The Powers That Be: Supreme Court Holds That Non-Voting Stockholder Classes Cannot Invoke the “Powers, Preferences or Special Rights” Exception in Section 242, to Vote on Charter Amendments to Exculpate Officers From Duty of Care Breaches
Following amendments in August 2022 to Section 102(b)(7) of the Delaware General Corporate Law (“DGCL”) to allow corporations to include provisions in their respective charters exculpating officers for breaches of the duty of care, a number of corporations naturally took steps to add such provisions. Stockholder challenges followed in In re Fox Corp./Snap Section 242 Litigation, No. 120, 2023, 2024 WL 176575 (Del. Jan. 17, 2024), as revised (Jan. 25, 2024), which involved parallel lawsuits contesting the manner in which two separate corporations with multi-class capital structures adopted amendments providing for officer exculpation. The Delaware Supreme Court ultimately affirmed a lower court decision in favor of the corporations, holding that, consistent with their respective charters, the corporations validly obtained approval from stockholder classes permitted to vote and validly excluded from the vote non-voting stockholder classes.
The Supreme Court’s opinion focused on whether DGCL Section 242(b) provides an exception to charter provisions that exclude from voting certain stockholder classes with no voting rights. In particular, the Court analyzed whether amending a charter to provide for officer exculpation triggers an exception in Section 242(b)(2), which states that stockholder classes with no voting rights shall be permitted to vote on an amendment where it would “alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.” Both the Supreme Court and the Delaware Court of Chancery held that this exception was not triggered and, thus, the corporations validly excluded from the charter amendment vote the subject stockholder classes lacking voting rights. In so holding, the courts relied on prior precedents in Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Mfg. Co. and Orban v. Field which interpreted DGCL Section 242(b) as requiring only a separate class stockholder vote when the charter amendment “adversely affected a peculiar attribute of the class of stock rather than rights incidental to stock ownership.”
Practitioners should take particular note of certain aspects of the Supreme Court’s reasoning:
First, neither charter provided that the “right to sue corporate officers for damages for breach of the duty of care is [] a class-based power.” Thus, the officer exculpation amendment did not infringe on the “powers, preferences, or special rights of” the subject stockholder classes lacking voting rights.
Second, the corporations’ adoptions of their respective officer exculpation amendments did not remove the ability of their respective stockholders to sue for duty of care violations; indeed, “[t]he ability to sue directors or officers for duty of care violations is an attribute of the Companies’ stock [as is the case for Delaware corporations], but not a power, preference, or special right of the” subject classes at issue in this action. Rather, the officer exculpation amendments provide that officers will not be subject to personal liability for duty of care violations.
Third, context matters when interpreting provisions. The Court noted that while dictionary definitions can be helpful when considering undefined terms, context ought to prevail. In particular, the Court observed that dictionary definitions “can also be inconclusive and subject to selection bias,” and parenthetically noted Judge Easterbrook’s observation that dictionaries are akin to “word museums.” But the context of the subject exception in Section 242(b)(2) — i.e., considering all of its words, as opposed to one in isolation, as well as consideration of other statutory provisions (or contractual provisions) — is critical.
And of course, when considering charter amendments that may impact share classes lacking voting rights, practitioners should continue to pay careful attention to the potential application of exceptions in DGCL Section 242.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.
