By: Tyler O'Connell and Melissa Lagoumis
In this decision, the Delaware Supreme Court addressed whether certain provisions in a stockholders agreement were void or voidable under Delaware law. This distinction is important because void acts cannot be ratified and are not subject to equitable defenses, such as laches. Voidable acts, however, are subject to ratification and equitable defenses.
The Supreme Court reasoned that the voidness inquiry does not focus on whether the method chosen to implement the challenged provisions was valid under the DGCL. Rather, the inquiry is whether the plaintiff has demonstrated that there are no lawful means by which the company could accomplish its desired governance arrangements, making the challenged provisions susceptible to cure and therefore voidable. The high Court explained that this framework appropriately considered whether the arrangements agreed to in a challenged contract are themselves contrary to public policy instead of whether the means by which they are agreed to are at odds with public policy. Here, the plaintiff failed to identify any provision of the DGCL or other Delaware law that would stand in the way of the challenged provisions if they had been implemented by charter amendment, for example. As such, the Court found that the challenged provisions of the stockholders agreement were voidable, not void. Therefore the plaintiff’s claims were subject to equitable defenses.
The Supreme Court further reasoned that the plaintiff’s claim, which was a challenge to the facial validity of certain provisions, had accrued when the stockholders agreement was entered into, which here was in 2014. In so reasoning, the high Court rejected the plaintiff’s arguments that, inter alia, the fact that the challenged provisions were in effect sufficed to demonstrate a “continuing wrong.” The Supreme Court accordingly ruled that the case was subject to dismissal on laches grounds, and it entered judgment in favor of the defendants.
