321 A.3d 516
Del. Ch.2024Background
- N-able, Inc. was spun off from SolarWinds; Lead Investors (Silver Lake and Thoma Bravo) controlled a large post‑spinoff stake (alleged ≈62%).
- In connection with the spinoff the Company adopted an amended Certificate of Incorporation, Bylaws, and a Stockholders Agreement (SA) granting Lead Investors broad governance rights instead of placing them in the charter/bylaws.
- Key SA terms: extensive Pre‑Approval Requirements (Lead Investor consent for mergers, significant asset deals, large financings, CEO hire/fire, board size changes, liquidation, etc.); Board Composition covenants (nomination rights, recommendation/efforts obligations, vacancy fill rules, nomination veto); Committee Composition provisions (Lead Investor seats on committees); and a Removal Provision allowing investor removal of directors without cause while they hold ≥30% voting power.
- Plaintiff (Seavitt) brought a facial challenge seeking declarations that many SA provisions are invalid under DGCL §141(a), §141(c)(2), and §141(k); parties filed cross‑motions for summary judgment on undisputed facts.
- Court applied the Moelis/Abercrombie framework: first ask whether the agreement governs internal corporate affairs; if so, test whether it substantially removes directors’ managerial judgment. The court found many SA provisions are part of the corporation’s governance arrangement and are facially invalid.
- The Charter contained three clauses stating they are “subject to” the SA; the court rejected incorporation‑by‑reference of private contracts into a public charter. The opinion also notes the 2024 Market Practice Amendments (new statutory authorization for governance agreements) but explains this case falls into a statutory "donut‑hole" and is decided under pre‑amendment law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Validity of Pre‑Approval Requirements under §141(a) | Pre‑approval suite unlawfully divests directors of their managerial authority and is facially invalid | These are consensual stockholder "consent rights" or contractual protections that don't prevent directors from discharging fiduciary duties | Court: Individual and collective Pre‑Approval Requirements are part of internal governance and are facially invalid under §141(a) (Abercrombie/Moelis analysis) |
| Can charter clauses saying provisions are “subject to” the SA incorporate the SA into the charter by reference? | "Subject to" language incorporates the SA into the charter, converting SA limits into charter provisions that survive §141(a) challenge | The SA should be treated as incorporated by reference and thus elevated to charter status | Court: Rejected incorporation‑by‑reference. DGCL allows charter dependence on "facts ascertainable," not incorporation of private substantive provisions; public‑filing, amendment and separation‑of‑powers concerns foreclose such incorporation |
| Board Composition Covenants (Nomination; Recommendation; Efforts; Vacancy; Nomination Veto) | These covenants unlawfully constrain board discretion (e.g., force recommendation, control vacancies, veto nominating committee) | Rights are contractual protections of investors (nomination rights, reasonable efforts, inclusion on proxy) and don’t irrevocably bind directors | Court: Recommendation, Vacancy, Nomination Veto, Board Size Covenant and parts of Efforts clause (forcing equal level of support) are facially invalid; Nomination Covenant (right to have nominees included on slate) and the ministerial part of Efforts Covenant survive facial challenge |
| Committee Composition provisions under §141(c)(2) | Guaranteeing investor designees seats on committees usurps board’s statutory committee‑composition power | Provides representation without preventing board from performing duties; is a contractual right of majority stockholders | Court: Committee Composition provisions are part of governance and are facially invalid under §141(a) and §141(c)(2) |
| Removal Provision vs §141(k) | Provision improperly allows investors holding ≥30% voting power to remove directors without cause, contrary to §141(k) | Provision merely reflects shareholders’ rights when they hold majority; or is being misread by plaintiff | Court: Facial invalidity. Provision conflicts with §141(k) because it authorizes removal without cause by less than a majority and thus is contrary to Delaware law |
| Effect of 2024 Market Practice Amendments (retroactivity) | Plaintiff proceeded under pre‑amendment law because suit was pending before the statutory effective date | Defendant points to the new statute authorizing governance agreements | Court: Notes the statute authorizes governance agreements prospectively and retroactively but creates a carve‑out for pending cases; this case falls in the carve‑out, so pre‑amendment law applies; court critiques the statutory "donut‑hole." |
Key Cases Cited
- W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809 (Del. Ch. 2024) (articulates the governance‑arrangement threshold inquiry and applies Abercrombie test to stockholder agreements)
- Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956) (test for when shareholder agreements improperly limit directors’ discretion)
- Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998) (reaffirming board‑centric management under §141(a))
- Grimes v. Donald, 673 A.2d 1207 (Del. 1996) (boards may bind future action by contract but contracts that remove directors’ judgment can be invalid)
- CA, Inc. v. AFSCME Empls. Pension Plan, 953 A.2d 227 (Del. 2008) (bylaw restricting board discretion can violate §141(a))
- Sample v. Morgan, 914 A.2d 657 (Del. Ch. 2007) (distinguishes commercial transaction protections from governance restraints; solitary example tolerating some contractual limits)
- Chapin v. Benwood Found., Inc., 402 A.2d 1205 (Del. Ch. 1979) (directors cannot precommit to a succession that removes their future judgment)
- In re Bicoastal Corp., 600 A.2d 343 (Del. 1991) (interpretation of charter provisions that depend on ascertainable facts rather than incorporation of external substantive provisions)
- Colon v. Bumble, Inc., 305 A.3d 352 (Del. Ch. 2023) (permitted charter reliance on an ascertainable factual determination; distinguished from impermissible incorporation of contractual provisions)