its motion as a facial challenge to the Challenged

Provisions. The Company maintains that a facial challenge is unsupportable. To the

contrary, a facial challenge is the proper vehicle to test the validity of the Challenged

Provisions. “Facial challenges to the legality of provisions in corporate instruments

are regularly resolved by this Court.” 240

The Delaware Supreme Court has stated that to succeed on a facial challenge,

the plaintiff must show that that a challenged provision cannot operate lawfully

“under any circumstances.” 241 Here, that standard is readily met.

240 Lions Gate Ent. Corp. v. Image Ent. Inc., 2006 WL 1668051, at *6 (Del. Ch. June 5,

2006); see, e.g., Boilermakers Loc. 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 938 (Del. Ch.
2013) (ruling on facial validity of bylaw); Sagusa, Inc. v. Magellan Petroleum Corp., 1993 WL
512487, at *1 (Del. Ch. Dec. 1, 1993) (ruling on facial validity of per captia voting provision).

241 Salzberg v. Sciabacucchi, 227 A.3d 102, 113 (Del. 2020). The Salzberg court drew

this standard from the Chevron case. See Chevron, 73 A.3d at 948. The Chevron decision cited
Frantz, but the Frantz case does not say that; it says: “The bylaws of a corporation are

83
presumed to be valid, and the courts will construe the bylaws in a manner consistent with
the law rather than strike down the bylaws.” Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401,
407 (Del. 1985). That is a similar proposition, but it addresses how a court construes a bylaw,
not when a facial challenge can succeed. The Chevron court later cited Stroud, but the same
admonition applies. See Stroud v Grace, 606 A.2d 75, 78–79 (Del. 1992) (cited in Chevron, 73
A.3d at 949 n.56). The real source of the Chevron standard appears to be United States v.
Salerno, 481 U.S. 739 (1987), which the Chevron decision cited as being in accord with a
Delaware Family Court case that had cited Salerno for that proposition. See Chevron, 73 A.3d
at 948 n.55 (first citing R.M. v. V.H., 2006 WL 1389864, at *8 (Del. Fam. Ct. Jan. 19, 2006)
(“A party may challenge a statute as unconstitutional on its face or as applied to a particular
set of facts. A facial challenge is the most difficult to bring successfully because the challenger
must establish that there is no set of circumstances under which the statute would be valid.”),
then citing Salerno, 481 U.S. at 745 (describing a facial challenge as the “most difficult”
challenge to succeed on because the statute must not operate lawfully in any circumstances)).

Considerable judicial and scholarly debate exists over the Salerno standard. E.g.,
Catherine Gage O’Grady, The Role of Speculation in Facial Challenges, 53 Ariz. L. Rev. 867,
875 (2011) (“Although the Court has relied extensively on the Salerno test to analyze facial
challenges, the standard has been controversial and criticized by some Justices as nearly
impossible to satisfy. Recently, the Roberts Court suggested that to succeed in a facial attack
a challenger must establish either that no set of circumstances exists under which the statute
would be valid, or that the statute lacked any ‘plainly legitimate sweep.’”) (footnotes omitted)
(citing United States v. Stevens, 559 U.S. 460, 472 (2010)); David L. Franklin, Facial
Challenges, Legislative Purpose, and the Commerce Clause, 92 Iowa L. Rev. 41, 62 (2006)
(“Scholars agree that facial adjudication occurs more frequently than the Supreme Court’s
stingy, and ostensibly broadly applicable, test in Salerno would indicate.”); Richard H. Fallon,
Jr., As-Applied and Facial Challenges and Third-Party Standing, 113 Harv. L. Rev. 1321,
1321 (2000) (“Both within the Supreme Court and among scholarly commentators, a debate
rages over when litigants should be able to challenge statutes as ‘facially’ invalid, rather than
merely invalid ‘as applied.’ To a large extent, this debate reflects mistaken assumptions.
There is no single distinctive category of facial, as opposed to as-applied, litigation. All
challenges to statutes arise when a litigant claims that a statute cannot be enforced against
her. In the course of as-applied litigation, rulings of facial invalidity sometimes occur, but
they do not reflect trans-substantive rules governing a purported general category of facial
challenges. Rather, rulings that a statute is facially (or partly) invalid are the consequence
of the particular doctrinal tests that courts apply to resolve particular cases. Some doctrinal
tests call for statutes to be tested on their faces, whereas others do not. Accordingly, debates
about the permissibility of facial challenges should be recast as debates about the substantive
tests that should be applied to enforce particular constitutional provisions.”); Marc E.
Isserles, Overcoming Overbreadth: Facial Challenges and the Valid Rule Requirement, 48
Am. U. L. Rev. 359, 397 (1998) (defending Salerno while arguing that the “any circumstances”
standard was “not a facial challenge test for overbreadth facial challenges, and indeed not a
facial challenge ‘test’ at all”); Michael C. Dorf, Facial Challenges to State and Federal
Statutes, 46 Stan. L. Rev. 235, 294 (1994) (arguing that the Salerno standard “finds little
support in the Supreme Court’s cases and is unsound in principle”). Chevron introduced the

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For purposes of the Section 141(a) challenge, the standard is met because of

how the Challenged Provisions operate. If Lowry and the Board agree on a course of

action, the Challenged Provisions do not operate at all, precisely because everyone

agrees. Lowry only has the need to invoke one of the Challenged Provisions if the

Board wants to commit to, agree on, or permit the Company to pursue a course of

action with which Lowry disagrees. Consequently, every setting in which Lowry relies

on one of the Challenged Provisions will constitute a violation of Section 141(a). Thus,

the Challenged Provisions are facially invalid.

For purposes of the Section 142 challenge to the Officer Pre-Approval

Requirement, the standard is again met. Sections 142(a) and (e) do not contemplate

a contract that would authorize a third party to control the selection of officers. The

Company’s Charter and Bylaws give that authority to the Board. Under current law,

the Officer Pre-Approval Requirement cannot operate consistently with Section 142.

The same is true for purposes of the Section 242 challenge to the Charter Pre-

Approval Requirement. Section 242 does not authorize a stockholder to act as the

initial gatekeeper for charter amendments. Only the board has that authority. By

purporting to put Lowry at the head of the line, the Charter Pre-Approval

Requirement facially conflicts with Section 242.

“any circumstances” concept as if it were a settled and widely accepted test, and Salzberg
adopted it on that basis. Because those assumptions seem debatable, it may be worth giving
further consideration to whether Delaware should use the Salerno test.

85
G. The Effect of The Consent Agreement

The analysis up to this point demonstrates that the Challenged Provisions

were statutorily invalid in the form in which they existed at the time of the lawsuit.

But after the plaintiff filed her complaint, the Company implemented the Consent

Agreement. As a practical matter, the Committee Waiver enables the independent

directors to override the Pre-Approval Requirements. 242 That does not solve the

statutory problems under Sections 142 or 242, but it does change the outcome under

Section 141(a).

1. The Section 142 Defect

The Consent Agreement does not solve the Section 142 defect for the Officer

Pre-Approval Requirement, because the mechanism for appointing, replacing, or

making any significant decisions regarding senior officers remains governed by a

process that neither the DGCL, the Charter, nor the Bylaws authorizes. The Consent

Agreement makes that process more complex by introducing the possibility of a

Committee Waiver, but the process remains beyond the statutory pale. The Officer

Pre-Approval Requirement still violates Section 142.

2. The Section 242 Defect

The Consent Agreement does not solve the Section 242 defect for the Charter

Pre-Approval Requirement. If anything, it exacerbates it.

242 See Part I.D. supra.

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Section 242 establishes a straightforward process in which the board acts as

the gatekeeper for charter amendments. Any charter amendment that the board

approves then goes to the stockholders. A corporation’s charter might impose

additional restrictions on charter amendments. A corporation also might agree

contractually to impose additional conditions on the implementation of a charter

amendment, including additional voting requirements like a majority-of-the-minority

vote, but those requirements cannot short-circuit the statutory process.

As modified by the Consent Agreement, the Charter Pre-Approval

Requirement continues to short-circuit the statutory process. The Company still must

appeal first to Lowry for written permission to proceed. If Lowry disagrees, then the

Independent Committee can unanimously approve a Committee Waiver, at which

point Lowry would be contractually compelled to consent. Under this system, his

consent is still required, but he is contractually obligated to deliver it. Only then can

the Section 242 process move forward.

Section 242 does not contemplate that Rube Goldberg structure. The Charter

Pre-Approval Requirement continues to violate Section 242.

3. The Section 141(a) Defect

The Consent Agreement does resolve the Section 141(a) problem. The Consent

Agreement introduces an override in the form of the Committee Waiver, and that

override is sufficiently broad to enable the Board to exercise its statutory authority.

The Committee Provision imposes tight procedural restrictions on the Independent

Committee’s exercise of that authority, but the Delaware Supreme Court has drawn

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a distinction between substantive limitations and procedural restrictions for

purposes of Section 141(a) analysis.

The Company argues that the Committee Waiver operates as a fiduciary out,

but that is not the case. The Committee Waiver does not force the directors to assess

what their fiduciary duties require. It only requires that they determine what “is in

the best interests of [the Company] and its stockholders.” 243

If the Consent Agreement stopped there, then its scope would not be sufficient

to cure the Section 141(a) problem. Lowry would have free rein to litigate what was

“in the best interests of [the Company] and its stockholders” and to argue that the

Company had breached the Consent Agreement. The directors would remain bound

by a meaningful contractual constraint not found in the Charter.

But the Consent Agreement does not stop there. It combines that test with a

subjective standard under which the Independent Committee need only make its

determination “in good faith.” 244 The Consent Agreement also does not introduce any

separate decision-maker, such as a law firm, as the gatekeeper for board action. As a

practical matter, that allows the Independent Committee to exercise its discretion

freely.

The analysis must continue, however, because the Consent Agreement adds

two additional requirements. The vote of the Independent Committee must be

243 DX 4 at 2.

244 Id.

88
unanimous, and all of the members of the Independent Committee must be present

for the vote to constitute a quorum. In the real world, those requirements make a big

difference. Absent the Pre-Approval Requirements, the Board would be able to

exercise its judgment freely on all of the issues that those provisions cover. Not only

that, but by statute, the Board would be able to act through “the vote of the majority

of the directors present at a meeting at which a quorum is present . . . .” 245 Under the

Charter and Bylaws, a majority of the directors constitutes a quorum. 246 With eleven

directors, a quorum is six, and a majority of a quorum is four.

With those parameters, there are 330 combinations of four directors that could

take action. Now introduce the Independent Committee and the procedural rules that

govern its decision-making. Because all of the members of the Independent

Committee must be present to constitute a quorum, and because the vote must be

unanimous, there is now only one combination that unlocks the Pre-Approval

Requirements.

That seems like a major restriction, but the Company argues that any

procedural constraints are irrelevant to a Section 141(a) analysis. The Company

245 8 Del. C. § 141(b).

246 Bylaws § 3.14. (“Quorum of Directors. The presence in person of a majority of the

total members of Board, provided that one of such members present is either the Chairman
or the Chief Executive Officer (if the Chief Executive Officer is then a member of the board),
shall be necessary and sufficient to constitute a quorum for the transaction of business at
any meeting of the Board.”)

89
correctly points out that under Section 141(c)(4) of the DGCL, the unanimous quorum

and voting requirements are statutorily permissible. 247

The Delaware Supreme Court’s Section 141(a) jurisprudence has drawn a

sharp distinction between substantive and procedural limitations. In AFSCME, an

institutional investor submitted a proposal for a bylaw that would require

reimbursement for a stockholder’s reasonable expenses incurred in nominating one

or more candidates for election to the board, as long as the stockholder did not seek

to elect a majority slate and at least one of the candidates was elected. 248 The

corporation asked the SEC for a no-action letter confirming that the corporation could

exclude the proposal from its proxy statement. The SEC certified two questions to the

Delaware Supreme Court. First, “[i]s the AFSCME Proposal a proper subject for

247 That section states, in pertinent part:

A majority of the directors then serving on a committee of the
board of directors or on a subcommittee of a committee shall
constitute a quorum for the transaction of business by the
committee or subcommittee, unless the certificate of
incorporation, the bylaws, a resolution of the board of directors
or a resolution of a committee that created the subcommittee
requires a greater or lesser number, provided that in no case
shall a quorum be less than ⅓ of the directors then serving on
the committee or subcommittee. The vote of the majority of the
members of a committee or subcommittee present at a meeting
at which a quorum is present shall be the act of the committee
or subcommittee, unless the certificate of incorporation, the
bylaws, a resolution of the board of directors or a resolution of a
committee that created the subcommittee requires a greater
number.

8 Del. C. § 141(c)(4).

248 AFSCME, 953 A.2d at 230.

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action by shareholders as a matter of Delaware law?” 249 Second, “[w]ould the

AFSCME Proposal, if adopted, cause [the corporation] to violate any Delaware law to

which it is subject?” 250

To answer the first question, the justices considered whether stockholders

could enact bylaws that limited board authority under Section 141(a). 251 The

Delaware Supreme Court explained that “stockholders of a corporation subject to the

DGCL may not directly manage the business and affairs of the corporation, at least

without specific authorization in either the statute or the certificate of

incorporation.” 252 In light of the board’s managerial authority, the Delaware Supreme

Court held that the stockholders’ power to adopt bylaws is “limited by the board’s

management prerogatives under Section 141(a).” 253

That meant the Delaware Supreme Court had to determine whether the bylaw

limited the board’s managerial prerogatives. Focusing on the nature of bylaws

generally, the Delaware Supreme Court held that “a proper function of bylaws is not

to mandate how the board should decide specific substantive business decisions, but

rather, to define the process and procedures by which those decisions are made.” 254

249 Id. at 231.

250 Id.

251 Id. at 232.

252 Id.

253 Id.

254 Id. at 234–35.

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Applying this principle, the court explained that a bylaw would be valid if it

“establishes or regulates a process for substantive director decision-making,” but not

“one that mandates the decision itself.” 255

For purposes of Section 141(a) analysis, there should not be any difference

between what a bylaw can accomplish and what a governance agreement can

accomplish. Bylaws are inherently part of a corporation’s internal governance

arrangement, so Section 141(a) naturally applies. 256 Delaware law also interprets

bylaws as a contract to which the stockholders are parties, 257 so bylaws present the

same issues of contractual power. During oral argument, the Company’s counsel

agreed that there would not be any difference between how a court analyzed a bylaw

and how a court analyzed the Stockholders Agreement. 258

Under AFSCME, the Committee Provision can validly regulate the procedural

operation of the Independent Committee. Those restrictions have a meaningful real-

255 Id. at 235.

256 See Quadrant II, 2014 WL 5465535, at *3 (“When evaluating corporate action for

legal compliance, a court examines whether the action contravenes the hierarchical
components of the entity-specific corporate contract, comprising (i) the Delaware General
Corporation Law, (ii) the corporation’s charter, (iii) its bylaws, and (iv) other entity-
specific contractual agreements, such as a stock option plan, other equity compensation plan,
or, as to the parties to it, a stockholder agreement.” (emphasis added)).

257 Chevron, 73 A.3d at 939 (“As our Supreme Court has made clear, the bylaws of a

Delaware corporation constitute part of a binding broader contract among the directors,
officers, and stockholders formed within the statutory framework of the DGCL.” (first citing
Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1188 (Del. 2010), then citing Lawson
v. Household Fin. Corp., 152 A. 723, 726 (Del. 1930)).

258 Tr. at 74–75.

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world impact on how the Independent Committee functions, but their presence does

not affect the Section 141(a) analysis.

The Committee Provision sufficiently frees the Board to make substantive

decisions on matters otherwise governed by the Pre-Approval Requirements. After

the execution of the Consent Agreement, the Challenged Provisions no longer violate

Section 141(a).

III. CONCLUSION

The plaintiff’s motion for judgment on the pleadings is granted in part. The

Officer Pre-Approval Requirement is facially invalid under Section 142. The Charter

Amendment Pre-Approval Requirement is facially invalid under Section 242.

Without the Consent Agreement, all of the Challenged Provisions would be facially

invalid under Section 141(a). With the Consent Agreement, the Challenged

Provisions survive review under Section 141(a).

Within ten days, the parties will submit a joint letter that attaches an agreed-

upon form of order implementing the rulings made in this decision. If the parties

cannot agree, they will submit a joint letter outlining their disagreements and

proposing a path for resolving them.

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