KRYSTYN COLON, on behalf of herself and all other similarly situated stockholders of BUMBLE, INC., Plaintiffs, v. BUMBLE, INC., WHITNEY WOLFE HERD, and BLACKSTONE, INC., Defendants.
C.A. No. 2022-0824-JTL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
September 12, 2023
Date Submitted: June 13, 2023
LASTER, V.C.
OPINION GRANTING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
Raymond J. DiCamillo, Kevin M. Gallagher, Nicholas F. Mastria, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Jonathan K. Youngwood, Craig S. Waldman, SIMPSON THACHER & BARTLETT LLP, New York, New York; Jacques J. Lamothe, SIMPSON THACHER & BARTLETT LLP, Palo Alto, California; Kevin J. Orsini, Rory A. Leraris, CRAVATH, SWAINE & MOORE LLP, New York, New York; Dana M. Seshens, Kyra M. Kaufman, DAVIS POLK &
LASTER, V.C.
The plaintiff challenges two provisions in the certificate of incorporation of Bumble, Inc. (the “Company“). In simplified form, those provisions contemplate that each share will carry one vote, unless the share is owned by a “Principal Stockholder,” in which case it will carry ten votes. The Principal Stockholders are defined as the parties to a publicly disclosed stockholders agreement. Currently, there are only two Principal Stockholders: the Company‘s founder, Whitney Wolfe Herd, and its financial sponsor, Blackstone, Inc.1
The plaintiff calls this “identity-based voting” and says it violates
I. FACTUAL BACKGROUND
The pertinent facts are undisputed.2
A. The Company
The Company is a Delaware corporation that operates a suite of online applications that enable users to make connections by initiating romantic relationships, forming friendships, and expanding their professional networks. Herd founded the Company in 2014 and serves as its chief executive officer. Blackstone is the Company‘s largest outside investor.
In 2021, Herd and Blackstone took the Company public using a bespoke governance structure. They sought to create a single capital structure that combined the benefits of two typically separate structures: an Up-C structure and a dual class voting structure.
1. A Standard Up-C Structure
The “Up-C” in “Up-C structure” refers to “umbrella partnership and C corporation.” A standard Up-C structure enables insiders to gain the benefits associated with a public listing without giving up the benefits associated with pass-through tax treatment. To eat that cake and still have it requires two entities: an umbrella partnership and a C corporation. It also requires that the C corporation issue two classes of stock.
The umbrella partnership owns the operating business. It is usually a limited liability compаny, but it can be any type of entity that can qualify as a partnership for tax purposes. When the umbrella partnership is an alternative entity, its equity interest is usually divided into units.
The C corporation is a holding company. It owns some, but not all, of the LLC units. The insiders taking the company public own the rest.
The certificate of incorporation for the holding company authorizes two classes of stock. The Class A stock is straight common
The holding company becomes the publicly listed entity. In the initial public offering, the holding company issues Class A shares to the public. Insiders receive Class B shares. The number of units issued by the LLC is adjusted to match the number of outstanding shares.
The result is a hybrid entity in which public investors participate in governance and economically through their Class A shares. Insiders participate in governance through their Class B shares and economically through their LLC units. As holders of LLC units, insiders retain the benefit of pass-through tax treatment. The insiders also gain the benefits of liquidity because the Up-C transaction documents authorize an insider to convert one Class B share plus one LLC unit into one publicly traded Class A share. After conversion, the Class A share can be sold.
2. A Standard Dual Class Voting Structure
A standard dual class voting structure enables insiders to gain the benefits associated with a public listing without giving up the prerogatives and perquisites of control, even if their economic ownership falls below a majority. To eat that cake and still have it requires at least two classes of stock, each with different voting rights.
In a typical dual class voting structure, Class A shares might carry one vote per share, while Class B shares might carry ten votes per share. In the initial public offering, the corporation issues Class A shares to the public. The insiders receive Class B shares.
The additional voting power carried by the Class B shares enables the insiders to preserve their control. Even if the corporation issues Class A shares reflecting a majority of the corporation‘s economic value, those Class A shares will not carry a majority of the corporation‘s voting power. At a ten-to-one ratio for voting rights, the Class B stockholders can exercise hard control with only 10% economic ownership. They can exercise working control at still lower levels. If the corporation creates and issues an additional class of non-voting stock, then the insiders can perpetuate their control regardless of the level of economic ownership.
3. Two Structures In One
An Up-C structure and a dual class voting structure both use two classes of stock, but they use them for different purposes and in different ways. In an Up-C structure, the two classes have the same voting rights but different economic rights, enabling the insiders to gain the advantages of a public listing while keeping the benefits of pass-through tax treatment. In a dual class voting structure, the two classes have the same economic rights but different voting rights, enabling the insiders to gain the advantages of a public listing while keeping the prerogatives and perquisites of control. Through the Company‘s bespoke governance structure, the insiders sought to do both. That required some transactional engineering.
As in a standard Up-C structure, the Company owns an alternative entity that is treated as a partnership for tax purposes. For the Company, that entity is a limited partnership named Buzz Holdings L.P. Its limited partnership interest is divided into units. The Company owns some of the units, and Herd and Blackstone own the rest. As in a standard Up-C structure, the
As in a standard Up-C structure, the Company‘s charter authorizes both Class A common stock and Class B common stock. See DX 4 at 1. The Class A common stock carries both voting rights and economic rights. The Class B stock carries only voting rights without any economic rights. DX 4 at 2–4.
For the drafters tasked with combining two structures into one, the challenge lay in layering on differential voting rights. To achieve the functional equivalent of a dual class voting structure, the charter provides that each Class A share carries one vote, unless that share is held by a Principal Stockholder, in which case it carries ten votes. The operative language states:
Each holder of record of Class A Common Stock, as such, shall be entitled to one vote for each share of Class A Common Stock held of record by such holder on all matters on which stockholders generally or holders of Class A Common Stock as a separate class are entitled to vote (whether voting separately as a class or together with one or more classes of the Corporation‘s capital stock), provided however, thаt . . . each Principal Stockholder shall be entitled to ten votes for each share of Class A Common Stock held of record by such Principal Stockholder on all matters on which stockholders generally or holders of Class A Common Stock as a separate class are entitled to vote (whether voting separately as a class or together with one or more classes of the Corporation‘s capital stock) . . . .3
The charter defines “Principal Stockholder” by referencing a definition that appears in a separate, publicly disclosed stockholders agreement that the Company, Herd, and Blackstone executed. DX 5. That agreement defines Principal Stockholders as any party to the agreement other than the Company. Id. at 4, 7.
In a standard Up-C structure, insiders receive a number of Class B shares equal to the number of units they hold, creating a one-for-one correspondence between the Class B shares that carry voting rights and the units that carry economic rights. The Company did not take that course. It issued only two Class B shares, one to Herd and one to Blackstone. The charter provides that each share of Class B stock carries a number of votes equal to the number of Class A shares that the holder would receive if all of its units were converted into Class B shares at the Exchange Rate and with a Principal Stockholder receiving ten votes per Class A share. In stunningly complex language, the provision states:
Each holder of record of Class B Common Stock, as such, shall be entitled, without regard to the number of shares of Class B Common Stock (or fraction thereof) held by such holder, to a number of votes that is equal to the product of (x) the total number of Common Units . . . held by such holder as set forth in the books and records of Buzz Holdings L.P. multiplied by (y) the Exchange
Rate (as defined in the Exchange Agreement) (the product of (x) and (y), the “Entitled Votes“), on all matters on which stockholders generally or holders of Class B Common Stock as a separate class are entitled to vote (whether voting separately as a class or together with one or more classes of the Corporation‘s capital stock), provided, however, that until the Sunset Date, each Principal Stockholder shall be entitled, with respect to the shares of Class B Common Stock (or fraction thereof) held by such Principal Stockholder (and without regard to the number of shares of Class B Common Stock (or fraction thereof) held by such holder), to a number of votes that is equal to the product of the number of Entitled Votes such Principal Stockholder would otherwise be entitled with respect thereto pursuant to the preceding provisions of this sentence multiplied by ten (10) on all matters on which stockholders generally or holders of Class B Common Stock as a separate class are entitled to vote (whether voting separately as a class or together with one or more classes of the Corporation‘s capital stock). . . .
DX 4 at 3 (the “Class B Voting Provision“).
Herd owns 25,000,817 units, so assuming she could convert her units into Class A shares on a one-for-one basis, her Class B share carries 250,008,170 votes. Blackstone owns 34,356,242 units, so assuming it could convert its units into Class A shares on a one-for-one basis, its Class B share carries 343,562,420 votes.
The Class A and Class B shares vote together as a single class on all matters submitted to a vote of the stockholders generally. Based on the Company‘s calculations in its most recent proxy statement, the Class A Voting Provision and the Class B Voting Provision (together, the “Challenged Provisions“) enable Herd and Blackstone to exercise 92.2% of the Company‘s outstanding voting power. DX 2 at 47.
In the Up-C IPO, the Company issued Class A shares to public investors, raising more than $2 billion. The Class A common stock continues to trade publicly on the NASDAQ under the ticker symbol BMBL.
B. This Litigation
On September 16, 2022, the plaintiff filed this lawsuit on behalf of a class of similarly situated Class A stockholders. The complaint asserts that the Challenged Provisions conflict with
II. LEGAL ANALYSIS
Under
A. The Statutory Analysis
A share of stock is a form of intangible property that reifies a bundle of rights that its holder can exercise. See Urdan v. WR Cap. Partners, LLC, 244 A.3d 668, 679 (Del. 2020). Under the DGCL, the rights appurtenant to a share of stock must be set forth in the certificate of incorporation. By statute, however, the DGCL is a part of every certificate of incorporation.
Because every charter incorporates the provisions of the DGCL, a share of stock possesses the default rights unless the charter expressly modifies them. A charter can also make a default right express. A charter can enhance a default right (make it stronger) and turn it into a superior right. A charter can limit or qualify a default right (make it weaker) and turn it into an inferior right. Some default rights, like the right to vote, can be eliminated entirely.4 Some default rights are so significant that the chаrter cannot eliminate them. The right to obtain books and records under
Because superior rights and inferior rights depart from default rights, they can be thought of as “special attributes.” A charter can also grant new rights to a class of shares
that are not based on default rights, or a charter can impose new qualifications or limitations on a class of shares that are not tied to default rights. Those are also special attributes.6
The DGCL requires that any special attributes appear in the certificate of incorporation.
If the corporation is to be authorized to issue only 1 class of stock, the total number of shares of stock which the corporation shall have authority to issue and the par value of each of such shares, or a statement that all such shares are to be without par value. If the corporation is to be authorized to issue more than 1 class of stock, the certificate of incorporation shall set forth the total number of shares of all classes of stock which the corporation shall have authority to issue and the number of shares of each class and shall specify each class the shares of which are to be without par value and each class the shares of which are to have par value and the par value of the shares of each such class.
If the corporation will issue stock that has special attributes, then
The certificate of incorporation shall also set forth a statement of the designations and the powers, preferences and rights, and the qualifications, limitatiоns or restrictions thereof, which are permitted by
§ 151 of this title in respect of any class or classes of stock or any series of any class of stock of the corporation and the fixing of which by the certificate of incorporation is desired.7
Id. The reference to “powers, preferences and rights” encompasses special attributes that confer superior rights. The reference to “qualifications, limitations or restrictions” encompasses special attributes that impose inferior rights. The “designations” refer collectively to any express rights, whether those are special attributes or default rights that are made express.8
The other alternative is for the corporation to authorize the board of directors to determine what special attributes the
The certificate of incorporation shall also set forth . . . an express grant of such authority as it may then be desired to grant to the board of directors to fix by resolution or resolutions any thereof [i.e., powers, preferences and rights, and the qualifications, limitations or restrictions] that may be desired but which shall not be fixed by the certificate of incorporation.
Every corporation may issue 1 or more classes of stock or 1 or more series of stock within any class thereof, any or all of which classes may be of stock with par value or stock without par value and which classes or series may have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the certificate of incorporation or of any amendment thereto, or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by the provisions of its certificate of incorporation.
attributes the charter sets forth. The special attributes can be superior voting rights, preferences, or other special rights. Or the special attributes can be inferior voting rights, no voting rights, or other qualifications, limitations, or restrictions.
Under
Unless otherwise provided in the certificate of incorporation and subject to
§ 213 of this title, each stockholder shall be entitled to 1 vote for each share of capital stock held by such stockholder. If the certificate of incorporation provides for more or less than 1 vote for any share, on any matter, every reference in this chapter to a majority or other proportion of stock, voting stock or shares shall refer to such majority or otherproportion of the votes of such stock, voting stock or shares.
carries (“[i]f the certificate of incorporation provides for more or less thаn 1 vote for any share . . . every reference in this chapter to a majority or other proportion of stock, voting stock or shares shall refer to such majority or other proportion of the votes of such stock, voting stock or shares“). For purposes of
Any of the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of any such class or series of stock may be made dependent upon facts ascertainable outside the certificate of incorporation or of any amendment thereto, or outside the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by its certificate of incorporation, provided that the manner in which such facts shall operate upon the voting powers, designations, preferences, rights and qualifications, limitations or restrictions of such class or series of stock is clearly and expressly set forth in the certificate of incorporation or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors.
The Delaware Supreme Court and this court have approved charter provisions that allocate voting power using a formula or procedure. In Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977), the Delaware Supreme Court upheld a scaled voting structure in which the number of votes appurtenant to a share varied depending upon the total number of shares that the owner held. The corporation‘s charter provided that each stockholder could cast one vote per share for its first 50 shares, then one vote for every 20 shares over the first 50, but in no event could the stockholder cast more votes than 25% of the total number of issued and outstanding shares. Id. at 121 n.2. Framed using the language of this decision, the certificate of incorporation departed from the default right of one vote per share to provide instead for inferior voting rights
In Williams v. Geier, 1987 WL 11285 (Del. Ch. May 20, 1987), this court dismissed a challenge to a tenured voting mechanism, holding that it complied with the DGCL. The charter provided that a share would carry ten votes if (i) the stockholder had owned it before the recapitalization that introduced the superior voting right or (ii) the stockholder acquired the share after the recapitalization and held it continuously for three years. Otherwise, a share carried one vote. Framed using the language of this decision, the certificate of incorporation departed from the default right of one vote per share by providing instead for
a superior voting right based on a fact asсertainable outside of the certificate, namely when the stockholder acquired its shares.
Finally, in Sagusa v. Magellan Petroleum Corp., 1993 WL 512487 (Del. Ch. Dec. 1, 1993), aff‘d, 650 A.2d 1306 (Del. 1994) (TABLE), this court dismissed a challenge to a per capita voting provision that gave each stockholder a single vote, regardless of how many shares the stockholder held, and the Delaware Supreme Court upheld the dismissal. Framed using the language of this decision, the certificate of incorporation used a mechanic conceptually similar to Providence. It departed from the default right of one vote per share by providing instead for an inferior voting right based on a fact ascertainable outside of the certificate, namely the number of shares the stockholder owned.
Under these authorities, the Challenged Provisions comply with DGCL. As required by
Under Providence, Williams, and Sagusa, having the level of voting power turn on the identity of the owner is permissible. To apply the formulas in Providence, Williams, and Sagusa, the corporation had to determine which stockholder owned the share. True, the processes also had to take into account another attribute. In Providence and Sagusa, it was how many other shares the owner held. In Williams, it was when the owner acquired the share. But the starting point in each mechanism was the identity of the owner. That is the same mechanism that the Challenged Provisions use.
The Challenged Provisions comply with the DGCL.
B. The Section 212(a) Argument
Contrary to the preceding analysis, the plaintiff argues that the Challenged Provisions violate
Before discussing the Providence decision in greater detail, it is helpful to start with the Court of Chancery decision that the Delaware Supreme Court reversed. Baker v. Providence & Worcester Co., 364 A.2d 838 (Del. Ch. 1976), rev‘d, 378 A.2d 121 (Del. 1977). Recall that the scaled voting provision at issue in that case called for the number of votes per share that a stockholder could exercise to vary depending upon the total number of shares that the stockholder owned. A stockholder could cast one vote per share for its
first 50 shares, then one vote for every 20 shares over the first 50, but in no event could the stockholder cast more votes than 25% of the total number of issued and outstanding shares.9
In Baker, the Court of Chancery held that that the scaled voting provision violated
Turning to the language of the statute itself, without question, a reading of § 151(a) leaves one with the firm conviction that ‘classes’ may be invested with differing voting rights but that particular shareholders within one class of stock may not. The statute speaks only in terms of ‘classes’ and unequivocally and repeatedly refers to differentiating only on the grounds of class . . . .Thus, I am compelled to conclude, after a consideration of both the evolution of § 151(a) and the language of its provisions, that the divergent voting rights in issue here arе not permissible since they are not on a class basis.
Id. at 847. The Baker court thus rejected the idea that a charter provision could use a formula or procedure to specify the number of votes that each share of a class would carry in which the inputs could result in different shares of the same class carrying different numbers of votes.
Today,
In 1977, however,
Every corporation may issue 1 or more classes of stock or 1 or morе series of stock within any class thereof, any or all of which classes may be of stock with par value or stock without par value and which classes or series may
have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the certificate of incorporation or of any amendment thereto, or in the resolution or resolutions providing for the issue of such stock adopted by the board of directors pursuant to authority expressly vested in it by the provisions of its certificate of incorporation. The power to increase or decrease or otherwise adjust the capital stock as provided in this chapter shall apply to all or any such classes of stock.
That is not what happened. In what seems like an effort to outflank the Court of Chancery‘s ruling, the corporation argued that Section 151(a) did not speak to the validity or invalidity of the scaled voting right. According to the corporation, that left the field open and enabled the corporation to rely on Section 102(b)(1), which authorizes the charter to contain,
any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, or the governing body, members, or any class or group of members of a nonstock corporation; if such provisions are not contrary to the laws of this State.
The Delaware Supreme Court initially followed the corporation‘s lead by stating that Section 151(a) did not answer the question presented. Providence, 378 A.2d at 122 (“We cannot agree that the answer to the problem presented is manifest and explicit on the face of § 151(a). The language of § 151(a), standing alone, neither permits nor prohibits the type of voting restrictions here challenged, either explicitly or by necessary implication.“). But the high court did not look next to Section
Relying primarily on Section 212(a) was a strange move, because that section does not authorize or restrict anything. Section 212(a) creates a default right of one vote per share, and it provides that if a charter departs from the default right, then any voting calculations required by the DGCL—such as the amount of voting power that would constitute a majority of the voting power outstanding—must use the voting power as determined by the charter.
Having cited Section 212(a) as the provision to which “one must look primarily,” the Providence decision offered the following observation:
In the final analysis, these restrictions are limitations upon the voting rights of the stockholder, not variations in the voting powers of the stock per se. The voting power of the stock in the hands of a large stockholder is not differentiated from all others in its class; it is the personal right of the stockholder to exercise that power that is altered by the size of his holding. In the hands of smaller stockholders, unrestrained in the exercise of their voting rights, the same stock would have voting power equal to all others in the class . . . .
We are of the opinion that, in the absence of any express provision in § 151(a), or elsewhere in the Law, prohibiting the [company‘s] charter restrictions on voting, the provisions of § 212(a) control in determining the validity of those restrictions. Under § 212(a), voting rights of stockholders may be varied from the “one share-one vote” standard by the certificate of incorporation, subject only “to the provisions of § 213” of the Corporation Law. It is significant, we think, that § 212(a) was not made expressly subject to the provisions of § 151(a) in a similar manner. The absence in § 212(a) of such similar cross reference to § 151(a) is, in our judgment, indicative of the absence of any legislative intent to prohibit, by § 151(a), charter restrictions upon stockholders’ voting rights such as are under challenge here.
Id. (footnote omitted).
That language is difficult to parse. One confusing aspect is the framing of the scaled voting provision as imposing “voting restrictions.” The Providence court appears to have viewed the charter provision as a restriction that prevented an owner from exercising the full voting power that the shares otherwise carried, rather than as a provision that established the voting power carried by shares. Under this reading, each share continued to carry one vote per share, with the scaled voting provision preventing the owner from exercising some of the votes that the share carried. That understanding creates knock-on problems that the Providence decision did not acknowledge. For example, if the scaled voting provision operated in that fashion, then the denominator for a vote of the outstanding stock would be calculated based on one vote per share, but the votes in the numerator would be cut back by ownership level, making it difficult to achieve the necessary majority. That does not seem intended. The provision instead appears to establish the voting power appurtenant to the shares, at which point Section 212(a) generates an adjusted lower number for both the numerator and the denominator.
of one vote per share applies “[u]nless otherwise provided in the certificate of incorporation.” Id. Section 151(a) is one of the DGCL provisions which determines the extent to which a corporation can “otherwise provide[]” in its certificate of incorporation. Id. The Providence court correctly held that nothing in Section 151(a) suggests an intent to prohibit a scaled voting structure, but that is a function of Section 151(a), not the absence of a reference to Section 151(a) in Section 212(a). Under the Providence court‘s reasoning, Section 212(a) is not subject to Section 151(a), which cuts Section 151(a) out of the analysis for purposes of voting rights. No matter what Section 151(a) said, a corporation would be free to rely on Section 212(a) to “otherwise provide[] in the certificate of incorporation.” Id. That is not a coherent reading of the two sections.
The biggest puzzle is the distinction that the Providence court drew between permissible “limitations upon the voting rights of the stockholder” and impermissible “variations in the voting powers of the stock per se.” 378 A.2d at 123. Elaborating on this distinction, the high court asserted that the scaled voting mechanism was permissible because “[t]he voting power of the stock in the hands of a large stockholder is not differentiated from all others in its class,” and “[i]n the hands of smaller stockholders, unrestrained in the exercise of their voting rights, the same stock would have voting power equal to all others in the class.” Id. Rather than any “variations of the voting powers of the stock per se,” the scaled voting provision was acceptable because it restriсted “the personal right of the stockholder to exercise that [voting] power” based on “the size of his holding.” Id.
The distinction between “voting rights of the stockholder” and “voting powers of the stock” is problematic when the pertinent provision appears in the charter. Under Section 102(a)(4) and 151(a), such a provision determines the voting power carried by the shares. What the provision generates
A related problem is that because the distinction is a false one, it is unstable. The Providence charter provision framed the scaled voting mechanism in terms of the number of shares that the stockholder could vote. The Providence opinion did not reproduce the provision, but the longer Baker opinion did:
NINTH: Meetings of the stockholders may be held at such city, town or village within or without the State of Delaware as may be named in the By Laws. The annual meeting shall be held at such time as required by the By Laws; and at all meetings stockholders, holding or representing by proxy not less than twenty-five hundred shares, shall be necessary to constitute a quorum of the corporation, and each stockholder shall be entitled to one vote for every share of the common stock of said company owned by him not exceeding fifty shares, and one vote for every twenty shares more than fifty, owned by him; provided, that no stockholder shall be entitled to vote upon more than one fourth part of the whole number of shares issued and outstanding of the common stock of said company, unless as proxy for other members.
Baker, 364 A.2d at 840 (emphasis added). Perhaps the provision‘s use of the phrase “each stockholder shall be entitled to vote” resulted in the Delaware Supreme Court‘s reference to “the voting rights of the stockholder.” But Section 212(a) uses the same framing interchangeably with the voting power of each share, so that language should not have mattered.
Demonstrating that the distinction lacks substance, the same scaled voting mechanism can be framed in terms of the number of votes carried by the shares. The operative language might state:
Each share shall carry one vote per share; provided, however, that if the owner of a share owns more than 50 shares, then that share shall carry a fraction of a vote equal to the sum of (i) the quotient of (a) 50 divided the number of shares held by the owner plus (ii) the quotient of (a) the number of shares held by the owner minus fifty divided by (ii) twenty; and provided, however, that if the owner of the share owns more than 25% of the outstanding stock, then that share shall carry a fraction of a vote equal to the quotient of (i) the number of outstanding shares times 25% divided by (ii) the number of shares held by the owner.
Yet another problem with the Providence distinction is that it conflicts with a strain of Delaware law that makes clear that the rights appurtenant to a share, whether they are default rights or special attributes, are property rights carried by the share. The holder can exercise those rights qua holder, but they are not personal rights of the holder. Urdan, 244 A.3d at 677. As such, both the rights and any claim that they were violated transfers to the new owner when the share is sold. See id.;
Despite these problems, the plaintiff embraces the distinction that the Providence court drew and argues that it renders the Challenged Provisions invalid. But comparing the language of the scaled voting right in Providence with the language of the Challenged Provisions demonstrates that there is no meaningful linguistic distinction between the provisions that such that one would be a permissible “limitation on the voting rights of the stockholder” and the other an impermissible variation “in the voting rights of the stock per se.” The scaled voting right in Providence stated that “each stockholder shall be entitled to” a particular number of votes. The Class A Voting Right states that “[e]ach holder of record of Class A Common Stock, as such, shall be entitled to” a particular number of votes. The Class B Voting Right states that “[e]ach holder of record of Class B Common Stock, as such, shall be entitled, without regard to the number of shares of Class B Common Stock (or fraction thereof) held by such holder,” to a particular number of votes. If the Providence provision permissibly addressed the voting rights of the stockholders as opposed to the shares, then so do the Challenged Provisions. The distinction is a false one, but to the extent it exists, the Challenged Provisions fall on the valid side of the line.
Another potential distinction between the scaled voting right and the Challenged Provisions might be that the former reduced voting power below the one-vote-per-share default right while the latter increased voting power beyond that default right. The underlying legal question
While it is possible fit the Challenged Provisions into the Providence framework and uphold them on that basis, the better path is to acknowledge that for purposes of a charter provision that establishes the voting power appurtenant to shares, there is no meaningful distinction between “the voting rights of the stockholder” and “the voting powers of the stock.” The Providence decisiоn reached the right result. We should not dissect its entrails to divine a prediction for future cases that does not make any sense.
The Challenged Provisions do not violate Section 212(a).
C. The Section 151(a) Argument
The plaintiff‘s other argument contends that the Challenged Provisions violate Section 151(a) of the DGCL based on an argument that the Baker court accepted in the trial-level decision but that the Delaware Supreme Court reversed in Providence. Under the most extreme version of that theory, embraced in Baker, a class of stock must assign the same voting rights to all shares. A class of stock can use a formula, but the formula must generate the same result for all shares. Under a less extreme version of that theory, a charter can deploy a formula that can generate different results for different shares, but it must be a formula that gives any holder an opportunity to gain the benefits of the superior voting rights. The provision cannot create a closed set of owners entitled to the superior voting rights. Neither version presents a valid challenge under Section 151(a).
The plaintiff‘s starting point is correct: A charter must provide for rights, powers, preferences, limitations, and qualifications that are identical across a class of stock. That requirement flows from Section 151(a) itself, which speaks of creating “1 or more classes of stock,” and then authorizes the charter to specify the attributes of the class of shares. Put differently, the words that frame the attributes of the class, whether by incorporating default rights from the DGCL, making those
The plaintiff then argues that if a formula does not create the same outcome for each share in the class, then the provision creates de facto subclasses in violation of Section 151(a). That does not follow, and Delaware decisions have rejected that argument. The Delaware Supreme Court‘s decision in Providence, plus this court‘s decisions in Williams and Sagusa, each upheld formulas that applied identically across all shares but generated different outcomes for particular shares.16 The same could be true for any other special attribute. For example, a charter provision might state that a series of preferred stock would earn cumulative dividends of 15% per share on the amount paid for the share starting one year after the date of issuance. If the corporation issued all of the shares of preferred stock on the same date and for the same price, then the formula would generate the same liquidation preference for each share. But if the сorporation issued shares over time and at different prices, then the formula would generate different liquidation preferences. There is nothing wrong with that; it is an efficient way to raise capital without having to create a new class of shares each time the issuance price chances. Or a provision in a certificate of designations might state that if an acquirer purchases more than 15% of the corporation‘s common stock, then each share would carry the right to convert into shares worth $100 in return for a payment to the corporation of $50, but that shares held by the acquirer would not carry that right. There is nothing wrong with that either; it makes poison pills work.
For purposes of its legal validity, a voting right that varies based on the identity of the holder is no different.
That leads to the plaintiff‘s alternative argument, which is that the formula must give any holder an equal opportunity to gain the superior right. The plaintiff says that the tenured voting provision in Williams was acceptable because any stockholder could own their shares for three years, thereby gaining ten votes per share. The scaled voting provision in Providence was acceptable because any stockholder who owns a particular number of shares is affected by the scale in the sаme way. And the per capita voting structure in Sagusa worked because it applied across the board.
What is not permissible, according to the plaintiff, is to create a closed set of beneficiaries. A charter provision thus could not say that each share of common stock carries one vote per share, unless held by Amy, Bob, and Charlotte, in which case each share carries ten votes per share. Under the plaintiff‘s logic, that structure creates two closed sets of owners. One set is Amy, Bob, and Charlotte; the other set is everyone else. According to the plaintiff, that is not a single class of stock with voting rights that vary based on a fact ascertainable outside the certificate of incorporation, but rather two classes of
The plaintiff‘s framing intentionally appeals to American cultural ideals like equality of opportunity and resistance to entrenched hierarchies. The plaintiff views identity-based voting as an entrenched hierarchy. The plaintiff wants all stockholders to have equality of opportunity.
In many areas of the law, those noble sentiments could carry weight. They cannot overcome the plain language of the DGCL. Nothing in Section 151(a) prohibits a provision that creates a closed set of holders who can exercise certain rights. As a matter of statute, the Amy, Bob, and Charlotte provision would be valid. The fact that the Challenged Provisions add flexibility by linking the identity of the Principal Stockholders to the parties to the stockholders agreement may frustrate the plaintiff, but it falls within the authority to make special attributes dependent on facts ascertainable outside of the certificate of incorporation. In fact, because an ascertainable fact can be “a determination or action by any person or body, including the corporation,” the voting power carried by shares could be made dependent on such a determination.
The Challenged Provisions do not violate Section 151(a).
III. CONCLUSION
The Challenged Provisions comрly with Delaware law. Corporate action under Delaware law is always twice tested, once for legal compliance and again in equity.17 The plaintiff in this case mounted the first type of challenge and tested the legal validity of the Challenged Provisions. This decision provides no opportunity to express any view on situations in which a governance structure that used identity-based voting could be inequitable.
The defendants’ motion for summary judgment is granted. The plaintiff‘s motion for summary judgment is denied. The parties will confer regarding any steps that are necessary to bring this matter to a close. If there are none, then the parties will submit a form of final order. Otherwise, the parties will submit a joint letter addressing those matters and proposing a schedule for resolving them.