The National Venture Capital Association (“NVCA”) has recently (but without any fanfare) released substantively important revisions to its model legal documents, specifically, the Investor Rights Agreement, the Stock Purchase Agreement, and the Certificate of Incorporation. These changes address critical developments in Delaware case law following the February 2024 decision in West Palm Beach Firefighters’ Pension Fund vs. Moelis, which addressed the enforceability of contractual provisions that constrain the governance powers of the board of directors. The Delaware Court of Chancery in Moelis ruled that certain provisions in a shareholders agreement undermined the fiduciary duties of the board of directors and were therefore violative of Section 141 of the Delaware General Corporation Law (“DGCL”). These provisions, which were previously considered marketplace standard, included consent of specific shareholders before certain board actions, mandatory creation of certain board committees, and board composition requirements.

What You Need to Know:

• In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, a Delaware court invalidated numerous provisions in a shareholder’s agreement on the basis that they undermined the fiduciary duties of the board of directors in violation of Delaware law. All of these provisions were previously considered to be industry standard. 
• In response, the NVCA has updated certain of its model form documents to address the concerns raised by Moelis that some provisions could now be invalid. 
• Unless pending Delaware statutory amendments are promptly enacted, those who have previously relied on the NVCA forms, or who have otherwise placed board restrictions in shareholders’ agreements, should review existing corporate documents and consider moving critical provisions into the Certificate of Incorporation in light of Moelis.

It is important to note that, following the Moelis ruling, the Delaware Bar Association proposed amending Section 122 of the DGCL (the “Proposed Amendment”) to clarify that companies can enter into agreements with current or future stockholders that include consent rights similar to those discussed in Moelis, even if not explicitly contained or authorized in the Certificate of Incorporation. The Proposed Amendment would apply to all corporations, regardless of whether they were incorporated before or after the Proposed Amendment's enactment. In the meantime, however, if parties wish to limit the board's governance authority, they should consider including those restrictions in the corporation’s Certificate of Incorporation.

Below is a summary of the key revisions to the NVCA documents and their implications for your corporate governance and transactions.

Model Certificate of Incorporation

Changes have been made to Article SIXTH to clarify the role of Preferred Directors in board decisions. The new, optional provision addresses when Preferred Directors must be included on committees, with a carve-out for situations where the Preferred Director has a conflict of interest. To the extent that an investor requires that its Preferred Directors be on certain committees, this language should be added. Additionally, the NVCA suggests in footnote 86 that if an investor requires the creation of specific committees, such as audit or compensation committees, that language should be added here as well.

Model Stock Purchase Agreement 

The NVCA has revised the Model Stock Purchase Agreement to include optional language for board committee requirements in Section 4.7, suggesting that committee formation can be a condition to closing, providing a simpler solution than relying on the board to form them post-transaction. However, we would recommend that where an investor expects the creation of those committees, that requirement would be more effective when included in the Certificate of Incorporation. We note that a condition to closing does not guarantee the continued existence of that condition once closing has occurred (i.e., a board could dissolve those committees post-closing). 

Model Investor Rights Agreement 

A majority of the NVCA’s changes were provided in the Investor Rights Agreement (“IRA”). The sections that were identified (collectively, the “Impacted Provisions”) were Sections: 5.1 (requiring the company to obtain certain insurance policies post-closing), 5.4 (requiring the company to refrain from acts that may impact Qualified Small Business Stock status), 5.6(b) (requiring audit and compensation committees), 5.8 (requiring successor indemnification), 5.9(b) (requiring the company to take certain actions with regard to a sale of the company), 5.9(d) (requiring that the company enter into a joint defense/common interest agreement if necessary), 5.12 (requiring the company to institute an anti-harassment policy), 5.13 (requiring the company to institute a DEI policy), 5.14 (requiring the company to covenant to FCPA compliance), 5.15 (requiring the company to institute a cash investment and management policy), and 5.16 (requiring the company to adhere to certain cybersecurity requirements). The NVCA noted in new footnote 79 that the balance of the provisions in the IRA are commercial in nature and are therefore not implicated by the Moelis decision. 

To minimize the Moelis concerns inherent in the Impacted Provisions, the NVCA added a new Section 5.20, which specifies that each of the Impacted Provisions are subject to the board's exercise of its fiduciary duties. This change aims to ensure these covenants do not impose unenforceable limitations on the board's governance powers. The idea is that if the Impacted Provision is “subject to” the board’s fiduciary duties, then the fiduciary duties trump the limitation, making it unenforceable to the extent it restricts the board from fulfilling its fiduciary duties. To the extent, however, an investor views any of these as critically important, they might be considered for inclusion in the Certificate of Incorporation as well.

Takeaways and Recommendations

• The Proposed Amendment Will Not Address All Moelis Implications. It is important to note that the Proposed Amendment does not contemplate matters concerning board composition. Thus, if your transaction will require certain committees, committee composition requirements, or board size or composition requirements, these should be placed in the Certificate of Incorporation to ensure enforceability. 
• Pending Passage of the Proposed Amendment, Law Firms Should Consider Whether They Can Give Clean Opinions as to the Enforceability of the NVCA Model Documents. While the NVCA has expressed the opinion that the recent revisions should hold up under the Moelis decision, they note that law firms should express no opinion as to the enforceability of any provision of the transaction documents to which Moelis applies.
• Review Existing Corporate Documents: The latest NVCA revisions are made on a drafting-forward basis, so, if you are an investor in a Delaware corporation that has in place prior versions of the NVCA model documents and/or a shareholder’s agreement, reviewing and possibly amending existing governance documents for post-Moelis considerations is advisable.