Seavitt v. N-Able, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

BRIAN SEAVITT, on behalf of himself )
and all other similarly-situated )
stockholders of N-ABLE, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2023-0326-JTL
)
N-ABLE, INC., )
)
Defendant. )

OPINION ADDRESSING THE VALIDITY OF PROVISIONS IN A
STOCKHOLDERS AGREEMENT

Date Submitted: May 6, 2024
Date Decided: July 25, 2024

Thomas Curry, SAXENA WHITE, P.A., Wilmington, Delaware; David Wales,
SAXENA WHITE, P.A., White Plains, New York; Adam Warden, SAXENA WHITE,
P.A., Boca Raton, Florida; Julie Goldsmith Reiser, Richard A. Speirs, COHEN
MILSTEIN SELLERS & TOLL PLLC, New York, New York; Counsel for Plaintiff.

Raymond J. DiCamillo, Matthew D. Perri, Nicole M. Henry, Kevin M. Kidwell,
RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for
Defendant.

LASTER, V.C.
This is another case in which investors took a company public and, in

preparation for the IPO, caused the company to enter into a contract that granted the

investors extensive governance rights. Under Section 141(a) of the Delaware General

Corporation Law (the “DGCL”), “[t]he 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.”1 Governance arrangements that do not appear in the charter and

deprive boards of a significant portion of their authority contravene Section 141(a).

A stockholder plaintiff has challenged the validity of provisions in the

governance agreement. The outcome largely parallels the results in the Moelis and

Wagner decisions.2 Many of the provisions are statutorily invalid.3

1 8 Del. C. § 141(a).

2 W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809 (Del. Ch.

2024); Wagner v. BRP Gp., --- A3d---, 2024 WL 2741191 (Del. Ch. May 28, 2024).

3 Recently enacted legislation could change the outcome for a subset of the provisions.

See 84 Del. Laws ch. 309 (2024) (the “Market Practice Amendments”). One aspect of that
legislation adds a new Section 122(18) to the DGCL that authorizes governance agreements
like the stockholders agreement in this case. The new statute provides that
“[n]otwithstanding § 141(a),” a governance agreement can contain provisions that “(a) restrict
or prohibit [the corporation] from taking actions specified in the contract, (b) require the
approval or consent of one or more persons or bodies before the corporation may take actions
specified in the contract (which persons or bodies may include the board of directors or one
or more current or future directors, stockholders or beneficial owners of stock of the
corporation), and (c) covenant that the corporation or one or more persons or bodies will take,
or refrain from taking, actions specified in the contract (which persons or bodies may include
the board of directors or one or more current or future directors, stockholders or beneficial
owners of stock of the corporation). Id. (the “Governance Agreement Provision”). A provision
in a governance agreement is not enforceable, however, “[t]o the extent such provision is
contrary to the certificate of incorporation or would be contrary to the laws of this State … if
included in the certificate of incorporation.” Id. That legislation specifically provides,
But this case adds one twist. A handful of provisions in the certificate of

incorporation states they are “subject to” the governance agreement. The company

asserts that this laconic prepositional phrase incorporates the governance agreement

into the charter by reference, thereby elevating the contract’s commitments to the

status of Section 141(a)-compliant, charter-based limitations.4

Surprisingly, no case has addressed whether a charter can incorporate a

private contract by reference. The structure of the DGCL forecloses that path.

The charter is a corporation’s foundational firm-specific document. Although

general incorporation statutes have standardized the process for obtaining a charter

and pushed the state’s role into the background, the issuance of a charter and the

concomitant creation of an artificial person remains an exercise of governmental

power akin to the enactment of a statute. The General Assembly cannot incorporate

private agreements into a statute. That goes for a charter as well.

The public nature of a charter also means it cannot incorporate a private

agreement by reference. The DGCL requires companies to publicly file their charters

with the Delaware Secretary of State. Any amendments must be filed too. That

requirement ensures easy public access to the charter so that anyone can determine

what the charter authorizes, prohibits, or limits. Permitting a charter to incorporate

however, that pending cases like this one must go forward under the pre-amendment regime.
Id.

4 Under the recently enacted Governance Agreement Provision, there is no need for

an incorporation-by-reference workaround.

2
a private agreement by reference undermines the public nature of a charter,

particularly for private companies.

The language of the DGCL also forecloses incorporation by reference. The

DGCL addresses when a charter or instrument can reference outside sources. The

DGCL specifically authorizes a charter to include provisions dependent on “facts

ascertainable” outside of that document. The DGCL nowhere authorizes a charter to

incorporate “agreements ascertainable” or “provisions ascertainable.”

A charter is also unique in that the DGCL establishes a mandatory procedure

for any amendments. Parties cannot simply amend the charter in any manner they

wish, nor can they create bespoke amendment procedures, such as only requiring

board approval. Allowing the incorporation by reference of a private agreement would

undermine the certainty and stability of the charter. The parties to the governance

agreement—typically the corporation and a favored stockholder—could amend their

governance agreement without following the DGCL’s requirements. By amending the

governance agreement, they would amend the charter.

Permitting parties to amend the charter by amending a governance agreement

would deprive non-party stockholders of their statutory right to vote. The DGCL’s

requirements for a charter amendment identify two steps that must be followed in

precise order: first, the board must approve the amendment and recommend it to the

stockholders; second, the stockholders must approve the amendment. If a charter

incorporates a private agreement by reference, and if the parties to the private

3
agreement can amend it themselves, then the non-party stockholders have lost their

right to vote.

Attempting to incorporate a contract into a charter introduces the DNA of a

purely private agreement into a foundational and public document. Rather than man

or bull, it spawns a corporate minotaur. The DGCL does not permit the creation of a

corporate mutant. The company’s attempt to side-step the limitations of Section

141(a) through incorporation by reference falls short.

I. FACTUAL BACKGROUND

The parties filed cross-motions for summary judgment. The pertinent facts are

undisputed.5

A. The Spinoff

Before July 2021, N-able, Inc. (the “Company”) existed as a wholly owned

subsidiary of SolarWinds Corporation. Two private equity firms controlled

SolarWinds: Silver Lake Group, LLC and Thoma Bravo, LLC (together, the “Lead

Investors”).

On July 19, 2021, SolarWinds spun off the Company. In the spinoff, each

stockholder of SolarWinds received one share of Company common stock for every

two shares of SolarWinds common stock.6

5 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. __” are to the
transcript of the oral argument. Dkt. 26.

6 PX 4 at 52.

4
The spinoff marked the start of the Company’s existence as a publicly traded

corporation. Since the spinoff, its common stock has traded on the New York Stock

Exchange under the ticker symbol “NABL.”

The complaint does not allege how much stock the Lead Investors held after

the spinoff. The complaint alleges that the Lead Investors currently own

approximately 62%.

B. The Stockholders Agreement

In anticipation of the spinoff, the Lead Investors restructured the Company’s

internal governance. As part of that effort, they amended and restated the Company’s

certificate of incorporation (the “Charter”).7 They also amended and restated the

Company’s bylaws (the “Bylaws”).8

Pertinent to this dispute, the Lead Investors and the Company entered into a

governance agreement, which they called the “Stockholders Agreement.”9 The Lead

7 PX 3 (cited as “Charter”).

8 PX 6 (cited as “Bylaws”).

9PX 1 (cited as “SA”). The Stockholders Agreement was amended as of
December 13, 2021. PX 2 (the “Amendment” or “Amend.”). This decision addresses
the Stockholders Agreement as amended. Among other things, the Amendment
removed the Thoma Bravo investors as parties to the Stockholders Agreement.
Amend. § 5.

The parties to the Stockholders Agreement include the Company and various affiliates
of the Lead Investors. One Silver Lake co-investor and over a score of Thoma Bravo co-
investors signed the agreement. For purposes of this decision, the distinction between the
Lead Investors and the affiliates and co-investors is immaterial, because the Lead Investors
control their rights under the Stockholders Agreement.

5
Investors included significant governance rights in the Stockholders Agreement,

rather than putting them in the Charter or Bylaws.

1. The Pre-Approval Requirements

In a section titled “Covenants,” the Stockholders Agreement requires the prior

approval of both Lead Investors before the Company or any of its subsidiaries can

take a wide range of actions (the “Pre-Approval Requirements”).

The pertinent language states:

5.4 Actions Requiring Approval of the Lead Investors. So long as the
Lead Investors collectively continue to hold at least 30% of the aggregate
number of then outstanding shares of Common Stock of the Company,
the following actions by the Company or any of its Subsidiaries shall
require the prior written consent of each Lead Investor that is then
entitled to nominate at least two Directors to the Board:

5.4.1 Entering into or effecting a Change of Control.

5.4.2 Directly or indirectly, entering into or effecting any
transaction or series of related transactions involving, or entering into
any agreement providing for, (a) the purchase, lease, license, exchange
or other acquisition by the Company or its Subsidiaries of any assets
and/or equity securities for consideration having a fair market value (as
reasonably determined by the Board) in excess of $150.0 million and/or
(b) the sale, lease, license, exchange or other disposal by the Company
or its Subsidiaries of any assets and/or equity securities having a fair
market value or for consideration having a fair market value (in each
case as reasonably determined by the Board) in excess of $300.0 million;
in each case, other than transactions solely between or among the
Company and one or more of its direct or indirect wholly-owned
Subsidiaries. For the avoidance of doubt, if any Lead Investor (including
any Silver Lake Director, in the case of Silver Lake, or Thoma Bravo
Director, in the case of Thoma Bravo) recuses itself from a decision with

Six members of Company management signed the Stockholders Agreement. It is not
clear whether the Lead Investors believe that the Stockholders Agreement binds the
members of management in their capacities as directors and officers of the Company. The
plaintiff has not raised this point, and this decision expresses no view on it.

6
respect to any such transaction, the consent of such Lead Investor shall
not be required but the other Lead Investor will continue to have the
consent right hereunder.

5.4.3 Directly or indirectly, entering into any joint venture or
similar business alliance involving, or entering into any agreement
providing for, the investment, contribution or disposition by the
Company or its Subsidiaries of assets (including stock of Subsidiaries)
having a fair market value (as reasonably determined by the Board) in
excess of $150.0 million, other than transactions solely between or
among the Company and one or more of its direct or indirect wholly-
owned Subsidiaries.

5.4.4 Incurring (or extending, supplementing or otherwise
modifying any of the material terms of) any indebtedness for borrowed
money (including any refinancing of existing indebtedness), assuming,
guaranteeing, endorsing or otherwise as an accommodation becoming
responsible for the obligations of any other Person (other than the
Company or any of its Subsidiaries), or entering into (or extending,
supplementing or otherwise modifying any of the material terms of) any
agreement under which the Company or any Subsidiary may incur
indebtedness for borrowed money in the future, in each case in an
aggregate principal amount in excess of $300.0 million in any
transaction or series of related transactions and other than a drawdown
of amounts committed (including under a revolving facility) under a debt
agreement that previously received the prior written consent of the Lead
Investors or that was entered into on or prior to the date hereof.

5.4.5 Initiating a voluntary liquidation, dissolution, receivership,
bankruptcy or other insolvency proceeding involving the Company or
any Subsidiary of the Company that is a “significant subsidiary” as
defined in Rule 1-02 of Regulation S-X under the Exchange Act.

5.4.6 Terminating the employment of the Chief Executive Officer
of the Company or hiring a new Chief Executive Officer of the Company.

5.4.7 Increasing or decreasing the size of the Board.10

10 SA § 5.4 (emphasis removed). The Amendment altered the first sentence of Section

5.4. Amend. § 4. The decision quotes the provision as amended.

7
Viewed in their totality, the Pre-Approval Requirements require the Company’s

board of directors (the “Board”) to obtain the prior written approval of both Lead

Investor for a broad swathe of actions that otherwise would fall within the Board’s

plenary authority. In their specificity, the Pre-Approval Requirements go far beyond

what a controlling stockholder could achieve by exercising its voting power at the

stockholder level. The Pre-Approval Requirements enable the Lead Investors to enter

the boardroom and take control of specific board-level decisions.

As demonstrated by the introductory clause, the Lead Investors can continue

to exercise the Pre-Approval Requirements as long as they jointly hold at least 30%

of the Company’s common stock. The Stockholders Agreement thus gives the Lead

Investors granular control rights that they can continue to exercise even as they sell

of shares and their ownership declines.11

2. The Board Composition Covenants

In a section titled “Corporate Governance,” the Stockholders Agreement

provides the Lead Investors with the ability to determine the composition of the

Board (the “Board Composition Covenants”). There are six provisions at issue: the

Board Size Covenant, the Nomination Covenant, the Recommendation Covenant, the

Efforts Covenant, the Vacancy Covenant, and the Nomination Veto.

11 The Stockholders Agreement includes a provision titled “Post-Distribution Sell-

Downs” that contemplates the Lead Investors selling down their positions. SA § 3.2.

8
a. The Board Size Covenant

The Board Size Covenant requires that the Company maintain a Board of eight

directors. Not only that, but the Stockholders Agreement mandates that the Board

change its size if requested in writing by the Lead Directors or to the extent required

by law. The operative language states:

On and after the Effective Time, the Board shall consist of eight (8)
Directors; provided, that the Board shall further increase

(a) the number of Independent Directors to the extent necessary
to comply with applicable law and the Stock Exchange rules, or as
otherwise agreed by the Board, subject to the rights of the Lead
Investors under Section 5.4.7,12 or

(b) the number of Directors as otherwise requested in writing by
the Lead Investors.13

Because of the Board Size Covenant, the Board cannot increase or decrease the size

of the Board as the directors see fit.

b. The Nomination Covenant

The Nomination Covenant gives the Lead Investors the right to nominate

individuals whom the Company must include in its proxy materials and on its proxy

12 Recall that the Pre-Approval Requirement found in Section 5.4.7 requires the Lead

Investors’ prior written approval before “[i]ncreasing or decreasing the size of the Board.” SA
§ 5.4.7. This requirement persists “[s]o long as the Lead Investors collectively continue to
hold at least 30% of the aggregate number of then outstanding shares of Common Stock of
the Company . . .” and the Lead Investors are “entitled to nominate at least two Directors to
the Board.” Id. § 5.4. The Lead Investors thus benefit from a negative covenant limiting the
Board’s size (i.e., no changes without the Lead Investors’ consent), plus an affirmative
covenant compelling the Board to act.

13 Id. § 2.1.1 (formatting added).

9
card. The number of individuals whom the Lead Investors can nominate depends on

their level of stock ownership.

Two sections of the Stockholders Agreement address the number of nominees

that the Lead Investors can name.14 One section addresses Silver Lake’s nominees.

The other addresses Thoma Bravo’s nominees. Both provisions are identical. The

Silver Lake provision is representative and states:

So long as the Aggregate Silver Lake Ownership continues to be

(i) at least 20% of the aggregate number of then outstanding
shares of Common Stock of the Company, Silver Lake shall be entitled
to nominate three Directors,

(ii) less than 20% but at least 10% of the aggregate number of
then outstanding shares of Common Stock of the Company, Silver Lake
shall be entitled to nominate two Directors and

(iii) less than 10% but at least 5% of the aggregate number of then
outstanding shares of Common Stock of the Company, Silver Lake shall
be entitled to nominate one Director.

. . . Notwithstanding the foregoing, Silver Lake shall be entitled to
nominate three Directors only if the total number of Directors (inclusive
of the number of Directors nominated by Silver Lake and Thoma Bravo)
exceeds seven Directors.15

14 Id. §§ 2.1.2(a) & (b). The Amendment modified these provisions. Amend. §§ 1 & 2.

This decision addresses the amended versions. This decision does not express any view on
Section 2.4 of the Stockholders Agreement, which purports to give the Lead Investor
designees the power to call a special meeting of the Board. That is a provision that could
readily appear in the Charter or Bylaws; it is dubious only because it appears in the
Stockholders Agreement. The Governance Agreement Provision enacted as part of the
Market Practice Amendments would affect the analysis in case filed after August 1, 2024.

15 Id. § 2.1.2(a) (formatting added).

10
Because Thoma Bravo receives identical rights, the Lead Investors are guaranteed

the ability to name six of eight directors for as long as they each hold at least 20% of

the outstanding shares. If their ownership drops to as low as 10% each, the Lead

Investors would still be guaranteed the ability to name four out of eight directors.

c. The Recommendation Covenant And The Efforts
Covenant

The Recommendation Covenant obligates the Board to recommend the Lead

Investors’ nominees for election as directors and forces the Company to include the

Lead Investors’ nominees on its slate. The Efforts Covenant obligates the Company

to use reasonable best efforts to secure the election of the Lead Investors’ nominees.

The operative language states:

The Company hereby agrees (i) to include the nominees of the Lead
Investors nominated pursuant to this Section 2.1.2 as the nominees to
the Board on each slate of nominees for election of the Board included
in the Company’s annual meeting proxy statement (or consent
solicitation or similar document),

(ii) to recommend the election of such nominees to the
stockholders of the Company and

(iii) without limiting the foregoing, to otherwise use its reasonable
best efforts to cause such nominees to be elected to the Board, including
providing at least as high a level of support for the election of such
nominees as it provides to any other individual standing for election as
a director.16

This provision obligates the Company to endorse the Lead Investors’ nominees for

election—which means as a practical matter the Board must endorse them for

16 Id. § 2.1.2(c) (formatting added).

11
election—regardless of whether the Board actually supports them. The Company also

must exert reasonable best efforts to ensure the successful election of the Lead

Investors’ nominees to the Board.

d. The Vacancy Covenant

The Vacancy Covenant obligates the Board to fill any vacancy in a seat

occupied by a Lead Investors’ designee with another Lead Investors’ designee. It

states:

If (i) a Director position is vacant (including due to a Lead Investor not
nominating a Director) and a Lead Investor is entitled to fill that vacant
position and (ii) such Lead Investor elects to nominate a Director to fill
that position, the Board shall take all actions necessary to appoint such
nominee to the Board as promptly as practicable.17

Without the Lead Investors’ permission, the Board cannot fill a vacancy in a seat

previously held by a Lead Investors’ designee with anyone other than another Lead

Investors’ designee.

e. The Nomination Veto

The Nomination Veto gives the Lead Investors the right to veto nominees for

any seat on the Board. The language states:

Any recommendation of the Nominating Committee shall require the
approval of the Silver Lake Director (if any) serving on the Nominating
Committee, for so long as the Aggregate Silver Lake Ownership
continues to be at least 10% of the aggregate number of outstanding
shares of Common Stock, and the Thoma Bravo Director (if any) serving
on the Nominating Committee, for so long as the Aggregate Thoma

17 Id. § 2.1.6(a).

12
Bravo Ownership continues to be at least 10% of the aggregate number
of outstanding shares of Common Stock.18

The Nomination Veto ensures that the Lead Investors control whom the Nominating

Committee recommends, as long as they each hold at least 10% of the common stock.

3. The Committee Composition Provisions

The Corporate Governance section of the Stockholders Agreement also

contains the Committee Composition Provisions. They ensure that the Lead Investors

have representation on Board committees. The pertinent language states:

(a) . . . Subject to Section 2.1.4(d),19 for so long as the Company maintains
the Audit Committee, it shall consist of at least one Silver Lake Director
(but only if Silver Lake is then entitled to nominate at least one Silver
Lake Director) and at least one Thoma Bravo Director (but only if
Thoma Bravo is then entitled to nominate at least one Thoma Bravo
Director).

(b) Subject to Section 2.1.4(d), for so long as the Company maintains the
Compensation Committee and Nominating Committee, such
committees shall each consist of at least one Silver Lake Director (but
only if Silver Lake is then entitled to nominate at least one Silver Lake
Director) and at least one Thoma Bravo Director (but only if Thoma
Bravo is then entitled to nominate at least one Thoma Bravo Director).

(c) Subject to Section 2.1.4(d), any committee of the Board not specified
in Section 2.1.4(a) or 2.1.4(b) shall consist of at least one Silver Lake

18 Id. § 2.1.6(d). The Amendment modified this provision. Amend. § 3. This decision

addresses the amended versions.

19 Section 2.1.4(d) requires the Board “upon the recommendation of the Nominating

Committee” to “modify the composition of any [] committee to the extent required to comply
with [] applicable law or the Stock Exchange rules.” SA § 2.1.4(d). This provision also allows
the Board to fill a vacant director committee position if the Lead Investors are not entitled or
decline to designate a director for the seat. But the Board does not have free rein even then,
because the “vacant position shall be filled by the Board upon the recommendation of the
Nominating Committee,” and any recommendation from the Nominating Committee is
subject to the Lead Investors’ Nomination Veto.

13
Director (but only if Silver Lake is then entitled to nominate at least one
Silver Lake Director) and at least one Thoma Bravo Director (but only
if Thoma Bravo is then entitled to nominate at least one Thoma Bravo
Director) and such additional members as may be determined by the
Board;

provided, that a special committee may exclude Directors nominated by
the Lead Investors if

(i) no such Director is eligible to serve on such special committee
due to the rules and requirements of any national stock exchange on
which the Company’s stock is listed or

(ii) the primary purpose of such special committee is to review,
assess and/or approve a transaction in which the applicable Lead
Investor has a material direct or indirect interest and having such Lead
Investor’s Director appointed on such special committee would
constitute a clear conflict of interest, in each case as determined by a
majority of the Independent Directors in their reasonable good faith
discretion.20

The Stockholders Agreement contemplates that the Lead Investors will maintain at

least one Board seat each so long as they own at least 5% of the Company. As long as

that is the case, the Committee Composition Provisions purport to give each of the

Lead Investors a seat on every committee, subject to the two exceptions for special

committees.

C. The Removal Provision

As noted, the Lead Investors caused the Company to adopt the Charter in

connection with the spinoff. The Charter provides for a classified board.21 Under

20 Id. § 2.1.4.

21 Charter, art. VI, pt. C. Because the plaintiff has not challenged it, this decision does

not address a provision in the Charter that purports to eliminate—yes, literally eliminate—
an aspect of the fiduciary duties that SolarWinds, the Lead Investors, and their affiliates

14
Delaware law, unless the charter provides otherwise, directors on a classified board

can be removed only for cause, and only by the affirmative vote of at least a majority

of the voting power present and entitled to vote.22

The Removal Provision purports to modify both aspects of Section 141(k)(i).

First, the Removal Provision authorizes removal without cause. Second, the Removal

Provision authorizes the Lead Investors to remove a director without cause, even if

the Lead Investors are not “holders of a majority of the shares then entitled to vote

at an election of directors.”23 The operative language states:

Subject to the rights of the holders of any series of Preferred Stock then
outstanding or the rights granted pursuant to the Stockholders
Agreement and notwithstanding any other provision of this Certificate,
(i) prior to the first date on which the Investors and their Affiliates cease
to beneficially own (directly or indirectly) in the aggregate at least 30%
of the voting power of the then outstanding shares of capital stock of the
Corporation then entitled to vote generally in the election of directors,
directors may be removed with or without cause upon the affirmative
vote of the Investors and their respective Affiliates which beneficially
own shares of capital stock of the Corporation entitled to vote generally
in the election of directors and (ii) on and after such date, directors may
only be removed for cause (as defined below) and only upon the
affirmative vote of stockholders representing at least sixty-six and two-
thirds percent (66-2/3%) of the voting power of all of the then
outstanding shares of the capital stock of the Corporation entitled to

otherwise would owe, including when serving as officers and directors of the Company. See
id. art. IX, pt. B.

22 8 Del. C. § 141(k) (“Any director or the entire board of directors may be removed,

with or without cause, by the holders of a majority of the shares then entitled to vote at an
election of directors, except as follows: (i) Unless the certificate of incorporation otherwise
provides, in the case of a corporation whose board is classified as provided in subsection (d)
of this section, stockholders may effect such removal only for cause . . . .”).

23 Id.

15
vote generally in the election of directors, voting together as a single
class.24

Thus, so long as Lead Investors hold a combined total of at least 30% of the Company’s

outstanding shares, the Charter purports to give them the power to remove directors

from a classified board without cause.

D. This Litigation

The plaintiff owns shares of the Company’s common stock. He purchased his

shares in May 2022. He filed this action on March 16, 2023. He seeks a determination

that the challenged provisions are invalid. After the Company answered the

complaint, the parties filed cross-motions for summary judgment.

II. LEGAL ANALYSIS

Under Court of Chancery Rule 56, summary judgment “shall be rendered

forthwith” if “there is no genuine issue as to any material fact and . . . the moving

party is entitled to a judgment as a matter of law.”25 The parties agree on the facts.

They only disagree about issues of law.

The plaintiff has mounted a facial challenge to the Pre-Approval

Requirements, the Board Composition Covenants, the Committee Composition

Provisions, and the Removal Provision. The Delaware Supreme Court has stated that

24 Charter, art. VI, pt. F.

25 Ct. Ch. R. 56(c).

16
to succeed on a facial challenge, the plaintiff must show that that a challenged

provisions cannot operate lawfully “under any circumstances.”26

A. The Section 141(a) Challenge To The Pre-Approval Requirements

The plaintiff contends that the Pre-Approval Requirements violate Section

141(a) of the DGCL. That section “declares that the business and affairs of every

corporation organized under the General Corporation Law shall be managed by or

under the direction of a board of directors, except as may otherwise be provided in

the statute itself or in the certificate of incorporation.”27

For 125 years, Section 141(a) has stood as the cornerstone of Delaware’s board-

centric model of corporate law. Delaware Supreme Court decisions regularly cite the

foundational role of that section.28

26 Salzberg v. Sciabacucchi, 227 A.3d 102, 113 (Del. 2020).

27 David A. Drexler, Lewis S. Black, Jr. & A. Gilchrist Sparks, III, Delaware
Corporation Law & Practice § 13.01[1] (2002 & Supp.) [hereinafter Drexler].

28 See, e.g., Quickturn Design Sys., Inc. v. Shapiro (Quickturn II), 721 A.2d 1281, 1291–

92 (Del. 1998) (“One of the most basic tenets of Delaware corporate law is that the board of
directors has the ultimate responsibility for managing the business and affairs of a
corporation. Section 141(a) . . . confers upon any newly elected board of directors full power
to manage and direct the business and affairs of a Delaware corporation.” (emphasis in
original) (citation omitted)); Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34,
41–42 (Del. 1994) (“The General Corporation Law of the State of Delaware . . . and the
decisions of this Court have repeatedly recognized the fundamental principle that the
management of the business and affairs of a Delaware corporation is entrusted to its
directors, who are the duly elected and authorized representatives of the stockholders.”);
Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 179 (Del. 1986) (“The
ultimate responsibility for managing the business and affairs of a corporation falls on its
board of directors.” (citing Section 141(a))); Unocal Corp. v. Mesa Petroleum Co., 493 A.2d
946, 953 (Del. 1985) (“The board has a large reservoir of authority upon which to draw. Its
duties and responsibilities proceed from the inherent powers conferred by 8 Del. C. § 141(a).”);
Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984) (“The bedrock of the General Corporation Law

17
An extensive body of Delaware precedent analyzes Section 141(a) claims.29

This court recently 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 addresses the corporation’s

internal affairs.30 As a leading Delaware treatise notes, “[a]n agreement among less

than all stockholders cannot substantially divest directors of their responsibility to

manage the business and affairs of the corporation.”31

At the same time, a corporation obviously can and must enter into third-party

contracts in order to conduct business. Delaware decisions have regularly

of the State of Delaware is the rule that the business and affairs of a corporation are managed
by and under the direction of its board.” (citing Section 141(a)) (subsequent history omitted)).

Going forward, the Governance Agreement Provision moves Delaware’s historically
board-centric regime towards the fully contractarian end of the spectrum. That amendment
states that notwithstanding Section 141(a), a governance agreement can contain (i)
restrictions on corporate action, (ii) requirements that persons or bodies (including one or
more current or future directors, stockholders, or beneficial owners of stock) give their
approval or consent before the corporation can take action, and (iii) covenants requiring that
the corporation or one or more persons or bodies (including the board or one or more current
or future directors, stockholders or beneficial owners) take action. The Governance
Agreement Provision contains an exception providing that a provision in a governance
agreement remains unenforceable if it is contrary to the certificate of incorporation or would
be contrary to Delaware law if included in the certificate of incorporation. An exception to the
exception permits a governance agreement to contain provisions contrary to Section 115 of
the DGCL, which states that “no provision of the certificate of incorporation or the bylaws
may prohibit bringing such claims in the courts of this State.” 8 Del. C. § 115.

29 See Moelis, 311 A.3d at 831–55 (collecting authorities).

30 Id. at 859–61.

31 Drexler, supra, § 13.01[1][a], at 13-3.

18
acknowledged that banal reality.32 For example, in Grimes II, the Delaware Supreme

Court observed that

[a] board which has decided to manufacture bricks has less freedom to
decide to make bottles. In a world of scarcity, a decision to do one thing
will commit a board to a certain course of action and make it costly and
difficult (indeed, sometimes impossible) to change course and do
another. This is an inevitable fact of life and is not an abdication of
directorial duty.33

That is plainly true. But it does not mean that contracts never violate Section 141(a).

What the law therefore requires is a means of distinguishing between internal

governance agreements, where Section 141(a) applies, and external commercial

agreements, where it does not. In Moelis, the court discerned just such a threshold

inquiry: “Although none of the cases say so expressly, they show that a court applying

Section 141(a) must first determine whether the challenged provision constitutes part

of the corporation’s internal governance arrangement. If not, then the inquiry ends.

32 See, e.g., Grimes v. Donald (Grimes II), 673 A.2d 1207, 1214 (Del. 1996)

(“[B]usiness decisions are not an abdication of directorial duty merely because they
limit a board’s freedom of future action.”); In re infoUSA, Inc. S’holders Litig., 953
A.2d 963, 999 (Del. Ch. 2007) (“Every contract approved by a board of directors, after
all, limits the discretion of the board in future transactions, but a board is empowered
to make agreements with other actors in commerce, including its own shareholders.”);
Sample v. Morgan, 914 A.2d 647, 671–72 (Del. Ch. 2007) (“Boards of directors
necessarily limit their future range of action all the time. For example, a core function
of boards is to ‘manage’ the business and affairs of the corporation. One aspect of
management involves procuring the factors of production the company needs to do its
business. If a board enters into a five-year exclusive agreement to purchase energy,
that necessarily limits its freedom to manage its procurement of energy. But that
does not mean that the board has ‘abdicated’ its authority to manage, it means that
the board has exercised its authority.” (footnotes omitted)).

33 Grimes II, 673 A.2d at 1214–15.

19
If so, then Section 141(a) applies.”34 Under this test, Section 141(a) only applies to

arrangements that are intended to alter the statutorily-mandated allocation of

authority between a board and the stockholders. The arc of Section 141(a)

jurisprudence reveals that our courts have regularly drawn that distinction and

tested nominally third-party agreements for compliance with the statute.35

If Section 141(a) applies, then the court looks to the test that Chancellor Seitz

created in his seminal decision in Abercrombie v. Davies.36 The Delaware Supreme

Court has endorsed and adopted that test on no fewer than five occasions.37 Under

34 Moelis, 311 A.3d at 828.

35 See Grimes II, 673 A.2d at 1214–15 (employment agreements with CEO); Politan

Cap. Mgmt. LP v. Masimo Corp., C.A. No. 2022-0948-NAC, at 173–91 (Del. Ch. Feb. 3, 2023)
(TRANSCRIPT) (employment agreement with CEO); Schroeder v. Buhannic, 2018 WL
11264517, at *2, *4 (Del. Ch. Jan. 10, 2018) (ORDER) (stockholder agreement); Marmon v.
Arbinet-Thexchange, Inc., 2004 WL 936512, at *4 (Del. Ch. Apr. 28, 2004) (stockholder
agreement); Nagy v. Bistricer, 770 A.2d 43, 60–62 (Del. Ch. 2000) (merger agreement); ACE
Ltd. v. Cap. Re Corp., 747 A.2d 95, 106 (Del. Ch. 1999) (merger agreement); In re Bally’s
Grand Deriv. Litig., 1997 WL 305803, at *5–6 (Del. Ch. June 4, 1997) (management
agreement); Jackson v. Turnbull, 1994 WL 174668 (Del. Ch. Feb. 8, 1994), aff’d, 653 A.2d 306
(Del. 1994) (merger agreement).

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

130 A.2d 338 (Del. 1957). The Abercrombie decision invalidated two parts of a
stockholders agreement. In one section, a stockholder who was also a director bound
himself as a director to vote as agreed, and Chancellor Seitz held that such an
agreement is void. Id. at 894–95 & n.1. The Abercrombie decision also addressed a
part of the agreement in which other stockholder signatories bound themselves as
stockholders to remove any director who failed to vote in line with the agreement.
Chancellor Seitz held that those provisions also were invalid under Section 141(a).
Id. at 899.

37 Grimes II, 673 A.2d at 1214 (quoting Abercrombie, 123 A.2d at 899); accord
Quickturn II, 721 A.2d at 1292; 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)
(endorsing Abercrombie’s analysis). Two more recent Delaware Supreme Court opinions cite

20
the Abercrombie 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 . . . .”38

1. The Governance Arrangement Inquiry

The first step in analyzing a Section 141(a) claim is to determine whether the

challenged provisions appear in an arrangement that governs the company’s internal

affairs. In this case, the challenged provisions meet that test.

One factor to consider is whether the agreement finds statutory purchase in

the DGCL.39 The DGCL governs a corporation’s internal affairs, so if the DGCL

contemplates a particular type of agreement, then it becomes more likely that some

or all of that agreement addresses internal affairs. Stockholders agreements are

grounded in Sections 218(c) and (d) of the DGCL.40 Here, the challenged provisions

appear in the Stockholders Agreement.

decisions that relied on Abercrombie, such as Quickturn II and Grimes II. See CA, Inc. v.
AFSCME Empls. Pension Plan (AFSCME), 953 A.2d 227, 238–39 (Del. 2008) (relying on
Quickturn II; concluding that bylaw violated Section 141(a)); McMullin v. Beran, 765 A.2d
910, 924–25 & n.66 (Del. 2000) (relying on Grimes II; holding that complaint stated a claim
that corporation improperly delegated to its controlling stockholder the task of initiating,
negotiating, and approving a sale of the company to a third party).

38 Abercrombie, 123 A.2d at 899.

39 Moelis, 311 A.3d at 859.

40 Id.

21
A second consideration is whether the corporation’s counterparties hold roles

as intra-corporate actors, such as officers, directors, stockholders, or their affiliates.41

Intra-corporate actors operate within the corporation to cause the firm to exercise its

powers. A contract that involves intra-corporate actors is therefore more likely to

involve internal affairs. The Lead Investors are major stockholders, and the

Stockholders Agreement is essentially a bilateral agreement between the Lead

Investors and the Company.

A third consideration is whether the challenged provisions seek to direct how

intra-corporate actors exercise corporate power. 42 The Pre-Approval Requirements

constrain actions that only the Board can take. The Board Composition Covenants

and the Committee Composition Provisions mandate action that only the Board can

take. Except for the Nomination Covenant and the Efforts Covenant, all of the other

covenants reference the Board expressly.

A fourth consideration is whether the arrangement readily reveals an

underlying commercial exchange.43 In a commercial agreement, the bargain is the

point, and the parties might include the governance rights to protect the bargain.44

In a governance arrangement, governance is the point, and the agreement exists to

41 Id.

42 Id.

43 Id.

44 Id.

22
allocate control rights.45 Here, there was no underlying bargain that led the Company

to grant the Lead Investors the extensive rights they received. The most that could

be said is that when considering what rights they wanted if the Company went public,

the Lead Investors decided they wanted the governance rights that appear in the

Stockholders Agreement.

A fifth consideration is the duration of the contract and whether the

corporation can freely terminate it. Governance arrangements are more likely to be

enduring, even indefinite.46 In this case the Board cannot unilaterally terminate the

Stockholders Agreement. The Pre-Approval Requirements will exist so long as the

Lead Investors continue to own, in the aggregate, 30% of the Company’s total

outstanding shares.47 The Board Composition and Committee Composition

Provisions will persist to various degrees until the Lead Investors own less than 5%

of the Company.48 Those features indicate that the purpose of the arrangement is to

ensure that the Lead Investors enjoy granular control rights over the Company’s

internal affairs and can continue to exercise those rights as their ownership

percentage falls.

45 Id.

46 Id. at 860.

47 SA § 5.4.

48 See id. §§ 2.1.2(a)–(b), 2.1.4(a)–(c).

23
A sixth consideration is the likely remedy for breach. In a commercial

agreement, the presumptive remedy will be damages tied to the commercial bargain.

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

relief enforcing the control right.49 The Stockholders Agreement provisions are

designed to compel or prevent action, through specific performance if necessary.

A final consideration is the nature of the provisions at issue. The Stockholders

Agreement contains a list of prototypical governance provisions that ordinarily would

need to appear in the Charter or Bylaws. The Lead Investors simply chose to put the

provisions in a contract. The resulting provisions give the Lead Investors more

specific authority than any controlling stockholder could achieve solely by exercising

stockholder-level voting power. As Chief Justice Strine observed while serving on this

court,

The reality is that controlling stockholders have no inalienable right to
usurp the authority of boards of directors that they elect. That the
majority of a company's voting power is concentrated in one stockholder
does not mean that that stockholder must be given a veto over board
decisions when such a veto would not also be afforded to dispersed
stockholders who collectively own a majority of the votes. Like other
stockholders, a controlling stockholder must live with the informed (i.e.,
sufficiently careful) and good faith (i.e., loyal) business decisions of the
directors unless the DGCL requires a vote. That is a central premise of
our law, which vests most managerial power over the corporation in the
board, and not in the stockholders.50

49 Moelis, 311 A.3d at 859–60.

50 Hollinger Inc. v. Hollinger Int'l, Inc., 858 A.2d 342, 387 (Del. Ch. 2004), appeal

refused, 871 A.2d 1128, 2004 WL 1732185 (Del. 2004) (TABLE).

24
The Pre-Approval Rights and Board Composition Covenants enable the Lead

Investors to exercise issue-by-issue control over the Board, and the Stockholders

Agreement enables the Lead Investors to continue to exercise those rights as they sell

down.

The Stockholders Agreement is therefore part of the Company’s entity-specific

governance arrangement. Indeed, the Stockholders Agreement is another

prototypical governance agreement that has all of the hallmarks of an effort to

regulate the internal affairs of the Company. The Board Composition Covenants and

the Committee Composition Provisions even appear in a section titled “CORPORATE

GOVERNANCE.” Even though the Stockholders Agreement is a separate contract,

its provisions are subject to Section 141(a).

2. The Improper Restriction Inquiry

If a contract qualifies as part of an entity-specific governance arrangement,

then Section 141(a) comes into play. At that point, the court must assess whether the

arrangement 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[s’] decisions on matters of

25
management policy.”51 An agreement can have that effect through direct or indirect

board-level constraints, or through direct or indirect company-level constraints.52

The Company’s governance structure reinforces the principle of board centrism

embodied in Section 141(a). Echoing the statutory language, the Charter states: “The

business and affairs of the Corporation shall be managed by or under the direction of

the Board of Directors.”53 The Bylaws reiterate this point, stating: “The business and

affairs of the Corporation shall be managed by or under the direction of a Board, who

may exercise all of the powers of the Corporation except as otherwise provided by law

or the Certificate of Incorporation.”54 Neither provision references the Stockholders

Agreement.55

51 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); Clearance Corp.,
121 A.2d at 305 (same).

52 Moelis, 311 A.3d at 830–31.

53 Charter, art. VI, pt. A.

54 Bylaws § 3.1.

55 Under the Governance Agreement Provision, language tracking Section 141(a) has

no meaningful effect. By stating that provisions in a governance agreement are unenforceable
if they conflict with the certificate of incorporation, the Governance Agreement Provision
authorizes corporations to opt out of its contract-centric regime, either for specific issues or
generally. But the Governance Agreement Provision qualifies that limitation by stating that
“a restriction, prohibition or covenant in any such contract that relates to any specified action
shall not be deemed contrary to the laws of this State or the certificate of incorporation by
reason of a provision of this title or the certificate of incorporation that authorizes or
empowers the board of directors (or any one or more directors) to take such action.” Because
of that language, general recitals about board authority, like those in the Charter, are not
sufficient after August 1, 2024, to maintain a board-centric regime. In the words of the
synopsis, such a provision “merely authorizes the board of directors to manage, or direct the
management of, the business and affairs of the corporation.” Instead, “to render inoperable

26
a. The Individual Pre-Approval Requirements

The Stockholders Agreement requires that the Company obtain prior written

approval from both Lead Investors before taking action falling into seven categories.

Each category encompasses decisions that the Board otherwise would make and

where the Board would act as gatekeeper. Nominally, the Pre-Approval

Requirements bind the Company. In practice, they operate as direct, board-level

restrictions on the directors’ ability to exercise their authority.

i. Approving A Change Of Control

Pre-Approval Requirement 5.4.1 requires the Lead Investors’ prior written

approval before “[e]ntering into or effecting a Change of Control.”56 The Stockholders

Agreement defines Change of Control as:

any transaction or series of related transactions (whether by merger,
consolidation, recapitalization, liquidation or sale or transfer of
Common Stock or assets (including equity securities of Subsidiaries) or
otherwise) as a result of which any Person or group, within the meaning
of Section 13(d)(3) of the Exchange Act (other than Equity Investors and
their respective Affiliates, any group of which the foregoing are
members and any other members of such a group), obtains ownership,
directly or indirectly, of (i) Shares that represent more than 50% of the
total voting power of the outstanding capital stock of the Company or

the provisions of § 122(18), a certificate of incorporation could state the corporation lacks the
power and authority to enter into the contracts authorized by § 122(18), or could state that
the corporation lacks the power and authority to authorize specific contracts, or types of
contracts, that would otherwise be authorized by § 122(18).” No charter currently contains
such a provision, because Section 122(18) did not previously exist.

56 SA § 5.4.1.

27
any applicable successor entity or (ii) all or substantially all of the assets
of the Company and its Subsidiaries on a consolidated basis.57

Through this provision, the Lead Investors usurp the Board’s ability to determine

whether the corporation will engage in a “merger, consolidation, recapitalization,

liquidation or sale or transfer of Common Stock or assets.”58

Approving a merger or consolidation59 or a sale of all or substantially all

assets60 requires a two-step process. First, the board of directors must initiate the

process and recommend the transaction to stockholders.61 Only then can the

stockholders vote to approve the transaction.62 A board cannot abdicate its statutory

duties in a merger or consolidation,63 and the same is logically true in a sale of all or

substantially all assets.

57 Id. § 7.2.

58 Id.

59 8 Del. C. § 251.

60 Id. § 271.

61 Id. §§ 251(b), 271(a).

62 Id. §§ 251(c), 271(b).

63 See ACE, 747 A.2d at 97, 106 (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.”); Turnbull, 1994 WL
174668, at *5 (“The [company] directors set a floor merger price, but left the final decision as
to any higher price to a third party. . . . This delegation of the directors’ statutory
responsibility is impermissible.”). The General Assembly responded to Jackson by amending
Section 251. The statute now provides that a board can establish the amount of merger
consideration by referring to “facts ascertainable” outside the merger agreement, including a
person’s determination. 8 Del. C. § 251(b).).

28
The Stockholders Agreement purports to displace the Board by giving the Lead

Investors the right to decide up front whether the corporation will enter into a

merger, consolidate, or sell all or substantially all of its assets. Without the Lead

Investors’ prior written approval, the Board cannot proceed. This is true regardless

of the fact that the Company is the jural person nominally bound by the Stockholders

Agreement.64 That limitation does not appear in the Charter, and it therefore violates

Section 141(a). It likewise violates the sections of the DGCL that specifically govern

those forms of transactions and require that the Board take the lead and act as

gatekeeper.

ii. Terminating The Company’s Existence

Pre-Approval Requirement 5.4.5 requires the Lead Investors’ prior written

approval in order to voluntarily terminate the Company’s existence. That includes

“[i]nitiating a voluntary liquidation, dissolution, receivership, bankruptcy or other

insolvency proceeding involving the Company or any Subsidiary . . . .”65

Liquidation and dissolution are related terms. The act of dissolution begins the

process of liquidation which ends with the cessation of a corporation’s existence.

Under the DGCL, the sequence for approving a dissolution has the same structure as

a merger, consolidation, or sale of all or substantially all assets: first board approval,

64 See Schroeder, 2018 WL 11264517, at *4 (holding that a stockholder agreement,

nominally binding the company, would be invalid under Section 141(a) if it required the
common stockholders, rather than the board, to select the CEO).

65 SA § 5.4.5.

29
then majority stockholder approval.66 But there is one exception: Dissolution can be

achieved unilaterally, without board involvement, by a unanimous stockholder vote.67

In light of this statutory structure, all of a corporation’s stockholders could

agree in a stockholder agreement to unanimously vote in favor of dissolution, but the

existence of that path is irrelevant to the ability of a governance arrangement to limit

the board’s authority to initiate a dissolution. Just as with a merger, consolidation,

or sale of all or substantially all of the corporation’s assets, the statutory order of

operations is fixed. The board must go first and fulfill its role as gatekeeper. The

Stockholders Agreement violates Section 141(a) and the specific statutes governing

those transactions by putting the Lead Investors at the head of the line and

empowering them to usurp the Board’s role as gatekeeper.

The other transactions in this provision—such as “receivership, bankruptcy or

other insolvency proceeding[s]” —involve either terminating the Company’s existence

or fundamentally altering it.68 Those issues fall within of the Board’s authority to

manage the business and affairs of the Company.69 Those transactions require a

meaningful level of board involvement.

66 8 Del. C. § 275(a) & (b).

67 Id. § 275(c).

68 SA § 5.4.5.

69 E.g., Unocal, 493 A.2d at 953–54 (holding that Section 141(a) gave the board of

directors the power and responsibility to intervene in response to a tender offer that posed a
threat to corporate policy and effectiveness).

30
These are areas where the Board is supreme. Without an express limitation in

the Charter, the Stockholders Agreement cannot elevate the Lead Investors over the

Board as to these matters.

iii. Approving Transactions Over $150 Million

Pre-Approval Requirements 5.4.2 and 5.4.3 require the Lead Investors’ prior

written approval before the Company can take three actions. First, the provisions

require Lead Investor pre-approval before the Company can acquire assets or equity

securities through purchase, lease, license, exchange, or other means, where the

consideration exceeds $150 million. Second, the provisions require Lead Investor pre-

approval before disposing of assets or equity securities through sale, lease, license,

exchange, or other means, where the fair market value exceeds $300 million. And

third, the provisions require Lead Investor pre-approval before the Company can

engage, directly or indirectly, in joint ventures or similar business alliances, and

before the Company can enter into agreements involving the investment,

contribution, or disposition of assets (including subsidiary stock), each with a fair

market value exceeding $150 million.

If the restriction appeared in a commercial contract, then the analysis could be

different. In Sample, for example, this court considered the validity of a provision in

a transaction agreement that governed a new investor’s purchase of a block of stock

from the corporation’s largest stockholder. As a condition to entering into that

transaction, the buyer received a commitment from the corporation not to issue any

shares of capital stock for five years (subject to exceptions not relevant here) (the

31
“Equity Capital Restriction”).70 In rejecting a Section 141(a) challenge to that

provision, the Sample decision sought to do away entirely with Section 141(a)

challenges to contracts, leaving only fiduciary review.71 As the Moelis decision

explained, that dramatic outcome conflicted with extensive Delaware precedent.72

But even under the approach taken in Moelis, the provision could have survived a

Section 141(a) challenge.

Under the analysis in Moelis, the validity of the Equity Capital Restriction

would rise or fall based on the first step—whether it appeared in a governance

agreement. For purposes of that analysis, the buyer’s investment and the related

Equity Capital Restriction could be viewed as part of a capital-raising transaction.

On the facts of the case, the buyer purchased shares directly from the seller, but the

70 Sample v. Morgan, 914 A.2d 657, 656 (Del. Ch. 2007).

71 Id. at 672–73 (“Corporate acts thus must be ‘twice-tested’—once by the law and

again by equity. If a contract with a third-party is premised upon a breach of fiduciary duty,
the contract may be unenforceable on equitable grounds and the third-party can find itself
lacking the rights it thought it had secured. But the basis for that determination is the fact-
intensive one demanded by equity, not a bright-line ruling that the contract is invalid simply
because it delimited the range of discretion the directors otherwise had under the law to
act.”).

72 See Moelis, 311 A.3d at 855 (“The Sample decision thus stands alone and on dubious

ground in arguing for eliminating Section 141(a) challenges to corporate contracts. The
weight of the Section 141(a) precedents, including the Delaware Supreme Court's decisions
in AFSCME, Quickturn II, and Grimes II, supports the viability of those challenges. If read
as Section 141(a) cases, the Delaware Supreme Court's decisions in QVC and Omnicare
support those challenges as well. The Delaware Supreme Court's decisions are controlling.”);
W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (Moelis Preliminary Defenses), 310
A.3d 985, 1005–08 (Del. Ch. 2024) (explaining why Sample “did not eliminate the ability to
bring Section 141(a) challenges”). The Governance Agreement Provision seeks to achieve the
same goal, albeit by statute rather than case law.

32
economic substance was akin to the buyer investing the purchase price in the

corporation and receiving shares in return, then the corporation using the capital to

repurchase the seller’s shares.

Particularly if viewed as governing a capital-raising transaction, the contract

containing the Equity Capital Restriction could be viewed as a commercial

agreement, rather than a governance agreement. The buyer was not an insider at the

time of contracting; there was evident consideration in the form of new money; the

only protective provision related directly to the economic purpose of the transaction;

and the arrangement was time-limited. Admittedly, there are factors pointing the

other way: the DGCL addresses both stock issuances and redemptions73; the

agreement limited the board’s ability to exercise authority delegated exclusively to

the board under Sections 16174; and the likely remedy for breach of the Equity Capital

Restriction would have been injunctive relief. To the extent a court held that the

Equity Capital Restriction appeared in a commercial agreement rather than a

governance arrangement, the analysis would have ended and the Equity Capital

Restriction would have survived.75

73 See 8 Del. C. §§ 151–153, 160–61.

74 8 Del. C. § 161 (“The directors may, at any time and from time to time, if all of the

shares of capital stock which the corporation is authorized by its certificate of incorporation
to issue have not been issued, subscribed for, or otherwise committed to be issued, issue or
take subscriptions for additional shares of its capital stock up to the amount authorized in
its certificate of incorporation.”).

Quite striking differences exist between the lone Equity Capital Restriction in
75

Sample and the extensive pre-approval requirements and affirmative covenants found in the

33
As drafted, this broad Pre-Approval Requirement appears in a governance

agreement, and it only applies to material transactions that fall within the Board’s

authority. For those transactions, the Pre-Approval Requirement purports to replace

the Board with the Lead Investors by making them the gatekeeper for these

transactions. Absent a limitation in the Charter, those limitations are facially invalid

under Section 141(a).

iv. Hiring And Firing The CEO

Pre-Approval Requirement 5.4.6 requires the Lead Investors’ prior written

approval before “[t]erminating the employment of the Chief Executive Officer of the

Company or hiring a new Chief Executive Officer of the Company.”76 That provision

is facially invalid for the reasons discussed in the recent Wagner case.77

v. Incurring Debt

Pre-Approval Requirement 5.4.4 requires the Lead Investors’ prior written

approval before the Company can incur debt above a certain level. The pertinent

language requires the Lead Investors’ pre-approval before

governance agreements at issue in Moelis, Wagner, and this case. It seems understandable
why practitioners would have read Sample as indicating that some types of governance
restrictions could be implemented by contract. It is hard (at least for me) to see how Sample
and the balance of the Section 141(a) canon could be read to authorize something on the order
of the eighteen pre-approval requirements and six affirmative covenants in Moelis, or the
similar suites of provisions in Wagner and this case. It is therefore surprising (again for me
at least) to learn that practitioners concluded that a Moelis-style governance agreement
would work and began implementing them widely. Regardless, going forward, the
Governance Agreement Provision enacts a new regime that will require a different analysis.

76 SA § 5.4.6.

77 Wagner, 2024 WL 2741191, at *16–17.

34
[i]ncurring (or extending, supplementing or otherwise modifying any of
the material terms of) any indebtedness for borrowed money (including
any refinancing of existing indebtedness), assuming, guaranteeing,
endorsing or otherwise as an accommodation becoming responsible for
the obligations of any other Person (other than the Company or any of
its Subsidiaries), or entering into (or extending, supplementing or
otherwise modifying any of the material terms of) any agreement under
which the Company or any Subsidiary may incur indebtedness for
borrowed money in the future, in each case in an aggregate principal
amount in excess of $300.0 million in any transaction or series of related
transactions . . .78

The provision is thus limited to transactions involving material amounts.

A corporation has the power to “incur liabilities, borrow money at such rates of

interest as the corporation may determine, issue its notes, bonds and other

obligations, and secure any of its obligations[.]”79 Yet the Pre-Approval Requirement

in Section 5.4.4 says that the Company cannot approve borrowings in excess of $300

million unless the Lead Investors first approve it in their capacities as stockholders.

A provision that restricts a board from exercising its authority over material

transactions violates Section 141(a).

This is another issue where the analysis would be different if the restriction

appeared in a commercial contract. Consider a situation where a company borrows

from a lender and agrees that without the lender’s prior approval, the company will

not borrow any additional amounts. In that setting, the commercial contract governs

the extension of credit, and the lender consent right protects the lender’s right to

78 SA § 5.4.4.

79 8 Del. C. § 122(13).

35
repayment. That would not be a governance agreement, so Section 141(a) would not

apply.

The Stockholders Agreement is not a commercial contract. It is a governance

arrangement designed to give the Lead Investors granular control over the

Company’s internal affairs. The Board’s authority to incur indebtedness above the

threshold amount is constrained by the requirement that the Lead Investors give

their prior written approval. This requirement is not in the Charter. Thus, the Pre-

Approval Requirement in Section 5.4.4 is facially invalid.

vi. Changing The Size Of The Board

Pre-Approval Requirement 5.4.7 requires the Lead Investors’ prior written

approval before “[i]ncreasing or decreasing the size of the Board” (the “Size

Requirement”).80 The Size Requirement is invalid because it conflicts with Sections

141(a) and (b) and the Charter.81

As a threshold manner, reviewing the Charter, Bylaws, and Stockholders

Agreement demonstrates the confusion that can result from attempting to address

the same matters through multiple governance documents, rather than putting

provisions in the governance documents where they belong. Here, the Company’s

80 SA § 5.4.7.

81
Chapin v. Benwood Found., Inc., 402 A.2d 1205 (Del. Ch. 1979) (holding that
directors of a non-stock corporation (who were called trustees) could not bind themselves by
agreement to maintain a board size of four members when the governing documents
permitted a range of three to five), aff’d sub nom. Harrison v. Chapin, 415 A.2d 1068 (Del.
1980)).

36
Charter does not fix the number of directors. Instead, it empowers the Lead Investors

to determine the size of the Board. It states:

Subject to any rights of the holders of any series of Preferred Stock then
outstanding or the rights granted pursuant to the Stockholders
Agreement to elect additional directors under specified circumstances,
the number of directors which shall constitute the Board of Directors
shall be fixed exclusively from time to time by,

(i) for so long as the Silver Lake Investors and Thoma Bravo Investors
(collectively, the “Investors”) collectively beneficially own (directly or
indirectly), in the aggregate, at least 40% of the outstanding Common
Stock of the Corporation, the Investors, or

(ii) thereafter, resolution adopted by the affirmative vote of a majority
of the directors then in office.82

As discussed below, the language “[s]ubject to the rights granted pursuant to the

Stockholders Agreement to elect additional directors under specified circumstances”

cannot incorporate provisions of the Stockholders Agreement by reference and is a

nullity.83 But the language giving the Lead Investors the exclusive right to set the

number of directors as long as their aggregate ownership exceeds 40% is valid

because it appears in the Charter.

The Bylaws establish yet another mechanism for determining board size, but

it conflicts with the Charter and is invalid. 84 It states “the number of directors shall

82 Charter, art. VI, pt. B (cleaned up).

83 See Part II.B.1, infra.

84 Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182, 1189 (Del. 2010) (“It is settled

Delaware law that a bylaw that is inconsistent with the corporation’s charter is invalid.”);
Sinchareonkul v. Fahnemann, 2015 WL 292314, at *6 (Del. Ch. Jan. 22, 2015) (“A bylaw that
conflicts with the charter is void . . . .”).

37
initially be seven (7) and, thereafter, shall be fixed from time to time exclusively by

the Board[.]”85 During the period when the Lead Investors have the Charter-based

right to determine the size of the Board, that Bylaw conflicts with the Charter and is

invalid. Once the Lead Investors’ ownership stake falls below 40%, the Bylaw

conflicts with the Charter because the Bylaw contemplates a decision by a majority

of the directors present at a meeting where a quorum exists, while the Charter

requires “the affirmative vote of a majority of the directors then in office.”86 There are

no circumstances when the Bylaw can operate validly.

The Size Requirement in the Stockholders Agreement contemplates a

completely different mechanism. It states:

[T]he Board shall consist of eight (8) Directors; provided, that the Board
shall further increase (a) the number of Independent Directors to the
extent necessary to comply with applicable law and the Stock Exchange
rules, or as otherwise agreed by the Board, subject to the rights of the
Lead Investors under Section 5.4.7,87 or (b) the number of Directors as
otherwise requested in writing by the Lead Investors.88

Under this provision, the Board is always required to set the number of directors at

the number requested by the Lead Investors, regardless of their holdings.

85 Bylaws § 3.3.

86 Charter, art. VI, pt. B.

87 SA § 5.4.7 contains the Pre-Approval Requirement where the Lead Investors must

give their prior written approval before the Board’s size may be increased or decreased.

88 Id. § 2.1.1.

38
At present, the Size Requirement is doing nothing because the Charter gives

the Lead Investors the exclusive right to set the number of directors as long as their

aggregate ownership exceeds 40%, and the Lead Investors current ownership exceeds

60%.89 Because the Charter already contains a statutorily valid, Charter-based

provision that constrain the Board, the Lead Investors can set the number of directors

without relying on the Stockholders Agreement. The Size Requirement is currently

superfluous.

But, as in Moelis, that does not mean the Size Requirement is not facially

invalid.90 The Size Requirement can only become operative if the Lead Investors’

holdings drop below 40%. At that point Article VI(B)(ii) of the Charter would control,

and it requires that “the number of directors which shall constitute the Board of

Directors shall be fixed exclusively from time to time by . . . resolution adopted by the

affirmative vote of a majority of the directors then in office.”91 The language in the

Stockholders Agreement requiring the Board to set the number of directors “subject

to the rights of the Lead Investors under [the Size Requirement], or (b) the number

of Directors as otherwise requested in writing by the Lead Investors” would conflict

with the Charter and be invalid.92

89 Compl. ¶ 11; Def.’s Opening Br. at 5–6.

90 Moelis, 311 A.3d at 874.

91 Charter, art. VI, pt. B

SA § 2.1.1. It is interesting to ponder whether, under the Governance
92

Agreement Provision, the Charter is sufficiently specific to override Section 122(18)

39
There is no setting where the Lead Investors could invoke the Size

Requirement and have it operate validly. The only time it can operate is if the Lead

Investors’ stock ownership falls below 40%, and the directors want to expand or

contract the Board to a different size then the Lead Investors prefer. Only in that

setting does the Size Requirement kick in, and in that setting, it operates invalidly

to constrain the Board’s authority under Section 141(a) and the Charter. The Size

Requirement is therefore facially invalid.

b. The Collective Analysis Of The Pre-Approval
Requirements

In addition to challenging the Pre-Approval Requirements individually, the

plaintiff also attacks them collectively. An individual provision in a governance

agreement that purports to enable stockholders to manage the business and affairs

of a corporation, without specific authorization in either the DGCL or the charter, is

invalid.93 A comprehensive suite of provisions that attempts to enable stockholders

to manage the business and affairs of a corporation is similarly invalid.

Taken in their totality, the Pre-Approval Requirements put the Board in the

same position as officers, who propose options for a board to review and approve. With

the Lead Investors holding the Pre-Approval Requirements, the Board must propose

options for the Lead Investors to review and approve. “[T]he power to review is the

for purposes of the Size Requirement. The Market Practice Amendments direct the
courts to apply the old law in this case, not the new, so this decision offers no
opportunity to express a view on that point.

93 See Part II.A.2, supra.

40
power to decide.”94 Here, the Lead Investors have expansive power to pre-review,

which gives them the power to decide.

The Company advances various arguments that the court addressed in the

Moelis and Wagner decisions. The Company inaccurately describes the Pre-Approval

Requirements as “consent rights”95 and argues that the “consent rights” do not

constrain the Board because they do “not compel the Board to take any particular

action” and are “structured in such a way that board members are not restricted from

discharging their fiduciary duties.”96 The Moelis and Wagner decisions considered

nearly identical arguments and rejected them.97

The Company also argues that the Pre-Approval Requirements do not actually

constrain the Board unless exercised, and the Company says they never have been.98

The Moelis decision considered nearly identical arguments and rejected them.99

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

95 See Def.’s Opening Br. at 28 (“The Approvals [Requirements are] a suite of consent

rights over acts and transactions taken by the Company.”); id. at 29 (“Here, the Board retains
its decision-making authority as to the consent rights and is not ‘precluded’ from exercising
its Section 141(a) powers relating to them.”); id. at 31 (“The Approvals [Requirements] merely
provides the Majority Stockholders a limited consent right to reject the Board’s candidate
and have the Board choose again, a mechanism by which the Board retains the ultimate
freedom to direct the strategy and affairs of the Company and continue discharging its
fiduciary duties.”); Tr. 35 (“It’s a consent right.”).

96 Def.’s Opening Br. at 28.

97 Moelis, 311 A.3d at 867–69; Wagner, 2024 WL 2741191 at *17.

98 Def.’s Opening Br. at 28–29, 33, 52; Tr. 30.

99 Moelis, 311 A.3d at 868–69.

41
The Abercrombie decision illustrates why the Pre-Approval Requirements

cannot pass muster. There, ten stockholders formed a corporation and entered into a

shareholder agreement, granting each the right to designate directors based on their

proportionate ownership.100 Later, six stockholders entered into an agents’

agreement, allowing them to designate a majority of the directors.101 The purpose was

to ensure these directors voted as a bloc, with a provision for consensus among the

appointed agents or arbitration if consensus could not be reached. 102 The agents’

agreement did not literally bind the director designees of the corporate stockholders

to vote as seven out of eight agents agreed or an arbitrator determined. Instead, the

corporate stockholders bound themselves to:

use their best efforts to cause their representatives on the Board of
Directors . . . to vote . . . as determined by the Agents or by any seven
thereof, and that in the event of the failure of any such director so to
vote all parties hereto will cooperate and act in any legal manner
possible to cause any director voting contrary to any such determination
by the Agents to resign or be removed and to be replaced upon the Board
of Directors . . . .103

Nevertheless, this provision was invalid as to the other directors “[b]ecause it tends

to limit in a substantial way the freedom of director decisions on matters of

management policy” and therefore prevents each director from being able “to exercise

100 Abercrombie, 123 A.2d at 894–95.

101 Id. at 895.

102 Id. at 895–98.

103 Id. at 897.

42
his own best judgment on matters coming before the board.”104 Chancellor Seitz also

noted that a director might feel bound to honor a decision even though it was contrary

to his own best judgment.105

The same is true here. In fact, the Pre-Approval Requirements are more

pernicious than the agreement in Abercrombie, because they expressly require the

Lead Investors’ prior written approval before the Company can act. In Abercrombie,

the directors other than Davies only faced the threat of removal after the fact.

The Pre-Approval Requirements are sufficiently encompassing to render the

Board an advisory body on many of the most significant actions that directors can

take. In those instances, the Lead Investors, not the Board, are running the show,

and the directors can only act to the extent that the Lead Investors let them.

Collectively, the Pre-Approval Requirements have the effect of removing from the

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

management matters. Taken as a whole, they are facially invalid under Section

141(a).

B. The Facial Challenge To The Board Composition Covenants

The plaintiffs next mount a facial challenge to the Board Composition

Covenants. There are six of them: the Board Size Covenant, the Nomination

104 Id. at 899.

105 Id.

43
Covenant, the Recommendation Covenant, the Efforts Covenant, the Vacancy

Covenant, and the Nomination Veto.

1. The Possibility Of Incorporation By Reference

The analysis of the Board Compensation Covenants generally tracks the

analysis in Moelis and Wagner, but with a twist: Certain provisions in the Charter106

and Bylaws107 contain language stating that the provision is “subject to” the Lead

Investors’ rights under the Stockholders Agreement. That raises a threshold

question: Can the Charter or Bylaws incorporate the substantive provisions in an

external agreement by reference? The structure of the DGCL indicates that

incorporating substantive provisions by reference is not possible.108

Analysis starts with the language of the DGCL. There is only one recurring

phrase in the DGCL that authorizes looking to sources beyond the instrument in

question—the ability to make a provision “dependent upon facts ascertainable.” For

example, after listing optional provisions that can appear in a certificate, Section

102(d) of the DGCL states:

[A]ny provision of the certificate of incorporation may be made
dependent upon facts ascertainable outside such instrument, provided
that the manner in which such facts shall operate upon the provision is
clearly and explicitly set forth therein. The term “facts,” as used in this
subsection, includes, but is not limited to, the occurrence of any event,

106 See Charter, art. VI, pt. B, E, F.

107 See Bylaws §§ 3.2, 3.3, 3.5, 3.6, 3.14, 3.16.

108 As noted previously, this issue will not arise for governance agreements after
August 1, 2024, because the Governance Agreement Provision eliminates any need for an
incorporate-by-reference workaround to Section 141(a).

44
including a determination or action by any person or body, including the
corporation.109

Section 102(d) thus distinguishes between “facts” external to the charter and

“provisions” internal to the charter. Other provisions in the DGCL use the same

phrasing.110 Nowhere does the DGCL contemplate that a charter could include

“provisions ascertainable” outside the charter.

Invoking Section 102(d), the Company argues that that section “permits, with

very limited exceptions, the terms of a certificate of incorporation to be made

dependent upon facts ascertainable outside of its four corners.”111 But there is a self-

evident difference between “facts” and “provisions.” A “fact” is “[s]omething that

actually exists; an aspect of reality” or “[a]n actual or alleged event or circumstance,

as distinguished from its legal effect, consequence, or interpretation.”112 A

“provision,” by contrast, is a “clause in a statute, contract, or other legal

instrument.”113

Under the common meaning of those terms, the concept of facts ascertainable

refers to specific inputs. Those words are not a vehicle for introducing additional

109 8 Del. C. § 102(d). Section 102(d) identifies some types of provisions that cannot be

made dependent on facts ascertainable outside of the charter, but none of them apply.

110 E.g., Id. §§ 151(a), 152(c), 157(d), 251(b), 252(b), 254(c), 255(b), 256(b), 257(b),

263(b), 264(b), 265(k), 266(l), 388(l), 390(j).

111 Def.’s Opening Suppl. Br. at 1.

112 Fact, Black’s Law Dictionary (12th ed. 2024).

113 Provision, Black’s Law Dictionary (12th ed. 2024).

45
substantive provisions. Section 102(d) and the other provisions in the DGCL that

refer to “facts ascertainable” reinforce the distinction. They provide examples of facts,

such as “the occurrence of any event” or “a determination or action by any person or

body.” Those are events. The sections do not speak in terms of provisions from other

agreements. Instead, they contemplate that the provisions are in the charter.

The ability to use a certificate of designations to specify the terms of preferred

stock reinforces the distinction between facts and provisions. The pertinent sections

of the DGCL make clear that when a board possesses blank check authority and

exercises it to create a new class or series of stock, the board must do so through a

certificate of designations that becomes part of the certificate of incorporation.114 A

board cannot simply declare that the newly issued preferred stock exists and

incorporate a set of rights, powers, and preferences by reference to an external

document. The certificate of designation must identify the rights, powers, and

preferences.

Strong policy reasons support requiring the charter to operate as a self-

contained set of provisions. One is public notice. The DGCL mandates that the

charter be filed with the Secretary of State as a public document.115 As Professor Jill

Fisch explains,

The rationale for requiring public filing of the corporate charter is to
make certain basic information about the corporation available to both
investors and third parties who deal with the corporation. Corporate

114 8 Del. C. §§ 102(a)(4), 141(d), & 151(a) & (g).

115 Id. §§ 101(a) & 103(c)(8).

46
charters therefore contain information on the corporation’s key features
including its legal purpose, its control dynamics, and its capital
structure. One should be able to determine from the charter both what
a corporation has the power to do and who can exercise that power.116

Incorporating provisions by reference from another agreement frustrates that

important interest. To be sure, the federal securities laws might require that listed

companies file their governance agreements publicly, but Delaware corporate law

applies equally to publicly traded and privately held firms.117 In a private corporation,

stockholders may not have ready access to the terms of the incorporated agreement,

and the publicly filed version of the charter would not be complete.118 The importance

of the publicly filed charter counsels against incorporation by reference.

Another significant policy interest is the certainty and stability of the

corporation’s foundational firm-specific document. The certificate of incorporation is

“the fundamental document which imbues a corporation with its life and powers.” 119

It is not only a contract between the corporation and its stockholders; it is also “a

contract between the State and the corporation.”120

116 Jill Fisch, Stealth Governance: Shareholder Agreements and Private Ordering, 99

Wash. U. L. Rev. 913, 947 (2021).

117 Nixon v. Blackwell, 626 A.2d 1366, 1380 (Del. 1993).

118 As discussed below, a stockholder could obtain a copy of the agreement by using

Section 220 of the DGCL, but that requires additional steps. See 8 Del. C. § 220. It is not the
same as simply requesting the charter from the Delaware Secretary of State.

119 STARR Surgical Co. v. Waggoner, 588 A.2d 1130, 1137 (Del. 1991) (citations
omitted) (subsequent history omitted).

120 Id.

47
Section 242 of the DGCL establishes a step-by-step process to be followed for

charter amendments that starts with a board recommendation and then continues

with a stockholder vote. It states:

If the corporation has capital stock, its board of directors shall adopt a
resolution setting forth the amendment proposed, declaring its
advisability, and either calling a special meeting of the stockholders
entitled to vote in respect thereof for the consideration of such
amendment or directing that the amendment proposed be considered at
the next annual meeting of the stockholders.121

Charter amendments depend for their legitimacy on that process being followed, and

the Delaware Supreme Court has held that because of the “fundamental interests” in

play when a charter is amended, those processes must be “scrupulously observe[d].” 122

Notably, Section 242 contemplates a stockholder vote on charter amendments,

and if the amendment would adversely affect a series of class of shares, then the

holders of those shares get a class or series vote.123 Under Section 242, stockholders

thus get to participate and have a voice in the amendment process, with enhanced

voice when an amendment adversely affects their class or series.

Once a charter incorporates a contract by reference, the parties to that

contract can skip the Section 242 process and amend the charter simply by amending

121 8 Del. C. § 242(b)(1).

122 STAAR Surgical, 588 A.2d at 1136; see also Blades v. Wisehart, 2010 WL 4638603,

at *8 (Del. Ch. Nov. 17, 2010) (explaining that Section 242’s procedural requirements “must
be followed precisely, and may not be altered by charter provision.”) (subsequent history
omitted).

123 8 Del. C. § 242(b).

48
the agreement. The state would not be involved, and in a private company, no one

need know. Stockholders would not have a voice.

This case demonstrates that danger, because the Stockholders Agreement has

already been amended once in a manner that altered the Nomination Covenant, the

Nomination Veto, and the Pre-Approval Requirements.124 The Company and the Lead

Investors can amend it again in the future.125 The importance of the Section 242

amendment process counsels against incorporation by reference.

Yet another consideration is the extent to which the General Assembly could

enact a statute that incorporates a private agreement by reference. During the era of

special charters, forming a corporation required that the General Assembly pass a

special act.126 The shift to general incorporation standardized the manner in which

charters would be issued, delegated that function to the Delaware Secretary of State,

and moved the state’s role into the background, but the issuance of a charter and the

creation of a body corporate remains a sovereign exercise of state power akin to

enacting a statute.127

A significant body of law establishes that the General Assembly cannot

delegate its legislative powers. For example, “[i]t is axiomatic that the General

124 Amend. §§ 1–4.

125 See SA § 6.2.

126 Samuel Arsht, A History of Delaware Corporate Law, 1 Del. J. Corp. L. 1, 2–6 (1976)

(discussing special act incorporation).

127 See id. at 6–7.

49
Assembly may not delegate to any other agency authority to exercise [legislative]

powers.”128

The maxim that power conferred upon the legislature to make laws
cannot be delegated to any other authority does not preclude the
legislature from delegating any power not legislative which it may itself
rightfully exercise . . . . The legislature must declare the policy of the
law and fix the legal principles which are to control in given cases; but
an administrative officer or body may be invested with the power to
ascertain the facts and conditions to which the policy and principles
apply.129

If the General Assembly enacted a statute that incorporated a contract by reference,

the General Assembly would have impermissibly delegated to the contracting parties

the power to change the statute. The private parties would be able to “declare policy”

or “fix the legal principles which are to control in given cases.” That would not be

permissible.

The Company responds that the Delaware Limited Liability Company Act

(“LLC Act”) demonstrates that the General Assembly can enact a law that

incorporates the terms of a contract—in that case, the LLC agreement. Other

alternative entity statutes operate in the same way. But the relationship between the

LLC Act and an LLC agreement resembles the relationship between the DGCL and

the corporation’s charter and bylaws. In both cases, the statute authorizes the

existence of an entity-specific document. The entity-specific document does not

become part of the statute.

128 Opinion of the Justices, 177 A.2d 205, 209 (Del. 1962).

129 Id. (quoting State v. Tatnall, 21 A.2d 185, 190–91 (Del. 1941)).

50
The Company also points to the legislation establishing the Delaware

Prosperity Partnership, a nonprofit state economic development agency.130 That

statute identifies requirements that the agency’s conflict of interest policy must

contain, but otherwise leaves the details of the policy to the agency to adopt. 131 Here

again, the policy does not become part of the statute.

Admittedly, the fact versus provision distinction can involve close questions.

In the recent AIM decision, for example, the corporation’s bylaws cited and relied on

a definition of “affiliate” and “associate” from the federal securities laws.132 No one

challenged the use of that definition as invalidly incorporating by reference an

external and mutable standard. Technically, that is what the bylaws did, but the

definition did not appear in a private contract; it appeared in a government

regulation. The parties to a private contract therefore would not be in a position to

revise the definition at will. Incorporating an external statute or regulation parallels

the incorporation by reference of the DGCL into every corporate charter.133

130 See 29 Del. C. § 8706A.

131 Id. § 8706A(h)(2).

132 Kellner v. AIM ImmunoTech, Inc., 307 A.3d 998, 1029 n.294 (Del. Ch. 2023), aff’d

in part, rev’d in part, --- A.3d ---, --, 2024 WL 3370273 (Del. July 11, 2024).

133 8 Del. C. § 394 (“This chapter and all amendments thereof shall be a part of the

charter or certificate of incorporation of every corporation except so far as the same are
inapplicable and inappropriate to the objects of the corporation.”).

51
To argue for the opposite result, the Company cites the Bumble and Bicoastal

decisions.134 In Bumble, the charter provided that if a share was held by a “Principal

Stockholder,” then it would carry ten votes.135 The Principal Stockholders comprised

the parties to an external contract. The identity of the parties to the external contract

was an ascertainable fact.136 The reference to that input did not incorporate by

reference the substantive provisions of the external contract. The Bumble charter also

addressed clearly and explicitly “the manner in which such facts shall operate upon

the provision.”137 Here, the Charter simply states that three of its terms are “subject

to” the Stockholders Agreement. That is not a fact ascertainable. The Bumble decision

therefore does not help the Company.

The Company finds a stronger precedent in the Bicoastal case. There, the

Delaware Supreme Court upheld language in a certificate of designations which

provided that the company would not redeem any shares of a series of preferred stock

if “such redemption would violate any covenant of the Corporation in any contract,

134 The Company also cites Kellner and Klassen v. Allegro Development Corp., 2013

WL 5739680 (Del. Ch. Oct. 11, 2013). Neither party challenged incorporation by reference in
those cases.

135 Colon v. Bumble, Inc, 305 A.3d 352, 363 (Del. Ch. 2023) (“[T]he charter sets out a

formula that applies to all the shares in the class and that specifies how voting power is
calculated. As authorized by Section 151(a), the formula makes the quantum of voting power
that a share carries dependent on a fact ascertainable outside of the certificate of
incorporation, namely the identity of the owner.”).

136 Id. at 357.

137 Id. at 372.

52
agreement, obligation, or guarantee of the Corporation . . . .”138 At first blush, that

might sound like a provision that incorporates by reference “any contract, agreement,

obligation or guarantee of the Corporation.” But what the provision actually turned

on was a binary factual input: breach or no breach. The charter did not attempt to

incorporate the universe of contracts, agreements, or guarantees to which the

corporation was a party into the language of the charter.

For these reasons, the Charter cannot incorporate the Stockholders Agreement

by reference through the simple device of mentioning in three provisions that they

are “subject to” the Stockholders Agreement.139 The DGCL does not permit the

wholesale inclusion of provisions from private agreements into charters through

incorporation by reference. Because the operative provisions of a certificate of

incorporation must appear in the certificate, the references to the Stockholders

Agreement are nullities.

2. The Recommendation Covenant

The Recommendation Covenant mandates that the Company recommend the

election of the Lead Investor’s designees, whoever they might be, by requiring that

the Company include these designees “on each slate of nominees for election of the

Board . . . [and] to recommend the election of such nominees to the stockholders of

138 In re Bicoastal Corp., 600 A.2d 343, 346 n.4 (Del. 1991) (emphasis omitted).

139 Charter, art. VI, pt. B, E, F.

53
the Company . . . .”140 That obligation is facially invalid for the reasons stated in

Moelis.141

3. The Vacancy Covenant

The Vacancy Covenant mandates that the Board fill any vacancy in a seat

occupied by the designee of a Lead Investor with another Lead Investor designee.

That obligation is facially invalid.

Section 223(a) of the DGCL addresses the filling of vacancies. It states:

(a) Unless otherwise provided in the certificate of incorporation or
bylaws:

(1) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of
the stockholders having the right to vote as a single class may be
filled by a majority of the directors then in office, although less
than a quorum, or by a sole remaining director;

(2) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect 1 or more directors by the certificate
of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the
directors elected by such class or classes or series thereof then in
office, or by a sole remaining director so elected.

If at any time, by reason of death or resignation or other cause, a
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of
stockholders in accordance with the certificate of incorporation or the

140 SA § 2.1.2(c).

141 Moelis, 311 A.3d at 827, 870–72.

54
bylaws, or may apply to the Court of Chancery for a decree summarily
ordering an election as provided in § 211 or § 215 of this title.142

Article VI, Part E of the Charter gives the Board the power to fill vacancies. It

states:

Subject to the rights of the holders of any series of Preferred Stock then
outstanding or the rights granted pursuant to the Stockholders
Agreement . . . (ii) any vacancies in the Board of Directors resulting from
death, resignation, disqualification, removal from office or any other
cause may be filled only by the Board of Directors (and not by
stockholders) . . . .143

The Bylaws say the same thing:

Except as otherwise provided by applicable law, vacancies occurring in
any directorship (whether by death, resignation, retirement,
disqualification, removal or other cause) and newly created
directorships resulting from any increase in the number of directors
shall be filled in accordance with the Certificate of Incorporation and the
Stockholders Agreement.144

The DGCL, the Charter, and the Bylaws thus provide that only the Board can fill

vacancies. “The power to fill a vacancy includes the power to select the person to fill

it.”145

The Stockholders Agreement attempts to establish a different mechanism.

Under the Vacancy Covenant, the Board cannot use its own judgment for a vacancy

if the seat was formerly occupied by a Lead Investor designee. The Board must

142 8 Del. C. § 223(a).

143 Charter, art. VI, pt. E.

144 Bylaws § 3.6.

145 Moelis, 311 A.3d at 873.

55
appoint another Lead Investor designee. The Moelis decision held that a similar

provision was invalid.146 That same analysis applies here.

The Chapin case is also on point. There, this court held that directors of a non-

stock corporation (who were called trustees) could not bind themselves via a

succession agreement to name designated persons to fill vacancies on the board of

trustees before the vacancy actually arose.147 The court explained that the trustees

needed to be free to use “their best judgment in filling a vacancy on the board of

trustees as of the time the need arises.”148 Under Chapin, the Vacancy Covenant

violates Section 141(a). The only difference between the succession agreement in

Chapin and the Vacancy Covenant is that the trustees agreed on specific people to

fill vacancies as they arose. Under the Vacancy Covenant, the Company must fill the

vacancy with a person whom the Lead Investors designate. The limitation on the

Board’s power is the same. The Vacancy Covenant is invalid under Sections 141(a)

and 223.

4. The Nomination Covenant

The Nomination Covenant obligates the Company “to include the nominees of

the Lead Investors . . . as the nominees to the Board on each slate of nominees for

election of the Board included in the Company’s annual meeting proxy statement (or

146 Id. at 872–73.

147 Chapin, 402 A.2d at 1210.

148 Id. at 1211.

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consent solicitation or similar document) . . . .”149 For the reasons stated in the Moelis

decision, that provision is not facially invalid.150

5. The Efforts Covenant

The Efforts Covenant obligates the Company to “otherwise use its reasonable

best efforts to cause [the Lead Investors’] nominees to be elected to the Board,

including providing at least as high a level of support for the election of such nominees

as it provides to any other individual standing for election as a director.”151 The

Efforts Covenant as a whole is not facially invalid, only the requirement that the

Company provide “at least as high a level of support for the election of such nominees

as it provides to any other individual standing for election as a director.”

As explained in Moelis, the first part of the Efforts Covenant legitimately

obligates the Company to take ministerial steps to ensure that stockholders can

consider the Lead Investors’ nominees and potentially elect them, such as by adding

the Lead Investors’ designees to the Company’s proxy card or by including

information about them in the Company’s proxy.152 Even in a situation where the

Board opposed the election of a Lead Investor designee, those actions would not

constitute a meaningful infringement on the Board’s authority under Section

149 SA § 2.1.2(c).

150 Moelis, 311 A.3d at 875.

151 SA § 2.1.2(c).

152 Moelis, 311 A.3d at 875.

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141(a).153 There might be situations in which an as-applied challenge to the Efforts

Covenant could succeed, but the existence of scenarios in which the Efforts Covenant

could operate legitimately is sufficient to defeat a facial challenge.

The outcome is different for the requirement that the Company provide “at

least as high a level of support for the election of such nominees as it provides to any

other individual standing for election as a director.” The resulting obligation operates

like the Recommendation Covenant by forcing the Board to support a Lead Investor

candidate that the Board does not support to the same degree as candidates that the

Board does support. The Board gest to decide how much support to give a particular

candidate. This provision is therefore invalid.

C. The Facial Challenge To The Committee Composition Provisions

Next, the plaintiffs mount a facial challenge to the Committees Provisions.

Those provisions are invalid under Section 141(a) and Section 141(c)(2).

Section 141(c)(2) empowers the board to determine the composition of

committees. It states:

The board of directors may designate 1 or more committees, each
committee to consist of 1 or more of the directors of the corporation. The
board may designate 1 or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any
meeting of the committee.154

153 Id.

154 8 Del. C. § 141(c)(2).

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“In plain terms, that section empowers the board to create committees and select the

members who will serve on those committees.”155

The Charter does not provide for any deviation from this default when

designating committees or committee members. Without giving effect to the

Company’s attempt to incorporate the Stockholders Agreement by reference,156 the

Bylaws confirm that Section 141(c)(2) applies to the Company. Section 3.14 of the

Bylaws states:

The Board may designate one or more committees, each committee to
consist of one or more of the directors of the Corporation in accordance
with the Stockholder Agreement . . . The Board may designate one or
more directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member
or members of the committee present at any meeting and not
disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another member of the
Board to act at the meeting in the place of any such absent or
disqualified member.157

That provision envisions the Board establishing committees and designating its

members. This contrasts with the Committee Composition Provisions, which require

that “for so long as the Company maintains the Audit Committee, it shall consist of

at least one Silver Lake Director . . . and at least one Thoma Bravo Director . . .” 158

155 Moelis, 311 A.3d at 876.

156 See Part II.B.1, supra.

157 Bylaws § 3.14

158 SA § 2.1.4(a).

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This requirement is repeated for the Compensation Committee, Nominating

Committee, and any other committee of the Board not specified in the Stockholders

Agreement.159

In response, the Company states that “[n]othing in the Committees Provision,

however, ‘commit[s] the board of directors to a course of action that would preclude

them from fully discharging their fiduciary duties to the corporation and its

shareholders.’ Rather, it provides the Majority Stockholders with the contractual

right to representation on the committees that the Board chooses to designate.” 160

That is doubletalk. The Board cannot independently select committee members in

the face of the Committee Composition Provisions.

To support the Committee Composition Provisions, the Company cites a

number of cases in which settlements resulted in committees which were required to

have either independent or expert members.161 Those were court-approved

settlements, not a private governance agreement.

The Committee Composition Provisions guarantee that favored stockholders

will have seats on each of the Board’s committees. They force the Board to select the

committee members designated by the Lead Investors.

159 Id. § 2.1.4(b)–(c).

160 Def.’s Opening Br. at 46 (quoting AFSCME, 953 A.2d at 238).

161 Id. at 47–48.

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The Committee Composition Provision found in Section 2.1.4(c) identifies two

instances in which the Lead Investors will not have guaranteed seats on a special

committee. First, if no Lead Investor designee is eligible to serve on the special

committee due to the requirements of a stock exchange.162 Second, if

the primary purpose of such special committee is to review, assess
and/or approve a transaction in which the applicable Lead Investor has
a material direct or indirect interest and having such Lead Investor’s
Director appointed on such special committee would constitute a clear
conflict of interest, in each case as determined by a majority of the
Independent Directors in their reasonable good faith discretion.163

These exceptions are helpful, but they do not address the Audit, Compensation, or

Nominating Committees. The Board is still bound when selecting those committee

members.

Next, the Company asserts that “nothing in Section 141(c) suggests the Board’s

decision-making needs to be exclusive.”164 As discussed in the Moelis decision, that

argument is not persuasive.165

The Committee Composition Provisions contravene both Section 141(a) and

Section 141(c)(2) by requiring that the Board include one of each Lead Investors’

designees on every committee. Those provisions are facially invalid as well.

162 SA § 2.1.4(c).

163 Id.

164 Def.’s Opening Br. at 49.

165 Moelis, 311 A.3d at 876–77.

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D. The Facial Challenge To The Removal Provision

The plaintiffs last contend that the plain language of the Removal Provision

violates Section 141(k) by permitting the Lead Investors to remove directors with less

than a majority vote so long as they hold at least 30% of the Company’s voting shares.

The plaintiffs are correct.

Section 141(k) states:

Any director or the entire board of directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to
vote at an election of directors, except as follows: (1) Unless the
certificate of incorporation otherwise provides, in the case of a
corporation whose board is classified as provided in subsection (d) of this
section, stockholders may effect such removal only for cause . . . .166

By contrast, the Removal Provision states:

(i) prior to the first date on which the Investors and their Affiliates cease
to beneficially own (directly or indirectly) in the aggregate at least 30%
of the voting power of the then outstanding shares of capital stock of the
Corporation then entitled to vote generally in the election of directors,
directors may be removed with or without cause upon the affirmative
vote of the Investors and their respective Affiliates which beneficially
own shares of capital stock of the Corporation entitled to vote generally
in the election of directors and

(ii) on and after such date, directors may only be removed for cause (as
defined below) and only upon the affirmative vote of stockholders
representing at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of directors,
voting together as a single class. . . .167

That provision conflicts with Section 141(k) and is therefore facially invalid.

166 8 Del. C. § 141(k).

167 Charter, art.VI, pt. F (formatting added).

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The Removal Provision attempts to depart from Section 141(k) in two ways.

First, the Removal Provision authorizes a director on a classified board to be removed

without cause. Second, the Removal Provision authorizes the Lead Investors to

remove a director without cause, even if the Lead Investors are not “holders of a

majority of the shares then entitled to vote at an election of directors.”168

The parties agree that nothing in the DGCL authorizes the removal of a

director by less than a majority vote of the stockholders. Section 102(b)(4) authorizes

charter provisions to require a larger vote than a simple majority.169 Section 102(b)(4)

does not authorize a minority vote for removal.

As its first gambit, the Company seeks to defend the Removal Provision by

rewriting its language. According to the Company, the provision only allows the Lead

Investors to call for a majority vote to remove a director from the Company’s classified

board without cause.170 But that is not what the Removal Provision says. It states

that “directors may be removed with or without cause upon the affirmative vote of

168 8 Del. C. § 141(k).

169 Id. § 102(b)(4).

170 Tr. 51 (“[W]e are not taking the position that [the Removal Provision] lowers the

required vote for removal.”); Def.’s Opening Br. at 51 (“Under the Removals Provision, in
circumstances where the Majority Stockholders own at least 30% of the outstanding stock,
the affirmative vote of the Majority Stockholders would allow for the removal of a director to
be effected without cause. If the Majority Stockholders own at least 30% of the outstanding
stock and they do not provide such a vote, the holders of a majority in voting power of the
outstanding stock entitled to vote in an election of directors would have the power to remove
directors, but any such removal would also require a showing of cause.”).

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the Investors and their respective Affiliates . . . .”171 That means however many shares

they own, as long as it is more than 30%.

The Company next argues that the Removal Provision survives a facial

challenge because the Lead Investors are majority stockholders and can thus remove

directors, with or without cause, without invoking the challenged provision.172 But if

the Lead Investors act to remove a director as holders of a majority of the voting

power, they are not relying on the Removal Provision; they are simply doing what

Section 141(k) permits. The Removal Provision only has utility once the Lead

Investors’ holdings fall below 50%. Thus, in every setting where the Removal

Provision operates, it violates Section 141(k).

Finally, the Company relies on Section 102(b)(1), which states:

(b) In addition to the matters required to be set forth in the certificate
of incorporation by subsection (a) of this section, the certificate of
incorporation may also contain any or all of the following matters:

(1) Any provision for the management of the business and for the
conduct of the affairs of the corporation, and any provision
creating, defining, limiting and regulating the powers of the
corporation, the directors, and the stockholders, or any class of
the stockholders, or the governing body, members, or any class or
group of members of a nonstock corporation; if such provisions are
not contrary to the laws of this State. Any provision which is
required or permitted by any section of this chapter to be stated
in the bylaws may instead be stated in the certificate of
incorporation[.]173

171 Charter, art.VI, pt. F.

172 Def.’s Opening Br. at 52.

173 8 Del. C. § 102(b)(1).

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That section does not permit a charter to contain provisions which are “contrary to

the laws of this State.”174 Here, the Removal Provision is contrary to Section 141(k),

and invalid.

E. The Policy Arguments

The Company advances a series of policy arguments in favor of the

Stockholders Agreement. This court analyzed those arguments in Moelis.175 This

decision need not repeat that discussion.

The Company raises one new argument. According to the Company, concerns

regarding the effect of private agreements upon corporate governance should be

minimized by the fact that agreements like the Stockholders Agreement will be

publicly filed as a material agreement or available through a Section 220 demand.

The argument about public filing applies only to public companies; private companies

are not required to disclose governance agreements. In all events, publicizing a

statutory violation does not cure a statutory violation.

The Company is correct that a stockholder could seek a copy using Section 220

of the DGCL, but first the stockholder would have to suspect that a governance

agreement existed. Then, the stockholder would have to make a demand and, if

necessary, enforce it. And because of the contract parties’ ability to amend the

agreement, a stockholder would have to send serial Section 220 demands on a regular

174 Id.

175 See Moelis, 311 A.3d at 877–81.

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basis to understand the current governance regime. The protection seemingly offered

by a stockholder’s ability to request books and records is illusory.

F. The Statutory Elephant

The elephant in the room for this decision is Senate Bill 313. That statute

enacted the Market Practice Amendments with the avowed purpose of reaching

different outcomes than the Moelis decision and conforming the requirements of the

DGCL to match currently prevailing market practice. One of the Market Practice

Amendments is the Governance Agreement Provision, which authorizes governance

agreements like the Stockholders Agreement in this case.176 The bill enacting the

Market Practice Amendments has this to say about when they become effective and

what they apply to:

Sections 1 through 5 of this Act shall become effective on August 1, 2024,
and shall apply to all contracts made by a corporation, all agreements,
instruments or documents approved by the board of directors and all
agreements of merger and consolidation entered into by a corporation,
in each case whether or not the contracts, agreements, instruments,
documents or agreements of merger or consolidation are made, approved
or entered into on or before such date, except that these Sections 1
through 6 of this Act shall not apply to or affect any civil action or
proceeding completed or pending on or before such date.177

The Market Practice Amendments thus apply both prospectively and retrospectively,

but with a donut hole for “any civil action or proceeding completed or pending on or

before [August 1, 2024].”

176 84 Del. Laws Ch. 309 (2024).

177 Id. § 6.

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This case falls into the donut hole, as do Moelis, Wagner, and a handful of other

pending actions. That means that this court and the Delaware Supreme Court must

expend judicial resources dealing with those cases by applying old law that has now

been changed.

There is no legal reason why the statute had to create the donut hole and force

the courts to deal with these cases under a now superseded version of the DGCL

“Retrospective operation is not favored by courts, and a law is not construed as

retroactive unless the act clearly, by express language or necessary implication,

indicates that the legislature intended a retroactive application.”178 A Delaware court

thus will presume that a new statute only applies prospectively. But when the

General Assembly makes clear that an act will have retroactive effect, the Delaware

courts will follow suit.179 Setting aside the donut hole, the Governance Agreement

Provision explicitly has retroactive effect. It applies to “all contracts made by a

corporation … whether or not the contracts … are made, approved or entered into on

or before such date [i.e, August 1, 2024].”

There are two provisions in the DGCL that nominally prohibit retroactive

application. Section 393 states:

All rights, privileges and immunities vested or accrued by and under
any laws enacted prior to the adoption or amendment of this chapter, all
suits pending, all rights of action conferred, and all duties, restrictions,

178 Fountain v. State, 139 A.3d 837, 842 (Del. 2016 (quoting 2 Norman J. Singer,

Sutherland Statutes and Statutory Construction § 41:4 (7th ed. 2015)).

179 See generally A.W. Fin. Servs., S.A. v. Empire Res., Inc., 981 A.2d 1114, 1120 (Del.

2009).

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liabilities and penalties imposed or required by and under laws enacted
prior to the adoption or amendment of this chapter, shall not be
impaired, diminished or affected by this chapter.180

That language would seem to provide that statutory amendments must be

prospective and, among other things, cannot affect any rights “vested or accrued by

and under any laws enacted prior to the adoption or amendment of this chapter.”

The same is true for Section 394, which provides that:

This chapter may be amended or repealed, at the pleasure of the General
Assembly, but any amendment or repeal shall not take away or impair
any remedy under this chapter against any corporation or its officers for
any liability which shall have been previously incurred.181

That provision also would seem to prevent an amendment that would “take away or

impair any remedy under this chapter against any corporation or its officers for any

liability which shall have been previously incurred.”

So how can the Market Practice Amendments have retroactive effect? The

answer lies the hornbook principle that “[i]mplicit in the plenary power of each

legislature is the principle that one legislature cannot enact a statute that prevents

a future legislature from exercising its lawmaking power.”182 The General Assembly

is thus free to override Sections 393 and 394 by expressly enacting a retroactive

statute.

180 8 Del. C. § 393.

181 8 Del. C. § 394.

182 82 C.J.S. Statutes § 11, Westlaw (database updated May 2024).

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Once the General Assembly has made that decision, there is no meaningful

difference between (i) pending lawsuits and (ii) injuries that occurred under the prior

regime but where no suit has as yet been filed. Section 393 refers not only to “all suits

pending,” but also all “privileges and immunities vested or accrued by and under any

laws enacted prior to the adoption or amendment of this chapter, . . . all rights of

action conferred, and all duties, restrictions, liabilities and penalties . . . .” Each of

the latter concepts encompasses an injury where, as yet, no lawsuit has been filed. A

right of action generally accrues when the injury occurs, not when a party sues.183

Consequently, when the General Assembly opts to make a statute retroactive,

it alters “privileges and immunities vested or accrued by and under any laws enacted

prior to the adoption or amendment of this chapter, … all rights of action conferred,

and all duties, restrictions, liabilities and penalties.” There is no reason why the

statute should not also apply retroactively to “all suits pending,” because under

Sections 393 and 394, those pending suits have no greater dignity than other vested

or accrued rights.

There are few Delaware decisions addressing the retroactive application of a

statute to a pending action. The Delaware Family Court considered the issue in 1995

and concluded that in other jurisdictions that have addressed the issue, “[t]he

183 Weinfeld v. Sullivan, 2006 WL 2588152, at *1 (Del. Super. Sept. 8, 2006) (“An

action ‘accrues’ when there is a right to sue, and, generally, the time of the injury or wrongful
act is the measuring date.”); see Moelis Preliminary Defenses, 310 A.3d at 994–98 (discussing
accrual methods).

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tendency in those jurisdictions is to apply the new statute retroactively to those cases

pending at the time of enactment.”184

It seems likely that the proponents of the Market Practice Amendments did

not want to appear to be affecting pending lawsuits and therefore created the donut

hole. Speaking for myself, I would have preferred the Market Practice Amendments

without the donut hole. Once a decision has been made to change the law

retroactively, there is no reason to force the courts to apply the superseded law to a

smattering of cases. That is a waste of judicial resources. It also risks creating

confusion because there will be more extant decisions addressing issues where the

Market Practice Amendments could lead to a different result. If the Governance

Agreement Provision applied to this case, the court could have given the plaintiffs

leave to amend the complaint to raise any challenges they thought could be asserted

under the new statute. The case could have been litigated under the law as it will

exist as of August 1, 2024. We might have found out something about what the

Governance Agreement Provision means, rather than what now superseded law

might have meant.

184 Rafael S. v. Lore S.-S., 1995 WL 765515, at *5 (Del. Fam. Sept. 22, 1995)

(collecting authorities); cf. Ocean Bay Mart, Inc. v. City of Rehoboth Beach Delaware,
285 A.3d 125, 141 (Del. 2022) (applying new ordinance to pending site plan
applications). Resolving the question of whether a statute applies retrospectively in
the absence of specific language saying so often preempts the question abut applying
a retroactive statute to pending cases. E.g., Div. of Fam. Servs. v. Palacio, 2016 WL
1364350, at *2 (Del. Fam. Feb. 16, 2016).

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This is a different issue than an argument that the Council of the Corporation

Law Section of the Delaware State Bar Association should not have acted until after

the Delaware Supreme Court heard an appeal in Moelis. That argument addresses

when the Council should act (if at all). The donut hole concerns what should happen

after the Council has decided to act by proposing a statutory amendment with both

prospective and retroactive effect. At that point, should the Market Practice

Amendments contain the donut hole? They didn’t have to, and I wish they hadn’t.

The donut hole is like a science fiction plot device where a timeline splits in

two. After August 1, 2024, we will live in a world where the Market Practice

Amendments have become law. Along that timeline, courts will apply the Governance

Agreement Provision to any new challenges to governance agreements. Yet because

of the donut hole, there is a stub timeline where courts must apply the old law. Split

timelines make for good movies, but not for good law. If the Council finds itself in a

similar situation involving an amendment with both retroactive and prospective

effect, consider this a polite request to skip the donut hole.

III. CONCLUSION

The plaintiffs’ motion for summary judgment is granted in part. The Pre-

Approval Requirements, the Board Size Covenant, the Recommendation Covenant,

the Vacancy Covenant, the Nomination Veto, the Committee Composition Provisions,

and the Removal Provision are facially invalid. The Company’s motion for summary

judgment is granted as to the facial validity of the Nomination Covenant and the

Efforts Covenant. The motions are otherwise denied.

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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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