Moelis stirs Delaware | July 18, 2024

On February 23, 2024, Vice Chancellor Laster issued a decision finding parts of an agreement between Moelis & Co. facially invalid. See West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 22, 2024).  

The stockholders had challenged the agreement between the investment bank and Ken Moelis, the bank’s founder.  Stockholders argued that certain provisions of the agreement were invalid under DGCL § 141 because the provisions granted Moelis extensive control over the company's governance (unbeknownst to most stockholder).  The control included certain pre-approval provisions giving Moelis the authority to limit the board's size, the designees on the board and its committees, and various other provisions to maintain his influence over the board.  Moelis & Co. argued that the stockholder agreement was based on market practice and otherwise valid.  VC Laster disagreed, concluding that “When market practice meets a statute, the statute prevails.”  The following week after the Moelis decision, Chancellor McCormick cited Moelis and similarly found invalid the Activision board’s approval of the Microsoft deal because its merger approval process violated both DGCL §§ 141 and 251.  See Sjunde AP-Fondemn v. Activision Blizzard, Inc., et al., C.A. No. 2022-1001-KSJM (Del. Ch. February 29, 2024).  

Reaction to these decisions was swift, with many commentators wondering whether previously executed agreements consistent with market practice were now subject to challenge.  In April, Delaware’s bar association sent over draft legislation to the General Assembly, which was overwhelmingly approved, and recently signed by the Governor.  

Why the swift (hasty) reactino?  One answer is that the decision undermined the primary value of Delaware as a corporate jurisdiction: certainty.  That is, the decision undermined the validity of an unknown number of agreements that entrenched founder authority over the board.  Another answer is that too intense of a spotlight was being shined on Delaware recently, with Musk looking to incorporate his companies in Texas, TripAdvisor looking to incorporate in Nevada, and general competition from other jurisdictions looking to topple Delaware’s dominance in the corporate formation market.  On the latter point, Texas even recently rolled out its own business court to incentivize the filing of more complex commercial litigation in its jurisdiction.  It’s probably a combination of these things, but it’s hard to imagine why any alleged harms caused by the Moelis and Activision decisions had to be addressed so quickly, before any appeals were even exhausted.  

Chancellor McCormick sent a letter to the executive committee of the Delaware State Bar Association that both defended the Moelis and Activison decisions and basically asked: Why the rush?  The answer, to my mind, is plain old political pressure. 

Implied contractual covenants should be stated explicitly | November 15, 2023

Certain contractual principles are considered “implied,” so-called because one need not state them explicitly to trigger their application.  These include the duty of good faith, the duty of fair dealing, and (in some contexts) the duty to make and maintain agreements and settle disputes.  Given their existence of by implication, many lawyers think that explicitly referring to them in a contract may be redundant.  But in FMLS Holding Co. v. Integris BioServices, LLC, the Delaware Chancery court’s analysis of a breach of contract claim suggests that an expressly stated obligation to not act in bad faith may provide more protection than relying on the background duty to act in good faith alone.  There, the purchase agreement required the acquirer to use“commercially reasonable efforts” to achieve an earnout and to not take any actions in “bad faith” that would undermine achieving the earnest. 

Reading the case, it’s notable how heavily the court relies on the the parties’ explicit “promises” via the good faith provision to work to achieve the earnout, particularly given how dismissive some courts are of breach of contract cases premised on the breach of the implied good faith covenant, often suggesting some unspecific degree of egregiousness is necessary for a plaintiff to avail itself of the covenant. But FMLS suggests that it may be worth making implied covenants more explicit, particularly if the implied covenant is key to receiving an ancillary post-closing payment. 

Full case here: https://courts.delaware.gov/Opinions/Download.aspx?id=355240