In this decision, the Court of Chancery invalidated certain provisions in a Stockholders Agreement between the corporation and its founder. The Agreement provided that, as long as the founder beneficially owned at least 10% of the outstanding shares, the corporation was required to obtain the founder’s prior written approval to authorize significant decisions regarding any senior officer, charter amendments, and various transactions. The corporation argued that the suit was barred by laches and acquiescence, that the claims were moot, and that because the Agreement pre-dated the corporation’s IPO, the plaintiff constructively accepted its terms by buying shares.
The Court first ruled that equitable defenses were not available because, as opposed to voidable acts, such defenses were not applicable to void acts. The Court then held that the founder pre-approval provision violated Sections 141(a),142(a), and 142(e) of the DGCL. Applying its analysis of a similar pre-approval provision in the Moelis decision (discussed here), the Court held that the pre-approval requirement was part of the corporation’s internal governance, and improperly restricted the board's ability to govern corporate affairs by giving the founder veto power, but without authority for the power contained in the charter, bylaws, or DGCL. The Court explained that the directors were bound by contract to adhere to the pre-approval provision and did not have discretion in the exercise of their fiduciary duties to overwrite the contractual obligations of the company. The pre-approval provision was not authorized under Section 141(a), the charter, or bylaws. Similarly, Section 142, the company’s charter, and the bylaws did not provide authority to a contractual counterparty to control significant decisions regarding senior officers. The Court also found that the provision violated Section 242 of the DGCL because it displaced the statutory sequence of the charter amendments and put the company's founder “at the head of the line.”
Since this decision, the DGCL has been amended to address the validity of governance agreements (see amendments and synopsis here).
