Moelis reversed: Stockholders agreement adopted in violation of DGCL was voidable (not void) and did not give rise to a continuing wrong

The Delaware Supreme Court recently issued its highly anticipated decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., reversing the Court of Chancery’s entry of summary judgment in favor of the plaintiff. Per the Supreme Court, the at-issue stockholders agreement was voidable—not void, as the Court of Chancery held—because the agreement’s objectives could have been accomplished adopted through lawful means (e.g., by charter amendment). The Supreme Court next held that the facial challenge to the stockholders agreement was barred by laches, because the challenged conduct did not constitute a continuing wrong. The key aspects of both courts’ rulings are summarized below.

Holding below: Delaware Court of Chancery declares that stockholder agreements’ provisions are void

For those unfamiliar with the rulings below, the Court of Chancery declared that a 2014 stockholders agreement between Moelis & Company (Moelis) and stockholders affiliated with its founder (Kenneth Moelis) was void because it violated Section 141(a) of the Delaware General Corporation Law (DGCL). The at-issue stockholders agreement granted substantial governance rights to Moelis & Company Partner Holdings LP (Partner Holdings)—an entity controlled by Kenneth Moelis—including by prohibiting “the Moelis board from making a number of fundamental decisions without the consent of Partner Holdings.” After classifying the agreement as an “internal governance arrangement,” the Court of Chancery held that it was void and unenforceable because it limited the board’s managerial authority “in a substantial way.”

The Court of Chancery also held that, even if the stockholders agreement was merely voidable (such that it would be subject to equitable defenses), the plaintiff’s facial challenge was not time-barred because the stockholders agreement gave rise to a continuing wrong in the form of ongoing management of the corporation in an unlawful manner.  

Legislative developments: Senate Bill 313 introduced in response to the Moelis decision

About three months after the Court of Chancery declared the stockholders agreement void, the legislature intervened. Specifically, Senate Bill 313 (introduced in May 2024) amended Section 122 of the DGCL by adding a new subsection (18) to expressly empower corporations to enter into agreements like the stockholders agreement from Moelis. The bill was passed, signed by the Governor, and became effective as of August 1, 2024. The newly added subsection (18), read together with the pre-existing statute, now provides, in relevant part, as follows:

Every corporation created under this chapter shall have power, whether or not so provided in the certificate of incorporation, to:

….

(18) Notwithstanding § 141(a) of this title, make contracts with 1 or more current or prospective stockholders . . . in its or their capacity as such, in exchange for such minimum consideration as determined by the board of directors (which may include inducing stockholders or beneficial owners of stock to take, or refrain from taking, 1 or more actions); provided that no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State (other than § 115 of this title) if included in the certificate of incorporation. Without limiting the provisions that may be included in any such contracts, the corporation may agree to: (a) restrict or prohibit itself from taking actions specified in the contract, (b) require the approval or consent of 1 or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or 1 or more current or future directors, stockholders or beneficial owners of stock of the corporation), and (c) covenant that the corporation or 1 or more persons or bodies will take, or refrain from taking, actions specified in the contract (which persons or bodies may include the board of directors or 1 or more current or future directors, stockholders or beneficial owners of stock of the corporation). Solely for purposes of applying the proviso in the first sentence of this subsection, a restriction, prohibition or covenant in any such contract that relates to any specified action shall not be deemed contrary to the laws of this State or the certificate of incorporation by reason of a provision of this title or the certificate of incorporation that authorizes or empowers the board of directors (or any 1 or more directors) to take such action.

Delaware Supreme Court reverses: The stockholders agreement is voidable and plaintiff’s challenge is barred by laches

The Delaware Supreme Court reversed, holding that the stockholders agreement’s challenged provisions were voidable (not void)—such that they were subject to equitable defenses—and, further, that the plaintiff’s challenge was barred by the doctrine of laches (i.e., the equitable analogue to the statute of limitations). 

Analytical framework: Corporate acts are voidable if there are lawful means to accomplish them

The crux of the Supreme Court’s decision was that the stockholder agreement was voidable (not void), because the plaintiff was unable to “demonstrate[] that there are no lawful means by which Moelis could accomplish its desired governance arrangements[.]” As the Supreme Court observed, not all contracts that conflict with positive law are void ab initio.  And in order to determine whether a contract is voidable or void, “courts should focus on the subject matter of the contract.”  Among other key cases addressing this distinction, the Supreme Court relied on CompoSecure, L.L.C. v. CardUX, LLC, where it noted that “[t]he common law rule is that void acts are ultra vires and generally cannot be ratified, but voidable acts are falling within the power of a corporation, though not properly authorized, and are subject to equitable defenses.”

Application of framework: The stockholders agreement was voidable because Moelis could have accomplished its objectives through lawful means

Applying this framework, the Court examined whether the plaintiff could demonstrate that “there are no lawful means by which Moelis could accomplish its desired governance arrangements,” such that the stockholders agreement was incurably void. After requesting supplemental briefing, the Supreme Court ultimately concluded the plaintiff “failed to identify any mandatory provision of the DGCL or other Delaware law that would stand in the way of the adoption of the challenged provisions by charter amendment or other method,” confirming that its dispute provisions were merely voidable, not void. Accordingly, the plaintiff’s challenge was subject to equitable defenses.

Time-barred: Plaintiff’s facial challenge is barred by laches

After holding that the agreement was voidable, the Supreme Court next held that the plaintiff’s challenge was time-barred under the doctrine of laches. It reasoned that the plaintiff’s claim fell “neatly” within the “discrete act” framework for analyzing timeliness, rather than the “continuing wrong” framework applied by the Court of Chancery.  

The discrete act framework was appropriate because “the gravamen of the plaintiff’s claim … focuses more on the manner in which the challenged provisions were adopted … than on any wrongful acts committed by the defendant within the [analogous] three-year limitations period” following the execution of the stockholders agreement. The fact that “complete and adequate relief was available to the plaintiff” during that period also weighed in favor of the discrete act framework.

From there, because the plaintiff failed to file the analogous three-year limitations period, the claim was presumptively time barred.  Because this presumption was not rebutted (and the plaintiff did not establish tolling, unusual conditions, or extraordinary circumstances), the claim was time-barred under laches.