WEST PALM BEACH FIREFIGHTERS’ PENSION FUND, on behalf of itself and all other similarly-situated Class A stockholders of MOELIS & COMPANY, Plaintiff, v. MOELIS & COMPANY, Defendant.
C.A. No. 2023-0309-JTL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
February 12, 2024
LASTER, V.C.
Date Submitted: October 18, 2023
OPINION ADDRESSING DEFENDANT‘S MOTION FOR SUMMARY JUDGMENT ON THE BASIS OF LACHES AND RIPENESS
John P. DiTomo, Miranda N. Gilbert, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; William Savitt, Anitha Reddy, Getzel Berger, Emma S. Stein, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Counsel for Defendant.
LASTER, V.C.
Section 141(a) of the Delaware General Corporation Law (the “DGCL“) famously states that “the business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.”1 Governance arrangements that do not appear in the charter and deprive boards of a significant portion of their authority contravene Section 141(a). An extensive body of Delaware precedent has considered Section 141(a) challenges to governance arrangements. Over a dozen decisions have invalidated governance arrangements that violated Section 141(a).
The plaintiff challenges a stockholders agreement between Moelis & Company (the “Company“) and three entities controlled by Ken Moelis, the Company‘s CEO, Chairman, and eponymous founder. In 2014, Moelis caused the Company to issue shares to the public. Shortly before its shares began to trade, Moelis and the Company entered into a stockholders agreement containing an array of provisions that grant Moelis expansive rights (the “Challenged Provisions“).
The plaintiff contends that the Challenged Provisions violate Section 141(a).2 Whether that is so raises significant doctrinal issues, but neither those issues nor the details of the Challenged Provisions are relevant to this decision. This decision only addresses the Company‘s arguments that the plaintiff‘s claims are non-justiciable because the plaintiff both sued too late and too early.
When ruling on a justiciability issue, a court assumes that the underlying claim is valid. Justiciability issues concern whether a particular court should hear the particular claim brought by a particular plaintiff at a particular time. A defendant might argue that a particular plaintiff is not the right person to bring the claim (standing), that the court lacks or should not exercise its power to hear the claim (jurisdiction), that the claim was filed at
The Company says the plaintiff waited too long because more than three years have passed since its IPO, when the stockholders agreement was first disclosed. Plus, more than three years have passed since the plaintiff acquired his shares, shortly after the IPO.
Neither argument prohibits a facial challenge to the legality of the Challenged Provisions. If the plaintiff is correct, and the court must assume so when conducting a timeliness analysis, then the Challenged Provisions are void. An equitable defense like laches cannot validate a void act, so the argument that the plaintiff sued too late fails because of the nature of the claim.
Assuming laches could apply, the plaintiff did not wait too long to sue. The illegality of the Challenged Provisions is not a discrete event that occurred and become complete when Moelis and the Company executed the stockholders agreement in 2014. The illegality began then and has persisted ever since. The wrongful conduct is ongoing. At a minimum, the plaintiff can attack the Challenged Provisions’ current illegality.
As part of its laches argument, the Company stresses that the stockholders agreement was disclosed in connection with the IPO, seemingly arguing for some species of acquiescence. Acquiescence cannot validate a void act either. Nor does a stockholder concede the legality of everything that a company has disclosed through the act of buying stock. A stockholder can rely on the law for protection against illegality.
The Company next argues that the plaintiff sued too early. According to the Company, the plaintiff must wait for Moelis or the directors to breach their fiduciary duties, then assert an equitable challenge. But corporate action is twice-tested, once at law and again in equity. The two challenges are separate and distinct, so the potential availability of one claim does not defeat another. The plaintiff could wait and bring an equitable, as-applied challenge in the future based on how Moelis wields the Challenged Provisions in a particular setting and how the Board responds. But the plaintiff can also bring a facial challenge to the legality of the Challenged Provisions now. The Company might want the plaintiff to wait, but the plaintiff is the master of the complaint. The facial challenge is ripe.
The Company‘s motion for summary judgment on the basis of laches and ripeness is denied. At an appropriate time, judgment will be entered in favor of the plaintiff on those defenses.3
I. FACTUAL BACKGROUND
The pertinent facts are undisputed.4 In 2007, Moelis formed a new boutique investment bank. He has run the business ever since as CEO and Chairman. The bank enjoyed immediate success and expanded
In 2014, Moelis decided to raise capital by selling shares to the public. He created the Company to effectuate the IPO.
The IPO prospectus disclosed that Moelis and the Company would enter into a stockholders agreement. One day before the Company‘s shares began trading, the Company and three of Moelis‘s controlled affiliates executed it (the “Stockholders Agreement“). That agreement contains the Challenged Provisions.
The plaintiff purchased shares of the Company‘s Class A common stock on November 19, 2014. He filed this action on March 13, 2023. The plaintiff contends that the Challenged Provisions are invalid and unenforceable. The Company answered the complaint, and the parties filed cross-motions for summary judgment.
II. LEGAL ANALYSIS
Under Court of Chancery Rule 56, summary judgment “shall be rendered forthwith” if “there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law.” The facts are undisputed.
Counter-intuitive though it might seem, the Company argues simultaneously that the plaintiff both sued too late and too early. The Company argues that any facial attack on the Challenged Provisions comes too late. The Company argues that any as-applied attack comes too early. Neither argument warrants summary judgment in the Company‘s favor.
A. Laches
“When asserting a timeliness defense, a defendant argues that even if the claims are viable, the plaintiff cannot assert them, so the court effectively assumes the validity of the claims, then applies timeliness principles.”5 By contending that the plaintiff‘s claim is untimely, the Company maintains that even if the Challenged Provisions facially violate Section 141, the plaintiff waited too long to sue.
There are two conceptual frameworks for analyzing timeliness: the statute of limitations and the doctrine of laches.6 Depending on the nature of the claim and the relief requested, a court of equity may apply either doctrine.
When a plaintiff has advanced a legal claim and seeks relief that would be available from a court at law, then the court will apply the statute of limitations in the same manner as a law court.7 If a plaintiff has advanced an equitable claim or sought equitable relief, then the court will apply the doctrine of laches.8 “Laches is an affirmative defense that the plaintiff unreasonably delayed in bringing suit after learning of an infringement of his or her rights.”9 It consists of two elements: “(i) unreasonable delay in bringing a claim by a plaintiff with knowledge thereof, and (ii) resulting prejudice to the defendant.”10
Here, the request to invalidate the Challenged Provisions seeks equitable relief. That makes laches the pertinent doctrine.
There are three reasons why laches does not apply. The first is that an equitable
1. Equitable Defenses and Void Acts
If the Challenged Provisions violate Section 141(a), then they are void.11 Equitable defenses, including laches, cannot validate void acts.12 When a defendant invokes laches to defeat a claim of statutory invalidity, a trial court can properly strike it.13 Given the theory of the complaint, laches is not an available defense.
2. Unreasonable Delay Since The Claim Accrued
Assuming laches could apply, the plaintiff must have delayed unreasonably before bringing the claim. Determining whether a plaintiff delayed unreasonably requires determining when the claim accrued. A plaintiff cannot sue before a claim accrues, so the period of unreasonable delay cannot begin before that point.14 Delaware decisions use three methods to determine when a claim accrues: the discrete act method, the continuing wrong method, and the separate accrual method.15
The discrete act method applies when a claim arises at a distinct point in time and is effectively complete as of that date, even if it has ongoing effects or implications. To apply the doctrine of laches using the discrete act method, “the court starts from when [the act occurred], counts forward to determine when the limitations period would end, and checks whether the plaintiff filed suit within the limitations period.”16 The statute of limitations can be extended by tolling doctrines, “but once a plaintiff is on inquiry notice, tolling stops, and the plaintiff must sue within a reasonable time or the claim will be barred.”17
The continuing wrong method applies when the conduct giving rise to the claim persists over time. The wrongful act “is not complete, and the limitations period does not begin to run, until the continuing wrong ceases.”18 The doctrine of laches rarely applies, because “[i]f any portion of
Like the continuing wrong method, the separate accrual method applies when the conduct giving rise to the claim continues for a period of time. But under the separate accrual method, the conduct involves a series of interlinked, recurring acts, like photons in a beam of light or pearls on a string. Under the separate accrual method, laches can limit how far back the plaintiff can go to challenge wrongful conduct. To apply the doctrine, “the court determines when the plaintiff filed suit, looks back from that point over the length of the limitations period, and checks whether actionable conduct took place within that period.”22
Under the separate accrual method, tolling and inquiry notice work in two ways. As with the continuing wrong method, “if the conduct has ceased and the limitations period otherwise would have run, then tolling doctrines can render the suit timely.”23 As with the discrete act method, “tolling doctrines can extend the actionable period, enabling the plaintiff to recover over a longer time frame.”24 Inquiry notice can cut off the extension of the actionable period, “but because the ongoing conduct is treated as a series of separate wrongs, inquiry notice does not cut off the plaintiff‘s ability to sue for conduct that took place within the portion of the actionable period that is unaffected by tolling doctrines.”25
When choosing an accrual method, a court considers various policy interests.
On one side of the ledger are considerations associated with finality, including the advantages that repose has for the certainty of legal relationships, the savings of judicial and litigant resources that result from avoiding litigation over stale claims, and the improved reliability of results when evidence is fresh. On the other side of the ledger are considerations associated with access to justice, including the importance of providing plaintiffs with a fair opportunity to present their claims and the savings of judicial and litigant resources that result from avoiding premature lawsuits on issues that may never ripen into meaningful disputes. For Delaware corporate law, an additional policy consideration is our reliance on private litigants to enforce legal norms and provide fiduciary accountability.26
Different types of claims warrant different methods.
The plaintiff asserts a claim based on an ongoing statutory violation. The plaintiff does not argue that the invalid act happened when the Stockholders Agreement was executed and became complete at that point. The plaintiff contends that
For an ongoing statutory violation, the policy interests support using either the continuing wrong method or the separate accrual method. Considerations associated with finality and repose are weak, because the claim concerns whether an ongoing arrangement contravenes limits that the General Assembly has imposed. Instead of the principal of finality yielding benefits, the principal of finality threatens to insulate illegality from review.
Concerns about stale claims and lost evidence also do not apply. The parties agree there are no facts in dispute. The key comparison is between the arrangement and the statute. There is no need for discovery into the details surrounding the arrangement‘s adoption or application. Concerns about lost evidence, faulty memories, or changing stories lack force. The desire to promote more accurate results by forcing plaintiffs to sue while the evidence is fresh does not apply either. Again, the facts are undisputed.
By contrast, the policy interest in providing plaintiffs with a fair opportunity to present their claims is strong. Delaware corporate law relies on private litigants to enforce legal norms and provide fiduciary accountability.27 Stockholders are
rationally apathetic and therefore passive.28 Stockholders and their advocates may not identify a statutory violation until something calls it to their attention.29 Here, the catalyst may have been a law review article in 2021.30 Delaware‘s reliance on private litigants to enforce its laws suggests the need for a more flexible accrual system, at least where statutory violations are concerned.
“When the wrongdoing is ongoing, cutting off the accountability mechanism allows the wrongdoing to continue. Delaware should not be in the business of facilitating ongoing wrongdoing,” suggesting that the discrete act approach should not be the law for a Section 141(a) claim.31 Under the discrete act approach, the mere passage of time would enable unlawful conduct to become lawful. Even if a Delaware corporation implemented a governance arrangement that directly violated the most fundamental principles of the DGCL, then as long as the arrangement managed to evade stockholder challenge for three years, the corporation could operate illegally in
perpetuity. The DGCL contains a number of mandatory provisions which, under the discrete act approach,
Take Section 220. Imagine a Delaware corporation included a provision in its charter or bylaws that purported to bar stockholders from inspecting books and records in the manner provided for by Section 220. The Delaware courts have held that even a charter provision cannot eliminate Section 220 rights.32 Yet according to the Company, if the arrangement were disclosed and went unchallenged for three years, then stockholders would be powerless to claim that it was facially invalid.
Or take Sections 211 and 231. A Delaware corporation could include a provision in its charter or bylaws purporting to only require stockholder meetings every five years (notwithstanding Section 211(c)) and purporting to do away with the requirement to appoint inspectors of election (notwithstanding Section 231(a)). If that arrangement was disclosed and avoided challenge for three years, its directors could serve five-year terms and count their own votes at quinquennial meetings, Stockholders would be powerless to challenge the arrangement as facially invalid.
Or take Section 102(b)(7), which authorizes exculpation subject to specified statutory limitations. A company might state in its certificate of incorporation that directors and officers will not owe monetary damages for any breach of fiduciary duty whatsoever. No one sues for three years. Under the Company‘s discrete act approach, that exculpation provision has become part of the corporation‘s governance structure, and no one can bring a facial challenge.
We could continue to play this game, but as a final example, consider a hypothetical similar to this case. Assume a Delaware corporation entered into a stockholder agreement with its founder stating: “Our elected board of directors shall have a purely advisory role, while ultimate discretion to manage the business and affairs of the corporation remains with our founder.” By the Company‘s logic, if no one challenged the provision within the first three years, then a facial challenge would be impossible. The purely advisory board would have become part of that company‘s corporate governance structure.
It might be tempting to pooh-pooh these examples because entrepreneurial plaintiffs’ lawyers monitor public filings. With plaintiffs’ lawyers on the job, how could any statutory violations slip through? But the enforcement efforts of plaintiffs’ counsel are spotty. They focus on bigger issuers (the Willie Sutton effect), and understandably prioritize reliable legal theories (reflecting loss aversion).33 They often pick up on trendy topics (the Baader-Meinhof effect), like recent efforts around
ESG. What the aggregation of entrepreneurial firms lacks is any type of systematic and proactive enforcement agenda.34
To blunt the radical implications of its argument, the Company argues that a stockholder can still bring an as-applied challenge for breach of fiduciary duty.35 True, but that is cold comfort. As discussed more extensively later,36 a breach of fiduciary duty claim is not a substitute for a statutory claim. A breach of fiduciary duty claim examines whether fiduciaries have acted disloyally, in bad faith, or without sufficient care. If a provision is invalid under the DGCL, the appropriate claim is a statutory one. If a laches defense has eliminated the statutory challenge, a fiduciary challenge may be impossible.37
The Company also cites a series of cases that it claims apply laches to bar statutory claims under a discrete act accrual regime.38 The Company likes those cases because they contain snippets about the timing of accrual for challenges to a contract. But all of those cases involve as-applied fiduciary duty challenges to the decision to enter into the contract. None involved statutory challenges and assertions of ongoing illegality.39
The Company cites one case where the court applied the discrete act approach and dismissed a claim asserting that a stock issuance from fifteen years earlier was void for failing to comply with Section 152 of the DGCL.40 The plaintiff argued correctly that the passage of time could not validate a void act, but did not cite any cases to support that assertion.41 Meanwhile, the defendants cited cases about
voidable acts or where the court found the challenged action was not void.42 The Kraft decision relied on the defendants’ precedents.43 But cases addressing voidable acts are not relevant to a void act. More recent Delaware Supreme Court precedent, including
By contrast, Delaware decisions have not used laches to cut off facial challenges to the statutory validity of governance arrangements. In Abercrombie v. Davies,45 the defendants entered into the challenged governance arrangement on
March 30, 1950.46 No one brought a facial challenge until after December 9, 1954.47 Chancellor Seitz held the arrangement invalid.48
Likewise, in Ebix,49 the plaintiffs contended that a provision in a CEO‘s employment agreement operated as an unreasonable antitakeover device.50 The defendants argued the claim was time-barred because the agreement had been adopted and disclosed in public filings more than three years earlier.51 The court rejected that argument, holding that a challenge to the adoption of the agreement was barred by laches, but the challenge to the “continued existence or subsequent implementation” of the agreement was “timely because the alleged injury [was] ongoing.”52
More recently, in Politan, this court sustained a claim that an agreement was invalid under Section 141(a), even though it was executed more than three years before suit was filed.53 Citing both Collis and Ebix, the court reasoned that accrual
should be measured under either the continuous wrong method or the separate-accrual method and that the claim was timely either way.54
As in Politan, the real choice is between the continuing wrong method and the separate accrual method. If a determination of invalidity had knock-on effects, then that choice could matter.55 For the facial challenge
3. Prejudice
Assuming laches were available, the defense fails for another reason as well: Laches requires a showing of prejudice.56 “Laches is fundamentally concerned with the prevention of inequity in permitting a claim to be enforced. Inequity for this purpose arises where there occurs some change in the condition or relation of the parties or the property involved in the pending lawsuit.”57
The Company has not pointed to any prejudice from any delay in filing suit. Nor could it. The facts are undisputed, so there can be no prejudice from the loss of evidence or faded memories. If anything, the Company has benefited from operating for ten years under its chosen (and, for present purposes, assumed-to-be illegal) governance arrangement. There is no reason to think that the timing of the suit puts the Company at any disadvantage.
4. Acquiescence In The Guise Of Unusual Conditions Or Extraordinary Circumstances
Finally, when conducting a laches analysis, a court may consider “unusual conditions or extraordinary circumstances.”58 “[I]f unusual conditions or extraordinary circumstances make it inequitable to allow the prosecution of a suit after a briefer, or to forbid its maintenance after a longer period than that fixed by the statute” then a court may “determine the extraordinary case in accordance with the equities which condition it.”59
The Company asserts that because its IPO prospectus described the Stockholders Agreement, and because the Company has repeatedly disclosed it since, the plaintiff and other stockholders “bought into” the Company‘s corporate governance regime and cannot now challenge it. Through this argument, the Company invokes a species of acquiescence based on the act of purchasing shares. That theory has numerous problems.
The first is that acquiescence is an equitable defense.60 Just as laches cannot validate a void act, acquiescence cannot either.61
A contrary result in which purchasing shares constituted acquiescence would enable a corporation to create its own body of law through its IPO prospectus. A corporation could implement any governance regime it wished, describe it in the prospectus, and argue that every stockholder who bought shares in the IPO had acquiesced to its terms. In that world, timeliness principles would become irrelevant because the act of purchasing shares would insulate the conduct from challenge. Delaware should not embrace that rule.
The existence of Section 327 of the DGCL suggests that absent a statutory amendment, Delaware does not equate the act of purchasing shares with acquiescence to illegal conduct.
Delaware has not invented a common law contemporaneous ownership requirement for direct claims.66 The right to assert a direct claim is a property right associated with the shares, so unless the seller and buyer agree otherwise, the ability to assert a direct claim and benefit from
The disclosure of the Stockholders Agreement does not constitute an extraordinary circumstance that results in laches barring the plaintiff‘s claim. If the Stockholders Agreement violates
B. Ripeness
Believing that its laches argument defeats the plaintiff‘s statutory challenge, the Company says all that remains is a potential claim for breach of fiduciary duty, if and when a breach occurs. But that claim is not yet ripe. Thus, as the Company sees it, the plaintiff sued too late to bring a statutory claim and sued too early to bring a fiduciary duty claim. The plaintiff therefore has no claim at all.
That argument attempts to defeat the claim the plaintiff filed by pointing to a claim the plaintiff did not file. The plaintiff is pursuing a facial statutory challenge, not a claim for breach of fiduciary duty. The plaintiff‘s statutory claim is ripe.
1. The Section 141(a) Claim Is Ripe.
“A ripeness determination requires a common sense assessment of whether the interests of the party seeking immediate relief outweigh the concerns of the court in postponing review until the question arises in some more concrete and final form.”69 “Generally, a dispute will be deemed ripe if litigation sooner or later appears to be unavoidable and where the material facts are static.”70
The first step in making this common sense assessment is to identify “the legal questions in the case.”71 The Company frames the legal question as whether the defendants have breached their fiduciary duties. But the plaintiff is not bringing a claim for breach of fiduciary duty. Under Professor Berle‘s famous formulation,
in every case, corporate action must be twice tested: first, by the technical rules having to do with the existence and proper exercise of the power; second, by equitable rules somewhat analogous to those which apply in favor of a cestui que trust to the trustee‘s exercise of wide powers granted to him in the instrument making him a fiduciary.72
Delaware follows the twice-testing formula.73
The first test—Berle I—looks to whether corporate action complied with “the hierarchical components of the entity-specific corporate contract, comprising (i)
The two tests are distinct. As Schnell teaches, conduct can be legal (passing Berle I) but inequitable (failing Berle II).75 As the all-holders rule and Unocal teach, conduct can be illegal (failing Berle I) and yet there could be situations where it would be equitable (passing Berle II).76 The vast majority of corporate actions pass both Berle I and Berle II. Some, such as a deferred redemption provision in a stockholder rights plan, violate both Berle I and Berle II.77
The plaintiff has not asserted a Berle II challenge. The plaintiff has only asserted a Berle I challenge.
A facial challenge contends that an act is invalid under any set of circumstances.78 It does not require factual development; it presents a pure question of law.79 “Facial challenges to the legality of provisions in corporate instruments are regularly resolved by this Court.”80
This court has rejected similar efforts to defeat facial challenges with ripeness arguments. In Abercrombie, the plaintiffs mounted a facial challenge to a provision in a stockholders agreement that the parties called the agents agreement.81 As in this case, the defendants argued that “plaintiffs do not show that the Agreement has been or will be used and so their complaint should be dismissed as premature.”82 Chancellor Seitz held that the provision was facially invalid.83
This court rejected a similar ripeness argument in Carmody v. Toll Brothers, Inc.84 The plaintiff mounted a facial challenge to the validity of a rights plan with a “dead-hand” feature that allowed only the incumbent directors who adopted the plan or their designated successors to redeem the rights.85 The defendants argued that the challenges were not ripe until there was a specific hostile takeover proposal involving a proxy contest in which the acquirer sought to replace its own nominees and those nominees wanted to redeem the pill.86 Justice Jacobs, then a Vice
Stripped of its bells and whistles, this argument boils down to the proposition that the adoption of a facially invalid rights plan, on a “clear day” where there is no specific hostile takeover proposal, can never be the subject of a legal challenge. Not surprisingly, the defendants cite no authority which supports that proposition, nor could they, since the case law holds to the contrary.87
Instead, he relied on Moran,88 where the defendants argued that a facial challenge to the legal validity of the rights plan was not ripe until the directors faced a hostile bid and refused to redeem the rights.89 Justice Walsh, then a Vice Chancellor, explained that the plaintiffs were “contesting the validity of the rights under the Delaware General Corporation Law,” resulting in a ripe claim regardless of whether the rights were ever triggered.90 Vice Chancellor Jacobs reached the same conclusion in Toll Brothers, holding that “the plaintiff‘s claims of statutory and equitable invalidity are ripe for adjudication.”91
As in Abercrombie, Moran, and Toll Brothers, the plaintiff here seeks a declaration that the Challenged Provisions are facially invalid. That claim is ripe.
2. Sample Does Not Foreclose A Section 141(a) Claim.
Relying on Sample v. Morgan,92 the Company next argues that a plaintiff only can bring an as-applied fiduciary challenge to a contractual arrangement. The Sample decision argued against
The Sample litigation challenged self-interested actions taken by a company‘s top three executive officers. The plaintiffs primarily argued that the officers breached their fiduciary duties, but the plaintiffs also challenged a contract provision in a stock purchase agreement as a violation of
While denying the rest of the motion as frivolous, the court dismissed the
Sample‘s once-tested approach also did not account for the many cases that evaluated
3. The Possibility Of A Future Fiduciary Duty Claim Does Not Prevent A Plaintiff From Pursuing A Ripe Section 141(a) Claim.
As discussed previously, a statutory Berle I claim and an equitable Berle II claim are separate and distinct. The Company argues that there is no need for a Berle I claim because of the possibility of a fact-specific Berle II claim. But a Berle II solution cannot solve a Berle I problem.
Chancellor Allen emphasized the distinctive nature of the two claims in Grimes I.106 There, a plaintiff contended that a CEO‘s employment agreement violated
Whether these contracts do violate
Section 141 is a question of law directly concerning the legal character of the contract and its effect upon the directors. The question whether these contracts are valid or not does not fall into the realm of business judgment; it cannot be definitively determined by the informed, good faith judgment of the board. It must be determined by the court.109
By contrast, Chancellor Allen agreed that the fiduciary duty challenges to the agreement were subject to
As the Grimes decision illustrates, a Berle I challenge and a Berle II challenge rest on different premises. The equitable Berle II challenge asserts that the directors breached their fiduciary duties of loyalty and care by acting in bad faith, making decisions when they were self-interested or not independent, or by acting in a grossly negligent manner. The Berle II claim focuses on what the directors knew, believed, and intended. It turns primarily on their subjective mental state.
A statutory Berle I claim turns on an objective comparison of the challenged arrangement with
For a
A Berle II challenge thus cannot substitute for a facial challenge because they invoke different principles and do different things. One enforces statutory requirements. The other enforces fiduciary obligations.
A Berle II challenge also cannot provide a substitute for a facial challenge in this case because the effects of the Challenged Provisions can be subtle, and a stockholder plaintiff might never know about the breach. Stockholders do not have a live feed of board deliberations so they can observe what is going on. Stockholders must rely initially on the Company‘s public disclosures and, if they can establish a proper purpose for obtaining them, books and records under
Before a stockholder could have a basis to sue for a Berle II claim, the stockholder would have to learn that an issue had arisen. But the Company is unlikely to disclose anything short of an open conflict between the Board and Moelis that resulted in Moelis invoking the Challenged Provisions. If the directors asked informally about whether Moelis would support a particular course of action, knowing that he can withhold approval if he disagrees, that exchange is unlikely to be disclosed. If the directors knew the aperture of Moelis‘s Overton Window from their ongoing interactions with him, they would not even have to ask. Once again, no disclosure.
Without an all-out fight, a stockholder is unlikely to have any reason to seek books and records. A stockholder might suspect that the Challenged Provisions were constraining the Board, but “merely offering a suspicion of wrongdoing is not enough to justify a
A situation in which the directors opt not to pursue a course of action because of the likelihood that Moelis would not approve thus will be virtually impossible to detect and more difficult to investigate. That undercuts the effectiveness of the Company‘s Berle II solution.
And that is not all. Substantial uncertainty exists as to whether a stockholder
Given all of these difficulties, the Company‘s Berle II solution is likely no solution at all. The facial Berle I challenge is ripe, and the plaintiff can bring it.
III. CONCLUSION
The Company‘s timeliness defenses do not provide a basis for granting summary judgment in its favor. The plaintiff has not sued too late. Nor has the plaintiff sued too early. The Company‘s motion for summary judgment on its laches and ripeness defenses is denied. Judgment on those defenses will be entered in favor of the plaintiff at an appropriate time—after the decision on the merits has been issued.