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Delaware Supreme Court Affirms Ruling Regarding Multi-Class Votes

Delaware Supreme Court Affirms Ruling Regarding Multi-Class Votes

On January 17, 2024, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s March 29, 2023 ruling that in accordance with the Delaware General Corporation Law (DGCL) Section 242(b)(2), where a company has a multi-class capital structure, a separate class stockholder vote is not required to amend the corporate charter to adopt officer exculpation provisions because such amendment does not “alter or change the powers, preferences, or special rights” of such classes adversely.

In re Fox Corporation/Snap Inc. was filed by Class A non-voting common stockholders of Fox Corporation and Snap Inc. Each company had at least one class of voting and non-voting common stock outstanding. In accordance with the August 1, 2022 amendment to DGCL Section 102(b)(7), each company amended its charter to include officer exculpation. The 2022 DGCL amendment allowed corporations to eliminate or limit the personal liability of its officers for claims related to a breach of the fiduciary duty of care, a right that was previously only afforded to company directors.

The plaintiff stockholders brought suit arguing that the officer exculpation amendment, made without a vote of all stockholder classes, was improper as it would limit their “powers” to sue, a right they claimed was afforded to the stockholders under DGCL Section 242(b)(2). Conversely, the defendant companies filed for summary judgment on the grounds that a contextual reading of DGCL Sections 242(b)(2), 151(a), and 102(a)(4), would only require a vote by any specific class of stockholders when the charter amendments would adversely affect special characteristics of that class. The companies argued that amending their charters to add officer exculpation in no way adversely affected a special characteristic of the non-voting common stockholders. The companies relied on Hartford Accident & Indemnity Co. v. Dickey Clay and Orban v. Field, two well established precedents, standing for the notion that a separate vote for each class of stockholders is only required when the charter amendment adversely affects a particular attribute of a class of stock.

In its initial ruling, the Delaware Court of Chancery granted the companies summary judgment, stating that “a separate class stockholder vote was required only when the charter amendment adversely affected a peculiar attribute of the class of stock rather than rights incidental to stock ownership.” The Delaware Court of Chancery further opined that the right to sue an officer as a stockholder is a general right afforded to all stockholders under common law rather than a special right provided to a specific class of stockholders. This week, on appeal, the Delaware Supreme Court unanimously affirmed the lower court’s decision.

In its unanimous opinion, the Delaware Supreme Court again rejected the stockholders’ argument that DGCL Section 242(b)(2) provides the “power” to sue. Chief Justice Collins J. Seitz, Jr., made it clear that “Section 242(b)(2) is intended as a ‘safeguard' to protect the powers, preferences and special rights authorized by Section 151 and expressed in the charter. It is not a broad grant of a right to vote on any amendment affecting any attribute of stock ownership.” The Delaware Supreme Court’s decision to affirm in favor of the companies’ summary judgment not only affirms the long-standing precedent but also provides guidance for multi-class companies when considering amending their charters to include officer exculpation as well as other possible additions. Moving forward, both companies and stockholders should consider whether the charter amendment in question will adversely affect a special right of a particular class of stock ownership or whether it is a right generally incidental to stock ownership in determining whether a special class vote may be required.

For More Information, Please Contact:

Morgan Gray
Morgan Gray
Los Angeles, CA