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We’ve been covering the controversy surrounding the 2024 amendments to the DGCL over on the DealLawyers.com Blog, but the CII has recently submitted a letter to Del. Gov. John Carney urging him to veto the amendments, which the Delaware Legislature passed late last month, and I thought it was worth sharing with the readers of this blog.

One of the most controversial aspects of the amendments is new Section 122(18), which permits a board to agree to governance arrangements giving a stockholder veto powers over a range of corporate actions that traditionally have been solely within the ambit of the board’s authority. That provision is intended to address Vice Chancellor Laster’s decision invalidating such an arrangement in West Palm Beach Firefighters v. Moelis, (Del. Ch.; 2/24).  This excerpt from the CII’s letter argues that Section 122(18) raises many of the same concerns for its members as dual class capital structures:

For CII and its members, we strongly believe that permitting stockholder agreements to contain the provisions at issue in the Moelis case as authorized by S.B. 313 would disadvantage long term investors. One of the core principles of corporate governance is the principle of one share, one vote. Currently, for a powerful founder to have full control rights — of the sorts granted to Mr. Moelis and authorized by S.B. 313 — a company generally must put these provisions into the certificate of incorporation and go public with a multi-class capital structure.

Because this is such an important protection for investors, both the New York Stock Exchange and the Nasdaq Stock Market prohibit companies traded on those exchanges from engaging in a “midstream” recapitalization that would create a new class of super-voting stock. However, it appears that under the provisions of S.B. 313, a company could instead go public with a single class capital structure and then, after the company is already public, confer comprehensive control rights by contract without any shareholder vote.

We believe many CII members and other long-term investors – whether they object to multi-class capital structures or not – would find very troubling this post-IPO transformation to a type of multi-class capital structure without a shareholder vote.

I think the CII raises a legitimate concern, but I also think that it overstates that concern when it points to the possibility of companies entering into such an agreement post-IPO.  Despite the authority granted by Section 122(18), boards still owe fiduciary duties to their stockholders, and entering into such an agreement with an affiliated stockholder or one which has the effect of changing control of the company could subject the board’s decision to heightened scrutiny.  My guess is that boards are going to proceed with caution when considering such a governance agreement post-IPO.

Despite the objections from the CII and others, all the reporting I’ve seen says that Gov. Carney is likely to sign the legislation.  The changes that are being made to the DGCL are pretty seismic, and even if you’re not an M&A lawyer, you should definitely check out our DealLawyers.com webcast – “2024 DGCL Amendments: Implications & Unanswered Questions” – on Tuesday, July 23rd at 2 pm eastern.

– John Jenkins