Earlier today, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery issued an important ruling concluding that two companies with multiple classes of common stock were not required, under the Delaware statute, to obtain separate class votes of their stockholders in order to amend their certificates of incorporation to provide for exculpation of their officers.1 Those charter amendments took advantage of the recent amendments to the Delaware General Corporation Law (the DGCL) permitting Delaware corporations to provide in their certificates of incorporation that, akin to protections long afforded to directors, specified officers of the corporation can be protected from monetary liability for certain breaches of fiduciary duty—specifically, direct, though not derivative, claims by stockholders asserting a breach of the duty of care. Today’s ruling, pending any appeal, is good news for dual-class companies seeking to amend their charters to implement officer exculpation and will also have broader implications for private and public companies assessing whether to seek a class or series vote of stockholders for other charter amendments. Wilson Sonsini is representing one of the defendant companies in the case.
The provision of the DGCL at issue in the case was Section 242, which provides that with limited exceptions—such as a change of the corporation’s name—any time a Delaware corporation amends its charter, both the board and stockholders must approve the charter amendment. The statute further provides in Section 242(b)(2) that if a corporation has more than one class of stock outstanding and a charter amendment would “alter or change the powers, preferences, or special rights” of the shares of a class of stock in an adverse manner, then the class must separately approve the charter amendment, regardless of whether the class is otherwise non-voting or has differential voting power. The statute similarly provides for series-level votes in some circumstances if a class is divided into series for the series so affected by the amendment. In the case at hand, the defendant companies each had at least one class of voting common stock and a class of non-voting common stock outstanding and adopted a charter amendment to incorporate officer exculpation based only on the approval of the voting stock, without a class vote of the non-voting common stock. The plaintiffs argued that the right to sue is a “power” of stock and that the defendants’ charter amendments adversely affected that power of the non-voting stock, such that a separate class vote of such stock was required. The court rejected that argument, determining that the companies did not need class votes and could instead rely on a majority of stockholder voting power to adopt officer exculpation.
The court concluded that the case was controlled by established Delaware case law interpreting Section 242 and also cited the expectations of practitioners and the market based on that case law. Under that case law, and accompanying legislative history, the phrase “powers, preferences, or special rights” of a class refers to the intrinsic, peculiar rights assigned to a class or series in the corporation’s capital structure, and Section 242(b)(2) is designed to protect class- or series-based interests. For example, a liquidation preference given to a particular class of stock or the right of a particular class of stock to elect a board seat would be a class-based power, preference, or special right. Applying that precedent here, the right to sue and seek monetary damages against officers is not a peculiar “power” or “special right” of any given class but is instead a generalized right of all stockholders that exists at common law. Accordingly, no class vote is required to adopt officer exculpation.
The ruling is welcome news for dual-class companies looking to adopt officer exculpation. In other contexts in which public and private companies need to assess whether to seek class or series votes, the ruling honors established Delaware precedents, which have long provided predictability to transaction planners.
[1] Elec. Workers Pension Fund, Local 103, I.B.E.W. v. Fox Corp., C.A. No. 2022-1007-JTL.
