Imagine you’re a private equity firm. You buy a company, and you want to retain and incentivize key employees, so you give them some equity in the form of incentive units. You also want to prevent them from running off and competing against you, so you impose restrictive covenants on them with a forfeiture provision.
DExit Strategy: Delaware’s Books and Records Reset
Stockholders of Delaware corporations for many years have had the right to examine stock ledgers, stockholder lists and “books and records” for a “proper purpose” under Section 220 of the Delaware General Corporation Law. Until recently, however, the concepts of “books and records” and “proper purpose” were not specifically defined in the DGCL.
Over time
“Draft Dodging”: Approving “Nearly Final” Merger Agreement Becomes Dangerous in Delaware
The board of directors of any Delaware corporation proposing to merge is required under Delaware law to adopt a resolution approving the merger agreement. In the real world of M&A practice, however, the version of the merger agreement presented to and approved by the board is typically still in draft or nearly-final draft form but not yet final. Does this practice violate Delaware law?
A recent amendment to the Delaware General Corporation Law (“DGCL”) provides that any agreement that must be approved by the board under Delaware law must be in “final or substantially final” form when approved. The DGCL amendment was adopted in reaction to an earlier Delaware Chancery Court ruling in favor of a stockholder that claimed that the board violated Delaware law when it approved only a draft version of the merger agreement. These developments underscore the need for boards to consider whether a merger agreement draft submitted for approval is substantially final before approving it.Continue Reading “Draft Dodging”: Approving “Nearly Final” Merger Agreement Becomes Dangerous in Delaware
Stay in Your Lane! Delaware Court Invalidates Stockholder Agreement Provisions that Encroach on Board Authority
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
Too Big to Waive? Enforceability of Drag-Along Covenants Not-to-Sue
In the world of venture capital, there are certain investor rights that ensure the smooth execution of exit transactions. The primary such mechanism is the drag-along provision, under which one group of stockholders agrees in advance to sell or vote their shares in a sale of the company approved by another group of stockholders and/or by the board. Drag-along provisions often include a covenant by the drag-along shareholders not to sue over a drag-along sale, often including waivers of claims for breach of fiduciary duties. But are fiduciary duties of directors too important to allow them to be waived by stockholders? A recent Delaware Chancery Court decision puts guard rails on such waivers.Continue Reading Too Big to Waive? Enforceability of Drag-Along Covenants Not-to-Sue
Course Correction: Why “Ordinary Course” Covenants in Acquisition Agreements Should be Drafted Carefully
Should a buyer be allowed to walk away from an acquisition if an extraordinary event occurs between signing and closing that forces the target company to take emergency remedial measures outside its ordinary course, even if consistent with industry practice under the circumstances? This became a pressing issue during the early months of the COVID-19
Series LLCs, Serious Risks
Lately I’ve been approached by clients and potential clients about series LLCs, so I thought it would be worth blogging about. Basically, a series LLC is an LLC that may create one or more series, each generally having separate assets and liabilities, similar to having separate entities except without the expense and administrative burden of
What Can’t be Cured, Must be Endured: Delaware Limits Defective Corporate Act Ratification
A recent Delaware Chancery Court decision provides important guidance on what types of defective corporate acts may be ratified under Section 204 of the Delaware General Corporation Law (the “DGCL”), and what types may not. Paul Nguyen v. View, Inc. also underscores the importance of focusing on whether to opt out of the class vote
Unchained: Delaware Authorizes Blockchain Technology for Corporate Records
On August 1, 2017, Delaware became the first state to allow corporations to 
record issuances, transfers and ownership of stock using blockchain technology. Amendments to the Delaware General Corporation Law authorizing blockchain stock ledgers were passed by the Delaware State Senate and House of Representatives in June, signed by Governor John C. Carney Jr. in