In January 2024, the Delaware Supreme Court issued a notable opinion[1] affirming that under the Delaware General Corporation Law (DGCL), a corporation with multiple classes of common stock does not have to obtain a separate class vote to amend its certificate of incorporation when it seeks to adopt officer exculpation under the recently amended Section 102(b)(7).[2] You can read our insights about officer exculpation here.
This decision arises from two parallel lawsuits that were filed in the Delaware Court of Chancery: one against Fox Corporation and the other against Snap Inc. (f/k/a Snapchat Inc.) (together, the Defendant Companies). In each of these cases, both Defendant Companies (i) had multiple classes of stock, with at least one class of voting common stock and one class of non-voting common stock, and (ii) obtained stockholder approval from all shares, voting together as a single class, to approve amendments to their respective certificates of incorporation. These amendments provided for officer exculpation under the recently amended DGCL Section 102(b)(7) (together, the Amendments). In both cases, the plaintiffs claimed that the Amendments violated DGCL Section 242(b)(2) and were therefore void because the Defendant Companies did not solicit separate class votes of the non-voting common stock to approve the respective Amendments.
Section 242(b)(2) states, in pertinent part, 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 . . . alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.
The plaintiffs claimed that Section 242(b)(2) unambiguously required separate class votes because the Amendments deprived the stockholders of the ability to hold officers liable for certain breaches of the fiduciary duty of care, which in turn adversely affects the non-voting common stock’s “powers, preferences or special rights” within the plain meaning of the phrase.
The Delaware Court of Chancery rejected the plaintiffs’ argument and granted summary judgment in favor of the Defendant Companies; however, the Court noted that the plaintiffs raised a contemporary issue under Delaware law that was ripe for appellate review. On appeal, Chief Justice Collins J. Seitz, Jr., wrote a unanimous opinion for the Court, affirming its decision.
Although the phrase “powers, preferences or special rights” is not defined by the DGCL, the Court reasoned that the Amendments did not require a separate class vote because that phrase refers to two specific types of rights. The first type relates to those rights expressly included in a corporation’s certificate of incorporation, as required by DGCL Section 102(a)(4) (requiring a certificate of incorporation to set forth, for any class or series of stock, a statement of, or an express grant of authority to the board to fix by resolution, the designations, powers, rights, and qualifications thereof, which are permitted by Section 151, as may be desired and 151(a) (permitting a corporation to issue classes and series of stock with such voting powers, designations, preferences, special rights, and qualifications (i.e., rights) as stated in the certificate of incorporation (or board resolutions as applicable), which such rights of any class or series may be made dependent upon facts ascertainable outside the charter or the issuing resolution, respectively, so long that the manner in which such facts shall operate upon the rights is clearly and explicitly set forth therein). The second type concerns those rights ascribed to shares of stock by virtue of the default provisions as set forth in Section 394 of the DGCL (providing that any amendments to the DGCL shall be a part of the certificate of incorporation of every corporation to the extent applicable). Taken together, these sections of the DGCL make it clear that the right to sue corporate officers for damages for certain breaches of their fiduciary duties is not a class-based power explicitly stated in either of the certificates of incorporation nor is it a right otherwise found in the DGCL.
Remaining consistent with decades-old case law,[3] the Court held that “[t]he ability to sue directors or officers for duty of care violations is an attribute of the [Defendant] Companies’ stock, but not a power, preference, or special right of the [non-voting] common stock under Section 242(b)(2)” that would warrant a separate class vote. Rather, such ability is a right that is “incidental to stock ownership.” In rejecting the plaintiffs’ plain-meaning argument, the Court made clear that it could not “pluck a single word from the statute” or “put on blinders to the rest of the words in the statute and the statute’s place in the DGCL.”
In issuing this opinion, the Court provides tangible guidance to corporations with multi-class structures that are considering expanding the scope of their exculpation provisions to their officers. When faced with a decision of whether to seek a separate class vote to amend its certificate of incorporation, the corporation should consider whether the proposed amendment affects a right that can be construed as being specifically attributable to a given class of shares or whether the affected right is merely incidental to the ownership of such shares. The opinion also underscores the Court’s willingness to take theoretical arguments under advisement, propensity to center statutory interpretation while navigating the contours of Delaware law, and ability to ultimately deduce a practical application of the Court’s statutory interpretation.
[1] In re Fox Corp./Snap Inc., 2024 WL 176575 (Del. Jan. 17, 2024), as revised (Jan. 25, 2024).
[2] In re McDonald’s Corp. S’holder Derivative Litig., 291 A.3d 652 (Del. Ch. 2023).
[3] Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Mfg. Co., 24 A.2d 315 (Del. 1942).