March 30, 2023

Officer Exculpation: Del. Chancery Says No Class Vote Required

Yesterday, Vice Chancellor Laster issued an oral ruling holding that companies with multiple classes of stock don’t have to hold a separate class vote on officer exculpation charter amendments. This Wilson Sonsini memo addresses the plaintiff’s allegations and the Vice Chancellor’s reasoning:

The plaintiffs argued that the right to sue is a “power” of stock and that the defendants’ charter amendments adversely affected that power of the non-voting stock, such that a separate class vote of such stock was required. The court rejected that argument, determining that the companies did not need class votes and could instead rely on a majority of stockholder voting power to adopt officer exculpation.

The court concluded that the case was controlled by established Delaware case law interpreting Section 242 and also cited the expectations of practitioners and the market based on that case law. Under that case law, and accompanying legislative history, the phrase “powers, preferences, or special rights” of a class refers to the intrinsic, peculiar rights assigned to a class or series in the corporation’s capital structure, and Section 242(b)(2) is designed to protect class- or series-based interests.

For example, a liquidation preference given to a particular class of stock or the right of a particular class of stock to elect a board seat would be a class-based power, preference, or special right. Applying that precedent here, the right to sue and seek monetary damages against officers is not a peculiar “power” or “special right” of any given class but is instead a generalized right of all stockholders that exists at common law.

The decision provides some certainty to multi-class companies that are seeking to adopt these amendments and avoids opening the kind of can of worms with respect to prior charter amendments that many SPACs have had to deal with as a result of Vice Chancellor Zurn’s decision in Garfield v. Boxed (Del. Ch.; 12/22).

John Jenkins