Last month, the Delaware Supreme Court unanimously reversed a closely watched Court of Chancery decision involving Moelis & Company and its stockholder agreement. The lower court had invalidated key provisions of that agreement, finding that they improperly restricted the board of directors’ authority under Delaware law.
The Supreme Court resolved the case on narrower procedural grounds and did not reach that core governance question. Instead, it held that the challenged provisions were voidable – rather than void – and that the stockholder’s lawsuit was brought too late. The decision is likely to shape how stockholder agreements are drafted, challenged and defended.
The case arose from a stockholder agreement adopted in 2014 in connection with Moelis’s initial public offering. That agreement granted the firm’s founder and affiliated stockholders’ extensive consent and approval rights over corporate actions, including matters typically left to the board of directors. In 2024, the Court of Chancery concluded that these provisions conflicted with Section 141(a) of the Delaware General Corporation Law (DGCL), which assigns management of a corporation’s business and affairs to the board unless the certificate of incorporation provides otherwise. On that basis, the court held that the provisions were facially invalid and void.
The implications of that ruling extended well beyond Moelis. Similar governance arrangements are common in founder-led companies, controlled public companies and private equity-backed businesses. If such provisions were truly void, they could not be ratified, cured or defended through equitable doctrines. That raised concerns that long-standing stockholder agreements across many Delaware corporations could suddenly be vulnerable to challenge.
The Supreme Court took a more restrained approach. Rather than deciding whether the Moelis provisions violated Section 141(a), it focused on two threshold issues: whether the provisions were void or merely voidable and when a facial challenge to those provisions accrued.
On the first issue, the court found that void acts are beyond a corporation’s legal power and are invalid from the outset. Voidable acts, by contrast, fall within the corporation’s power even if they are flawed and therefore subject to challenge or equitable defenses. The court emphasized that similar governance outcomes could be achieved lawfully through other means, such as provisions in the certificate of incorporation or rights attached to preferred stock. Because Delaware law permits those alternatives, the court concluded that the Moelis provisions were not beyond the corporation’s power and therefore were, at most, voidable.
The court then turned to timing. It rejected the argument that the stockholder agreement created a continuing statutory violation that delayed the start of the limitations period. Instead, it held that a facial challenge accrued when the agreement was executed and publicly disclosed in 2014. The plaintiff waited nearly nine years to bring suit. By analogy to Delaware’s three-year statute of limitations and under the equitable doctrine of laches, the claim was barred. Having resolved the case on those grounds, the court expressly declined to decide whether the provisions substantively violated Section 141(a).
The immediate effect of the decision is to give defendants facing facial challenges to stockholder agreements clearer grounds for early dismissal. For companies and their advisers, the ruling provides greater certainty that long-standing governance arrangements will not be undone years later by delayed lawsuits.
The decision also aligns with a broader policy shift in Delaware. In 2024, the Delaware General Assembly adopted Section 122(18) of the DGCL, which expressly authorizes many governance arrangements in stockholder agreements, so long as they would be lawful if included in the certificate of incorporation. Although that amendment did not apply to Moelis, it reflected legislative concern over the potential disruption caused by the Chancery Court’s earlier ruling.
What this means is that facial challenges to stockholder agreements must be brought early or risk dismissal, regardless of their merits. At the same time, the Supreme Court left unresolved the core question of how far stockholder agreements can go in constraining board authority.
Whether future courts will confront that issue in as-applied challenges remains an open question and one that governance watchers will be tracking closely