In a recent ruling on summary judgment, the court found that Bumble, Inc.’s “identity-based voting” does not violate Sections 212(a) or 151(a) of the Delaware General Corporation Law (the “DGCL”). Colon v. Bumble, Inc., et al., C.A. No. 2022-0824-JTL. However, the court left open for another day the question of whether such a governance structure is equitable.
In 2021, Bumble had its IPO using a “bespoke” governance structure: a single capital structure that combined the benefits of an Up-C structure and a dual class voting structure. As the court explained: “In simplified form, those provisions [in the certificate of incorporation] contemplate that each share will carry one vote, unless the share is owned by a ‘Principal Stockholder,’ in which case it will carry ten votes. The Principal Stockholders are defined as the parties to a publicly disclosed stockholders agreement.”
Plaintiff challenged the pertinent provisions in Bumble’s certificate of incorporation as violating DGCL Sections 212(a) and 151(a). The court held the challenged provisions are valid.
The Court’s Statutory Analysis
The court began with its own analysis of how stockholder rights are established by both the certificate of incorporation and the DGCL:
“Under the DGCL, the rights appurtenant to a share of stock must be set forth in the certificate of incorporation. By statute, however, the DGCL is a part of every certificate of incorporation. 8 Del. C. § 394. The DGCL sets out rights that shares of stock possess by default (‘default rights’), and those rights are automatically incorporated into the certificate of incorporation.” Order at 8.
DGCL Section 151(a) generally authorizes a corporation to issue multiple classes of stock with “default rights” that can be implicit or expressly stated and that can be enhanced, limited, or (in some instances) eliminated by the charter. DGCL Section 212(a) provides that if the certificate of incorporation is otherwise silent, then each share of stock carries one vote by default. However, the court recognized that “[n]othing in Section 102(a)(4), 151(a), or 212(a) requires that the charter frame the voting power appurtenant to a share in terms of a specific number of votes per share. The charter can set out a formula or procedure for calculating that figure. Not only that, but Section 151(a) permits special attributes, including voting rights, to depend on facts ascertainable outside of the certificate of incorporation.” Order at 14.
As part of its statutory analysis, the court also reviewed the history of case law consistently upholding voting rights provisions that used formulas dependent on facts outside of the charter. Order at 15-16 (citing Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977), Williams v. Geier, 1987 WL 11285 (Del. Ch. May 20, 1987), and Sagusa v. Magellan Petroleum Corp., 1993 WL 512487 (Del. Ch. Dec. 1, 1993), aff’d, 650 A.2d 1306 (Del. 1994)).
The court concluded that “[u]nder these authorities, the Challenged Provisions comply with DGCL. As required by Sections 102(a)(4) and 151(a), the charter sets out a formula that applies to all the shares in the class and that specifies how voting power is calculated. As authorized by Section 151(a), the formula makes the quantum of voting power that a share carries dependent on a fact ascertainable outside of the certificate of incorporation, namely the identity of the owner.” Order at 16. Furthermore, “having the level of voting power turn on the identity of the owner is permissible.” Id.
The Court Rejects Plaintiff’s Challenge Under DGCL Section 212(a)
After reaching its own conclusion based on the language of the statutes and the case law, the court considered and found unpersuasive Plaintiff’s interpretation of those same provisions.
With respect to Section 212(a), Plaintiff based its challenge on language from Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977), rather than on the statutory language itself, asserting that under Providence, a corporation cannot create a mechanism in which shares of the same class differ in their share-based voting power depending on who holds them. Order at 17.
In Providence, the Delaware Supreme Court upheld a scaled voting structure in which the number of votes appurtenant to a share varied depending upon the total number of shares that the owner held. In the Bumble ruling, the court carefully picked its way through the history and legal analysis of the Providence ruling, noting “the Delaware Supreme Court needed only to explain that what must be identical across all shares in the class is not the outcome, but the method.” Order at 20.
The Court Rejects Plaintiff’s Challenge Under DGCL Section 151(a)
With respect to Plaintiff’s challenge under Section 151(a), the court confirmed that “plaintiff’s starting point is correct: A charter must provide for rights, powers, preferences, limitations, and qualifications that are identical across a class of stock.” Order at 30. But, Plaintiff veered off course in asserting that Section 151(a) demands a formula that leads to the same outcome for each share in a class. To the contrary, the court found, the only requirement under Section 151(a) is that the formula be applied identically across all shares. Id. at 31.
In the alternative, Plaintiff argued that the formula must give any holder an equal opportunity to gain the superior right. According to Plaintiff under this theory, the defect in Bumble’s charter was that only the founder and one investor were defined to be “Principal Stockholders” and thus entitled to the superior voting right. The court rejected this argument as well: “The plaintiff wants all stockholders to have equality of opportunity. In many areas of the law, those noble sentiments could carry weight. They cannot overcome the plain language of the DGCL. Nothing in Section 151(a) prohibits a provision that creates a closed set of holders who can exercise certain rights.” Order at 33.
But Is Identity-Based Voting Equitable? A Question for Another Day
In reaching the conclusion that identity-based voting is legal under the DGCL, the court went out of its way to note, however, that corporate action under Delaware law is “always twice tested,” leaving for another day the question of whether there are circumstances in which a governance structure that uses identity-based voting could be inequitable. Order at 34.
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