Moelis stirs Delaware
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.
