Delaware Court Invalidates Common Shareholder Agreement Provisions

By Jed Weiner

A recent Delaware court ruling invalidated provisions regularly included in shareholder agreements. In West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024), the Delaware Court of Chancery ruled that most of the governance control provisions in a stockholder agreement in favor of a stockholder were invalid under Delaware corporate law. 

In this case, the shareholders agreement granted the company’s founder veto rights over key company decisions and the right to select a majority of board members. The court said these decisions belong to the board of directors. 

Alternative Approach
The court said that many of the control provisions would be valid if included in the certificate of incorporation rather than the shareholders agreement. 
As an alternative approach, shareholders may decide to incorporate by reference the control provisions in the shareholder agreement into the certificate of incorporation. 
The court decision is subject to appeal and proposed amendments to Delaware corporate law drafted to overrule this court ruling.
The court ruling does not apply to limited liability company operating agreements. 

Jed Weiner

Founder grIp Venture Studio