In Wagner v. BRP Gp., Inc., the Delaware Court of Chancery considered the facial validity of three challenged provisions of a stockholders agreement under the Delaware General Corporation Law (the DGCL). BRP Group, Inc. (the Company), is the product of an Up-C IPO, in which Baldwin Risk Partners, LLC (the LLC) issued LLC units to the Company, which in turn sold Class A common stock to the public in an initial public offering. The Company issued Class B common stock to the LLC’s remaining members (which corresponded to the LLC units the members still held directly) and entered into a stockholders agreement with respect to the Class B stock, such that Class B holders, including the LLC’s founder, Lowry Baldwin (Lowry) would maintain significant control over actions by the Company’s board of directors (the Board) via 12 broad pre-approval rights. The Class B stockholders committed to vote as Lowry directed via a voting agreement, granting Lowry control over the pre-approval rights, and as a result, the board’s actions on matters subject to the pre-approval rights.
The plaintiff, a Class A stockholder, filed a complaint challenging the facial validity of three of the stockholders agreement’s pre-approval rights: (i) the right to pre-approve officer employment decisions (the Officer Pre-Approval Requirement), (ii) the right to pre-approve amendments to the Company’s charter (the Charter Pre-Approval Requirement), and (iii) the right to pre-approve major transactions including mergers, the sale of substantially all assets, liquidation, and dissolution (the Transaction Pre-Approval Requirement and, collectively, the Pre-Approval Requirements). Notably, unlike in the Moelis decision mentioned below, the Wagner plaintiff did not challenge the entire suite of governance restrictions as a whole, choosing instead to focus on these three specific Pre-Approval Requirements.
Section 141(a) of the Delaware General Corporate Law provides that a corporation’s business and affairs shall be managed by or under the direction of the board of directors, unless otherwise provided by the DGCL or certificate of incorporation. In West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809 (Del. Ch. 2024) (Moelis II), the Court of Chancery set forth a two-step test for a Section 141(a) inquiry: (i) a court must determine whether a challenged contractual provision is part of an Internal governance arrangement, and (ii) if so, the court must apply the Abercrombie test, which asks whether the provision has the effect of removing from the directors in a very substantial way their duty to use their own best judgment on management matters or tends to limit in a substantial way the freedom of director decisions on matters of management policy. The court found that each of the Pre-Approval Requirements failed this test and were facially invalid.
However, in response to the Wagner complaint, the Company had entered into a consent agreement under which Lowry committed to approve any board decisions implicated by the Pre-Approval Requirements so long as an independent committee of the Board determined (i) in good faith that (ii) the board decision is in the best interests of the Company and its stockholders (the Committee Waiver). The court determined that the Committee Waiver was sufficiently broad to enable the Board to exercise its statutory authority, thus curing the facial invalidity of the Pre-Approval Requirement, even though the Committee Waiver required unanimous approval of the independent committee and that all eight of the committee members be present to constitute a quorum.
The Officer Pre-Approval Requirement and Charter Pre-Approval Requirement were also challenged under Sections 142 and 242 of the DGCL, respectively.
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Sections 142(b) and (e) (when combined with Section 102(b)(1)) provide that officers shall be chosen, and their positions filled, as prescribed by the charter or bylaws or by the board of directors. The Company’s charter and bylaws each vested control over hiring and firing corporate officers with the Board. The court, finding that none of Section 142, the charter, or the bylaws empowered a contractual counterparty to control the employment decisions for senior corporate officers, invalidated the Officer Pre-Approval Requirement under Section 142.
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Section 242 of the DGCL requires two steps for charter amendments. First, a board must adopt a resolution declaring the advisability of the amendment and calling for a stockholder vote. Second, a majority of the corporation’s outstanding stock must vote in favor. Because the Charter Pre-Approval Requirement placed Lowry’s pre-approval ahead of these two steps, the court declared the Charter Pre-Approval Requirement invalid under Section 242. Importantly, the court noted that the Charter Pre-Approval Requirement was not an additional vote, which are typical in transaction agreements and not violative of Section 242 because the additional vote follows the mandatory sequence of Section 242.
In response to Moelis II, Delaware recently adopted Section 122(18) of the DGCL, which validates stockholders agreements that might otherwise infringe on the statutory authority of corporate boards of directors so long as the provisions in the stockholders agreement are not contrary to the certificate of incorporation or would be contrary to Delaware law if included in the certificate of incorporation. Section 122(18) therefore effectively overrules the Moelis II and Wagner opinions, except with respect to civil actions or proceedings completed or pending before its passage. The Moelis II and Wagner opinions therefore retain precedential value for litigation commenced before August 1, 2024.
