Delaware Follows Ontario's Lead in Corporate Governance
In a surprising (and refreshing) turn of events, Delaware, a jurisdiction widely recognized for its leadership and expertise in corporate law, is now looking to Ontario for guidance. The recent decision by the Delaware Court of Chancery in the case of West Palm Beach Firefighter's Pension Fund v. Moelis & Company, No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024) (“Moelis”), has led to legislative reaction in Delaware. The developments in Moelis have prompted Delaware to make significant changes to the Delaware General Corporate Law (“DGCL”),bringing it into closer alignment with the corporate law principles of Ontario/Canada.
The Moelis Decision:
The Delaware Court invalidated a shareholders' agreement that allowed Mr. Moelis significant control over Moelis & Company, citing it as inconsistent with the DGCL's emphasis on board primacy. This decision raised concerns about shareholder rights under such agreements impinging on this primacy. The key language from the DGCL's s. 141(a) that led to this decision is as follows:
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. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the Board of Directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.
Ontario's Influence:
Unlike Delaware, Ontario's corporate statutes, such as s. 108(1) of the Ontario Business Corporations Act (“OBCA”), provide for robust shareholders' agreements. These agreements are frequently used to allow shareholders to retain significant control without completely undermining the board's authority, a balance that Delaware's new amendments aim to replicate.
Legislative Response:
In response to the Moelis Decision, Delaware introduced Senate Bill 313, which will come into effect on August 1, 2024. This bill enacts new Section 122 (18) of the DGCL, permitting corporations to enter into shareholders' agreements that govern internal affairs, despite DGCL s. 141(a) and Delaware's generally more board-centric model of corporate governance. This generally mirrors the OBCA approach, though it is worthwhile to note that the DGCL does not contain language that relieves directors of their duties and liabilities to the extent that such are adopted by the shareholders through a shareholders' agreement the way that s. 108(5) of the OBCA does.
A New Era of Corporate Governance?
This legislative shift suggests that Canadian and Ontarian corporate law has an increasing influence on global practices. In particular, Ontario's emphasis on shareholder primacy and flexible governance structures is now being recognized and adopted by one of the most influential jurisdictions in corporate law practice.
How does this impact us here in Ontario?
Before reading the Moelis Decision, I had often wondered why U.S. investors in Canadian and Ontario corporations were eager to amend the corporation's Articles to allow for this type of shareholder control. Hopefully, this change to Delaware jurisprudence will be influential on other states and Ontario corporate lawyers will find it easier to explain to these investors that they can achieve similar protections through shareholder's agreements, without the need to embed these rights in potentially cumbersome, publicly available, and hard to amend documents like Articles.
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