In connection with the company's initial public offering in 2014, the company entered into a stockholder's agreement with
In its 131-page decision, the Court agreed with the plaintiffs' contention that the above mentioned provisions of the stockholders' agreement deprived the company's board of directors of a significant portion of its authority, in contravention of Section 141(a) of the DGCL, which provides, in relevant part, that "the business and affairs of every corporation organized . . . [in
Based in part on prior
First, the Court must determine whether the challenged provision is part of an external commercial agreement or one that seeks "to govern the corporation's internal affairs". If the former, a challenge based on a violation of Section 141(a) will likely be unsuccessful.
Second, if the provision involves an "internal governance arrangement," the Courts will apply the test espoused in
As to the first prong of the analysis, the Court identified a number of factors to distinguish between external commercial contracts and internal governance arrangements, including whether the agreement:
(i) has a statutory grounding in the DGCL (here, the Court noted that stockholders agreements specifically are grounded in DGCL Section 218);
(ii) is agreed to by intra-corporate actors (here, the Court highlighted that the only parties to the relevant agreement are the company,
(iii) seeks to specify how intra-corporate actors exercise corporate power, (here, the court noted the stockholders' agreement in question, prohibits actions that a director on the board could otherwise take and restricts voting in a particular way);
(iv) reflects "an underlying commercial exchange" or has a "commercial purpose" beyond mere governance rights (here, the Court distinguished supply agreements, credit agreements and other commercial arrangements from the stockholders agreement in question);
(v) provides for a remedy of damages tied to a commercial bargain, rather than an injunctive remedy enforcing governance rights; and
(vi) has an indefinite duration and/or cannot be readily terminated by the company.
After determining the stockholders agreement was clearly an internal governance arrangement, the Court reviewed the pre-approval requirements and held that the requirements force the board to obtain prior consent from
As to the board and committee composition provisions, the Court found that certain aspects were also invalid, including, among others, the restrictions on board size and the obligation on the board to recommend candidates designated by
While not expressly endorsing other alternatives, the board discussed other structuring options that may have been less problematic, including incorporating the restrictive provisions into the company's certificate of incorporation or issuing to
Looking forward, both public and private companies should consider this decision when evaluating existing and prospective agreements that may encroach on board action and determine whether such provisions of agreements should be incorporated into the company's certificate of incorporation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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