Delaware Supreme Court Issues Decision Emphasizing Stability of Corporate Law
The Delaware Supreme Court recently confirmed that the adoption of an exculpatory charter amendment does not require a class vote under the Delaware General Corporation Law ("DGCL").
Section 242(b)(2) of the DGCL provides that the holders of the outstanding shares of a class shall be "entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation," if the amendment would, among other things, "change the powers, preferences, or special rights of the shares of such class so as to affect them adversely." In 2022, Fox Corporation and Snap Inc. both adopted charter amendments that exculpated their officers for damages liability for violations of the duty of care. (For our previous Commentary on the change to the DGCL that made the amendment possible, see here.) Both companies had multi-class capital structures, where certain classes of common stockholders have no power to vote. In each case, the amendment was approved by the company's voting stockholders, but no vote was solicited from the nonvoting stockholders.
Nonvoting stockholders of both companies sued, arguing that the amendments changed the "powers" of their stock, and they were thus entitled to vote on them under Section 242(b)(2). The Court of Chancery held that they were not, relying on past case law, the use of Section 242(b)(2)'s language in other sections of the DGCL, and practitioners' understanding of what vote was required for an exculpatory charter amendment. But the Court also noted that "there was a lot to be said" for the linguistic argument that the right to sue for breach of the duty of care should be considered a "power" of stock subject to Section 242(b)(2).
On appeal, the Delaware Supreme Court affirmed. Consistent with longstanding precedents, the Supreme Court held that the plain meaning of the words used in Section 242(b)(2), when considered in the context of other sections of the DGCL, did not include the right to sue directors or officers for duty of care violations. Moreover, the Supreme Court noted that, ever since exculpation first became possible in 1986, "no one has taken the position until this case that an exculpation amendment requires a class vote." The Delaware Supreme Court's decision thus underscores the importance Delaware places on the stability of its corporate law.
