On January 20, 2026, the Delaware Supreme Court reversed a notable 2024 Delaware Court of Chancery decision in West Palm Beach Firefighters Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024), which had cast doubt on the enforceability of thousands of stockholder agreements of Delaware corporations which granted influential investors, including private equity firms and founders, control of certain decisions made by corporate boards of directors.
Moelis was the rare case in which the Delaware Court of Chancery handed down a decision in the area of corporate governance viewed by some as so inconsistent with accepted market practices that the Delaware General Assembly responded by quickly amending the Delaware General Corporation Law (the "DGCL") to add a new Section 122(18) to the DGCL (as previously reported in Saul Ewing's Alert available here). That legislation, though, did not apply retroactively.
Moelis appealed to the Delaware Supreme Court, and the Court has now reversed the Chancery decision, albeit perhaps on surprising grounds. The Supreme Court, disagreeing with the Court of Chancery, held that laches did apply (the agreement at issue in Moelis had been adopted some nine years before the suit was brought) and would bar the suit given the passage of time. The Supreme Court also provided helpful guidance on how Delaware corporations and stockholders should approach stockholder agreements which delegate significant decision-making rights that may traditionally be viewed as in the purview of the board of directors, and discussed at length the differences between "void" and "voidable" corporate actions.
What You Need to Know:
Among other things, key takeaways from the Delaware Supreme Court ruling in Moelis are:
- Where a stockholder agreement or other governance structure may be subject to challenge, any challenge must be brought relatively quickly. Delaware's three (3)-year statute of limitations for contract claims applies to facial challenges to contracts (including stockholder agreements), and any alleged wrongdoing will be deemed to occur as of the date the agreement was signed for purposes of calculating the statute of limitations, rather than being considered an ongoing action every day the agreement exists.
- "Void" and "Voidable" provisions in a stockholder agreement will be treated differently by Delaware courts. A provision is deemed "void" when it is deemed completely beyond a corporation's power because it contravenes a statute or the corporation's certificate of incorporation. "Voidable" acts, by contrast, can be challenged, but such challenge must occur within the statute of limitations.
- The Delaware Supreme Court signaled by implication that where substantive rights (such as corporate governance rights) are conveyed through a contract (such as a stockholder agreement), and such result may be achieved through alternative means, such as through a provision in the corporation's certificate of incorporation, the provision may be challenged as "voidable" (not "void"), and the instrument used to grant such rights is immaterial.
- The Supreme Court's decision means that many existing stockholder agreements thought subject to challenge as a result of the Chancery decision, will no longer be subject to challenge given the passage of time, or, if still subject to challenge, will only be "voidable" rather than "void." Of course, with the 2024 legislation passed by the General Assembly, agreements adopted after the passage of the legislation are not presumptively valid.
In the Court of Chancery's 2024 Moelis decision, Vice Chancellor Laster ruled that certain rights granted to a founding stockholder in a stockholders' agreement (the "2014 Moelis Agreement") were facially invalid, as they impermissibly constrained the board of directors' authority to manage the corporation. These rights included certain pre-approval requirements for certain corporate actions (the "Pre-Approval Provisions"), rights to control the composition of the board of directors (the "Board Composition Provisions"), and a right to control the composition of certain committees of the board of directors (the "Committee Composition Provision," and together with the Pre-Approval Provisions and the Board Composition Provisions, collectively, the "Moelis Agreement Provisions"). The Court held that the Pre-Approval Provisions violated Section 141(a) of the DGCL because they effectively constrained "in a very substantial way" the directors' ability to manage the corporation, and Section 141(a) of the DGCL provides that the business and affairs of a corporation must be managed by or under the direction of the board of directors, unless otherwise specified in the DGCL or the corporation's certificate of incorporation. The Court also held that three (3) of the six (6) Board Composition Provisions violated Section 141(a) of the DGCL and that the entire Committee Composition Provision violated Sections 141(a) and 141(c) of the DGCL. The Vice Chancellor also noted that the other three (3) Board Composition Provisions (specifically, a board designation right, a recommendation requirement, and a nomination requirement), while not facially invalid, could in the future be the subject of "as applied" challenges based on the factual circumstances.
In its ruling in Moelis, the Court nodded to the state legislature, concluding that "[m]arket participants must conform their conduct to legal requirements, not the other way around," and suggested that "the General Assembly could enact a provision stating what stockholder agreements can do." Ultimately, that is exactly what transpired later that year. Senate Bill 313 was signed into law, amending Section 122 of the DGCL by adding a new Section 122(18) to codify the ability of a Delaware corporation's board of directors to provide contractual rights to stockholders.
In its decision earlier this week, the Delaware Supreme Court held that the trial court erred in determining that the West Palm Beach Firefighters' Pension Fund was not required to sue within three (3) years of the parties' entry into the 2014 Moelis Agreement (the West Palm Beach Firefighters' Pension Fund had brought suit in 2023), as it concluded the arrangement did not amount to an ongoing violation of Delaware law as the Court of Chancery had concluded, and instead was subject to a three (3)-year statute of limitations.
Further, the Delaware Supreme Court drew a distinction when it found that the 2014 Moelis Agreement was voidable, not void, and vacated a $6 million attorneys' fees award. When the trial court found the Moelis Agreement Provisions were void, it exhausted the defense for laches or other equitable defenses, and went further to note that even if laches were a successful defense, the stockholder's delay in bringing suit within the statute of limitations was excused due to the ongoing violation. The Delaware Supreme Court reversed, holding the Moelis Agreement Provisions were voidable, but that it need not address their validity, because the claims were barred by the doctrine of laches. The Delaware Supreme Court explained, "[a]s we see it, the only wrongful conduct alleged in the complaint was the execution of the stockholders agreement in 2014. Despite the plaintiff's artful pleading, that is the gravamen of its complaint." The Delaware Supreme Court further explained that the Moelis Agreement Provisions were voidable because "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. Consequently, we conclude that the plaintiff has not carried its burden of establishing that the challenged provisions are void."
This precedent affects how corporations, including private equity firms, investment banks, asset managers, and other financial services companies incorporated in Delaware can structure their internal corporate governance. The decision, combined with the previous DGCL amendments in response to the initial Moelis decision by the Court of Chancery, establishes that dual-class stock and founder-friendly agreements are permissible under Delaware law, and if challenged, require suit to be brought promptly within the three (3)-year statute of limitations.
