Managed Care Outlook 2025

Business and management - briefcase icon

Read time: 5 minutes

Organizations in the managed care industry planning to engage in joint ventures or investment transactions – where parties often negotiate specific stockholder rights – should take into account recent changes to Delaware law when evaluating stockholders’ agreements. Delaware has codified the right of a Delaware corporation to enter into contracts with current or prospective stockholders that include broad stockholder protections or approval rights through the adoption of section 122(18) of the Delaware General Corporation Law (DGCL). Many growth stage companies seeking investment money are incorporated in Delaware, and Delaware remains a frequently preferred jurisdiction for corporate formation.

It's crucial for managed care organizations to carefully consider the legal implications of joint ventures and investments, and to ensure that appropriate agreements are in place to protect the rights of all parties involved. This includes understanding the impact of section 122(18) of the DGCL and how it may affect governance rights negotiated with stockholders. Proper legal evaluation and strategic planning are essential to navigate the complexities of these transactions effectively.

Moelis decision and introduction of Senate Bill 313

Company founders and other significant stockholders in the managed care industry have traditionally negotiated governance protections in stockholders’ agreements, such as requiring certain approvals before the corporation takes specific actions, for example, entering into a significant transaction or hiring or firing the corporation’s CEO. Prior to the Delaware Court of Chancery’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024), many believed that Delaware corporations were free to enter into contractual governance agreements with their stockholders.

The Moelis case challenged the validity of certain provisions in a stockholders’ agreement that, among other things, required the prior written consent of the corporation’s founder and majority stockholder for the corporation’s board of directors to take certain actions. The court determined that certain provisions in the stockholders’ agreement violated section 141(a) of the DGCL by delegating to the stockholder certain management rights that are traditionally held by a corporation’s board of directors. Section 141(a) of the DGCL provides the fundamental principle of Delaware corporate law that the “business and affairs of every [Delaware] corporation . . . shall be managed by or under the direction of a board of directors, except as may be otherwise provided [in the DGCL] or in the [corporation’s] certificate of incorporation.”

The Moelis court acknowledged that its decision would impact commonly used stockholders’ agreements that typically “contain extensive veto rights and other restrictions on corporate action.” The court noted that the Delaware General Assembly could enact a provision stating what stockholder agreements are permitted to do. Responding to this suggestion, the General Assembly proposed and passed Senate Bill 313 (S.B. 313) just a few months after the Moelis decision. S.B. 313, which added subsection (18) to section 122 of the DGCL, was signed into law on July 17, 2024, and became effective on August 1, 2024.

Opponents of S.B. 313 criticized its broad scope, predicting that it would erode fundamental principles of corporate law and lead to unintended consequences due to its rapid enactment and lack of thorough evaluation. On the other hand, proponents argued that the amendments provide needed flexibility to boards to achieve their goals without limiting directors’ fiduciary duties. While the merits or lack thereof of section 122(18) are beyond the scope of this article, the focus here is to evaluate section 122(18) as it exists and raise considerations for parties investing in Delaware corporations.

Key takeaways
  • Validity of governance arrangements in agreements with stockholders was addressed in updates to the Delaware General Corporation Law this year
  • Criticism of the scope of these updates suggests the use of stockholders’ agreements to address certain governance rights may be subject to additional judicial challenge
  • When negotiating governance rights in stockholders’ agreements, minority holders should consider additional protections to ensure they receive their bargained-for rights
Download full report
Download full report
Download