I’m often asked by clients whether startups should have a separate stockholders’ agreement among the founders. The answer largely depends on whether they have or will have certain other startup documents in place.
First, some background on stockholders’ agreements. These are contracts entered into by owners of privately held companies to manage the following governance
There are generally two ways you can control a corporation. One is by owning a majority of the stock, in which case you control the board of directors. The other is to secure control contractually, through agreements and charter provisions that provide protections such as board representation or vetos over major transactions. But what happens when those contractual and charter provisions interfere with the statutory authority of a board of directors to manage a company’s affairs as mandated by state corporate law? A recent Delaware Chancery Court decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. invalidated provisions of a stockholders agreement because they constituted an impermissible delegation of the board’s managerial authority in contravention of Delaware law. The decision throws into question the enforceability of corporate governance provisions routinely included in stockholder agreements, investor rights agreements and voting agreements.
Statutory Authority of Board of Directors
Section 141(a) of the Delaware General Corporation Law (the “DGCL”) provides that:
“the business and affairs of every [Delaware] corporation … shall be managed by or under the direction of a board of directors, except as may be otherwise provided [under the DGCL] or in its certificate of incorporation.”
Section 141(c)(2) empowers the board to designate one or more committees and to determine the composition of those committees.Continue Reading Stay in Your Lane! Delaware Court Invalidates Stockholder Agreement Provisions that Encroach on Board Authority
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” Such was the lament of John Ray, the legendary restructuring executive tasked with the unenviable assignment of serving as the caretaker CEO of bankrupt FTX Trading Ltd. As the criminal and civil cases by the DOJ, SEC and CFTC against FTX founder and former CEO Sam Bankman-Fried play out in the courts, what does the “complete failure of corporate controls” at FTX teach us about corporate governance, unchecked founder control and the importance of proper oversight?Continue Reading FTX, Sam Bankman-Fried and the Risk of Unchecked Founder Control