Legal Alert

DE Supreme Court: No Class Vote Required Where Corporations With Multi-Class Capital Structure Adopted Exculpatory Charter Provision

by Elizabeth S. Fenton, David J. Margules, Elizabeth A. Sloan, Jessica Case Watt, and Henry Longley
January 25, 2024

Delaware’s Supreme Court unanimously rejected challenges by stockholders of two corporations who argued the respective companies invalidly adopted exculpatory charter provisions without giving each class of stock a separate vote. Section 242(b)(2) of the Delaware General Corporation Law requires a class vote on provisions that would “alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.” The Court held the provision was inapplicable: “[T]he ability to sue directors or officers for duty of care violations is an attribute of the Companies’ stock, but not a power, preference, or special right of the Class A common stock under [DGCL] Section 242(b)(2)."

DCGL § 102(b)(7) authorizes Delaware corporations to adopt charter provisions that relieve directors and officers of liability for breaches of the duty of care. Originally applicable only to directors, the statute was amended in 2022 to extend that protection to officers. After the statutory amendment, Fox Corporation (Fox) and Snap, Inc. (Snap), amended their charters to include the broader immunity.

Both Fox and Snap have capital structures with multiple stock classes. Each company was sued in the Court of Chancery by stockholders claiming that approval by a majority of all voting shares was insufficient, i.e., the change required approval from each class of stock, voting separately. According to plaintiffs, the ability to sue officers and directors was a “power” that could not be abridged without a class vote.

Upholding the Chancery Court’s entry of summary judgment dismissing the complaints, the Supreme Court explained the word “powers” in Section 242(b)(2) refers to class-based powers or rights explicitly stated in the charter or incorporated through the DGCL’s default provisions, but “not to general powers incidental to stock ownership.” In doing so, the Court upheld the Court of Chancery’s conclusion that a class vote is required “only when the charter amendment adversely affected a peculiar attribute of the class of stock rather than rights incidental to ownership.” (emphasis added).

Practice Tips

The Court’s holding must be considered with care. Possibly signaling that the underlying principles would be reconsidered in a proper case, the Supreme Court noted the Chancery Court “had some reservations about this interpretation, [but] ultimately held that two [prior] decisions controlled the outcome.” The Court further noted plaintiffs had “not asked us to overrule” that “long-standing precedent.”

The Ballard Spahr team is available to counsel clients on the advisability of adopting exculpatory charter provisions, on the substance of proposed amendments, and on the process for adopting them (including any need for class voting). If a charter amendment is challenged, we can work with clients to maximize the probability of a favorable outcome.

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