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Delaware Supreme Court Affirms That the Right to Sue Corporate Officers is Not a “Power” Within the Meaning of DGCL Section 242(b)(2)

In re Fox Corporation/Snap Inc. Section 242 Litigation, C.A. 2023-1007-LWW (Del. Ch. January 17, 2024)
DGCL Section 242(b)(2) requires approval by each class of stock to amend a corporate charter, where the amendment alters or changes – adversely – the powers, preferences, or special rights of a class of stock. Here, the Delaware Supreme Court was asked to determine whether a charter amendment affecting the right to sue implicated "powers" of a certain class of stockholders, such that the amendment required approval by all classes of stock. Affirming the Court of Chancery below, the Delaware Supreme Court held that the right to sue is not a “power” within the meaning of Section 242(b)(2), and, thus, the charter amendment did not require approval by all classes of stock.

Following the 2022 expansion of DGCL Section 102(b)(7) to allow officer exculpation for breach of the duty of care, Fox Corporation and Snap Inc. both amended their respective charters to exculpate officers. The charter amendments were approved by Fox and Snap stockholders holding shares with voting rights.  Following adoption, stockholders holding non-voting stock brought an action claiming that the charter amendments violated Section 242(b)(2) of the DGCL under the theory that the amendment adversely affected the class’s “powers” – here, the right to sue corporate officers – and, therefore, required approval by all classes of stock, not just those with voting rights. 

Following cross-motions for summary judgment, the Court of Chancery held that under long-established Delaware precedent, Dickey Clay and Orban, a class vote was only required when the charter amendment “would impair a ‘peculiar, or special’ characteristic of class shares rather than rights incidental to share ownership.”  While the plain meaning of “powers” might support the plaintiffs' argument, under the Dickey Clay and Orban precedent, the right to sue is incidental to share ownership, not a “power[]" specific to that class of shareholders under the certificate of incorporation. Accordingly, the Court of Chancery granted summary judgment in favor of the defendants.

On appeal, the Supreme Court rejected the plaintiffs' plain language argument, reasoning that it ignored “the context in which the word ‘powers’ is used…”  Specifically, the Supreme Court held that, when put in context, “powers” in Section 242(b)(2) of the DGCL refers to specific class powers set forth in the charter (in accordance with Sections 151(a) and 102(a)(4) of the DGCL), which do not include the incidental right to sue.  The Supreme Court accordingly affirmed.

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