Background
Last week, it was reported that a controversial new law had been passed in Delaware that could have extreme ramifications in how corporations in Delaware are run. The recently passed legislation in Delaware can be traced back to a landmark case earlier this year involving the investment bank Moelis & Co.
In February, Vice Chancellor J. Travis Laster invalidated most of an agreement between Moelis & Co. and its founder, Kenneth Moelis. This agreement would have granted Moelis extensive powers over the company’s leadership and litigation strategy, effectively allowing him to bypass the company's Board of Directors. Vice Chancellor Laster ruled that this arrangement did not follow Delaware corporate law, which requires certain checks and balances to ensure proper corporate governance. As of now, this decision has not been appealed although an appeal is expected.
In mid-May, another event that prompted the new bill occurred when Tesla CEO Elon Musk had a pay package valued at $55 Billion invalidated by a Delaware judge for being excessive and not in the best interest of the company’s shareholders. In response, Tesla moved its incorporation to Texas. This move by such a high-profile company and influential CE highlighted potential vulnerabilities in Delaware’s corporate laws and prompted Delaware lawmakers to act swiftly. Despite opposition in the Delawares House of Representatives, the new bill was quickly passed through the Delaware Senate and now awaits the signature of Governor John Carney.
What This Means for Businesses
The new legislation could be a seismic shift in how businesses in Delaware are run. It essentially would allow corporations to enter into side agreements with individual shareholders or investors without approval from a company’s Board of Directors. These agreements could give these shareholders significant power within a company, even allowing them to bypass the Board of Directors in certain circumstances.
Opinion on the bill is split, with supporters of the bill arguing that it is in line with current business practices and is necessary to keep Delaware a top destination for corporations to do business. Opponents of the bill argue it will weaken the oversight of Delaware corporations’ boards of directions. They also contend that it has the potential to give too much power to these individuals and will ultimately be bad for businesses and shareholders.
Impact on Corporate Structure and Operation
If the bill becomes law, it could have a significant impact on corporate structures and operations. Businesses might need to update their bylaws and Board resolutions to account for these new side agreements. Corporations formed in Delaware would need to consider how to manage the powers of individual shareholders and ensure that their Board of Directors retains essential oversight functions. Should the bill become law, practically every corporation formed in Delaware is likely to be potentially impacted in some way.
Conclusion
It is unclear whether Governor Carney will sign the bill into law and, if so, whether we will see many agreements with individual shareholders follow. Businesses incorporated in Delaware will need to ensure that they have the proper protections in place if they want to try and avoid potential conflicts and preserve the authority of their Board of Directors.
If you are concerned about the new law and want help with navigating the new corporate landscape should the bill be signed, Seck & Associates brings nearly two decades of helping entrepreneurs navigate change.
As always, the choice of a lawyer is an important decision and should not be based solely upon advertising.
Soruces:
Moelis Ruling Sharpens Focus on Private Equity Veto Agreements (bloomberglaw.com)
Move to Change Delaware Law After Musk Attacks Called Knee-Jerk (bloomberglaw.com)
Delaware corporate law overhaul could soon become law - WHYY