Delaware High Court Rulings Seen as Staving Off Corporate Exits

Two rulings from Delaware’s Supreme Court signal a potential shift in the way it handles disputes concerning controller-led companies as the state fights for its best-in-class corporate reputation.

The state Supreme Court’s Jan. 20 ruling in favor of investment banking firm Moelis & Co. in a dispute over the former CEO’s board influence focused on procedural arguments instead of the merits, said Charles Elson, a retired University of Delaware professor who founded the school’s Weinberg Center for Corporate Governance. Justices could have instead spent time weighing whether the legislature cut into a lower court’s judicial discretion by amending the law in favor of the defendant, he said.

Taken in conjunction with the court’s December approval of a multibillion-dollar pay package for Tesla Inc. CEO Elon Musk, the Moelis ruling shows justices could start allowing controllers more leeway in their transactions, said Ann Lipton, a corporate governance scholar and law professor at the University of Colorado Boulder.

“It feels very much like the Delaware Supreme Court is tacitly trying to signal that it’s a new day,” she said.

Both the Moelis and Musk rulings come as Delaware battles to retain its spot as the top company enclave after several high-profile corporate relocations out of state fueled talks of a larger Delaware exit, or “DExit.” Meanwhile, the fate of Delaware’s recent corporate law overhaul, Senate Bill 21, which promised to help shield companies from shareholder litigation, is unclear as the state Supreme Court weighs the constitutionality of its safe harbor provisions.

“The court is under huge pressure, and the legislature specifically overruled the Moelis case itself, and I guess they probably figured, ‘Why poke the bear?’” Elson said.

Unsatisfying—or Surgical?

The Delaware Chancery Court in February 2024 invalidated years-old contract provisions that gave Moelis & Co.’s chief executive officer veto power over board decisions. Shortly after, Delaware’s legislature effectively rendered moot the case’s main argument by passing a law expanding stockholder power through private contracts.

The state Supreme Court’s ruling sidestepped the question they’re being asked to consider in the S.B. 21 case: whether the legislature diminished the Chancery Court’s equity power, Elson said. Equity power allows the court to weigh cases based on principles other than strict legal rules.

The court instead followed the same narrow, procedural path they used to decide the Musk case, Elson said.

Justices said the plaintiff, a pension fund, brought the challenge too long after the contract was signed. They also ruled the Moelis contract provisions at issue were “not void, but voidable.” A contract is void if a company cannot apply it at all because it violates the law, whereas it’s voidable if the contract can go into effect until one party challenges it.

The distinction lies in whether the company could have accomplished an act through “appropriate” means, rendering the contract voidable, or whether the contract was legally impermissible in every way, according to the opinion.

This contract’s outcome—granting veto power to former CEO Ken Moelis, who is now the company’s executive chair—could have been accomplished through amending the company’s charter or other measures. But the court’s legal rationale felt “unsatisfying” because it didn’t distinguish between the vehicles used to institute veto rights to begin with, Lipton said.

In other words, the court didn’t weigh in on whether there was a legal avenue to give Moelis veto power specifically through a private contract, Lipton said.

What some see as a conciliatory move others see as smart and succinct. John Lawrence, co-chair of Baker Botts LLP’s shareholder litigation practice, called the Moelis decision a narrow ruling that sets reasonable time frame expectations for shareholder complaints and assures companies their every move isn’t subject to a legal challenge years down the line.

Lawrence is also doubtful about political pressure affecting the ruling. The only pressure Delaware Supreme Court justices feel, he said, is to “get it right.”

Kristen Swift, managing partner of Kaufman Dolowich LLP’s Delaware office, said the “surgical” Moelis ruling proved the court was focused on the big picture and unswayed by controversy.

The court’s future ruling on S.B. 21 will likely rise above the DExit frenzy and stick to answering the narrow set of questions in front of it, Swift said.