So, the Delaware Supreme Court came out with its long-awaited decision in Moelis & Co. v. West Palm Beach Firefighters’ Pension Fund and as far as I can tell, it holds that a contract is a charter if you wait long enough.
So, the issue here is, Moelis went public with this overweening shareholder agreement in place in 2014 granting Ken Moelis various governance rights. A shareholder bought stock shortly after the IPO, but waited nine years to sue claiming that the agreement was categorically illegal under Delaware law (which, you may have heard, has since been amended). I genuinely, honestly, get the idea that this long after the IPO there might be reliance interests in this governance arrangement, but the Delaware Supreme Court’s manner of expressing such an idea is … weird.
Doctrinally, the legal issue is whether a contract that usurps board authority is (was) “void” or “voidable.” What is the difference? A voidable contract is one that a party has the option of rejecting, but also the option of accepting. A void contract simply cannot be enforced, at all – it is legally impermissible. So, for example, a voidable contract might be one that corporate directors reach in violation of their fiduciary duties – shareholders can choose to challenge it, but they can also accept it. Voidable actions are those that “could have been accomplished lawfully by the defendants had they done them in the proper manner,” Op. at 20, in other words. A void action is one that the corporation literally cannot take no matter what procedure is used.
This matters because challenges to a voidable action must be brought reasonably promptly; if you don’t, it’s sort of the equivalent of ratification. Challenges to void contracts can be brought at any time. In other words, if your only objection is a procedural defect, if enough time passes, you’ve waived the objection.
In this case, the challenge to the Moelis contract was brought very very late. So, according to the Delaware Supreme Court, if this was something that was, essentially, procedurally lacking – if this was something the Moelis corp. could have accomplished by other means – then the plaintiff waited too long to lodge that objection.
The Court – using incredibly weak, wiggle-room-y language – concluded this contract was voidable. Why? Because Moelis argued that the governance powers contained in the contract could just as easily have been granted via charter provision or preferred shares. I say the Court’s language was weak because it did not come right out and say it agreed with Moelis that the same results could be achieved via charter provision; instead, it said:
the plaintiff failed to identify any mandatory provision of the DGCL or other Delaware law that would stand in the way of the adoption of the challenged provisions by charter amendment or other method. Consequently, we conclude that the plaintiff has not carried its burden of establishing that the challenged provisions are void.
See what they did there? They made this about the exact arguments plaintiff advanced, rather than declaring for all time that Moelis was correct.
Why?
Because a contract is not the same thing as a charter provision or preferred shares. For one thing, the process for amendment is different; contracts require the agreement of the parties to amend but there are no other formalities; even course of performance might suffice (though to be fair the Moelis contract said it could only be amended in writing). Charters/shares require a vote. You could restrict the vote to just particular parties, even permit amendment by written consent of those parties, but these are not the same thing – if for no other reason than charter amendments must be proposed by boards in the first instance, procedurally. Shares are chattel property; contracts are not. Contracts are personal to the parties; rights granted in shares are not. Sure, you can say that the shares are not transferrable or have different rights if they’re transferred, but they are still rights that attach to the shares themselves, as financial instruments. See, e.g., In re AMC Ent. Holdings, Inc. S’holder Litig., 299 A.3d 501 (Del. Ch. 2023). And personal contracts are subject to ordinary choice-of-law rules; charter provisions, including preferred share provisions, are subject to the internal affairs doctrine.
So yes, Ken Moelis could have been granted the same substantive rights in a different instrument, but there would be different technicalities associated with that instrument. In other words, being granted rights in a charter is not the same result as being granted rights in a contract.
You can see this in the way the Court handled the related issue of when the actual “wrong” occurred. The Delaware Supreme Court’s theory was that the “wrong,” if any, occurred when the Moelis board granted Ken Moelis these rights in a contract, and so it was that specific act that should have been challenged. And now, in 2023, it was too late to file suit. It recognized that Ken Moelis may have exercised his authority in the years since 2014 and therefore usurped the board, but these were not new wrongs extending the period to sue; they were the “ongoing effects” of the original wrong, i.e., the original contract. Op. at 29.1 The Court compared this case to situations in which entities entered into contracts without following procedural niceties, and where – despite the entities’ continued (damaging) performance under the contract – the “wrong” occurred only at the original signing.
But in those cases, you could imagine going back in time, following proper procedure, and then today – when the case was brought – there would be no change in the plaintiff’s current conditions. The plaintiff was objecting to procedural failures back at original formation, and there was an alternate world in which the procedures were followed and the plaintiff would be in the exact same position today.
But if things had been done properly in Moelis, if we went back in time, and fixed the problem, then, today, Ken Moelis would hold preferred shares, with rights that attached to the shares, governed by the internal affairs doctrine, modifiable in accordance with statutory law. Or, there would have been a charter provision, with similar implications. Now, however, Ken Moelis holds contract rights, and that will continue to be the case going forward.
So if the Court’s theory is that these exact same results could have been achieved via charter provisions, and that’s why they’re voidable, and that’s why the plaintiffs can’t sue 9 years after the fact, do we … pretend the contract is part of the charter now? Is it modifiable the way a charter would be? Is it subject to the internal affairs doctrine the way a charter would be? Or do we say he holds chattel property in the form of preferred shares? Are the terms of the contract transmogrified into a charter provision by the sheer passage of time?
If the Court is saying the same thing could have been achieved using procedurally different means, it’s implying that the substantive rights conveyed are all that matters, and the distinction between instrument – contract vs charter – is immaterial.
And yes, this is incredibly technical. I absolutely agree, as a practical matter, the practical effects could have been achieved in multiple ways. I argued that very point, recently. Nonetheless, the edifice of corporate law – the distinction between corporate law and contract law, between the corporate form and other forms – are these statutory minima. These formalities. Which means, I think, this case is yet another step in obliterating any distinction between the two.
- Though, separately, the Court allowed for the possibility of an “as-applied” challenge to particular exercises of Ken Moelis’s authority. ↩︎