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A new Delaware case that was filed last week may impact how far stockholder agreements can go, as reported in Law360. Brian Seavitt – who was also a plaintiff in the SolarWinds litigation – filed a class action complaint taking issue with a stockholder agreement between a publicly held company and two private equity firms.

The stockholder agreement gives the firms a contractual right to remove directors, approve borrowing arrangements and other significant corporate transactions, and terminate or hire the CEO. It also allows the private equity directors to veto other directors’ selections to fill board vacancies. The plaintiff wants to invalidate parts of the agreement as unenforceable under the Delaware General Corporation Law.

Private equity folks will be watching this case as it proceeds. On Twitter, Tulane’s Ann Lipton pointed out that it also could have implications for public companies with “special governance rights.” A 2021 study that Ann shared from Michigan Law School’s Gabriel Rauterberg found that 15% of companies going public from 2013 – 2018 had a shareholder agreement that continued after the IPO.

In addition, dual-class shares have surged in prevalence at new public companies over the past few years – with nearly one-third of 2021 IPOs having that capital structure. The rights in a dual-class situation can vary – as explained in this paper from BYU Law’s Jarrod & Gladriel Shobe that Ann linked to – but whichever way you slice it, the structure isn’t not appreciated by institutional investors. Those investors have risen up to fight for equal rights for common equity holders – and they likely will be watching this lawsuit.

– Liz Dunshee