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Moelis & Company

Case Details

Date Filed: March 13, 2023
Case Number: C.A. No. 2023-0309-JTL
Jurisdiction: Delaware Court of Chancery
icon-casetype Case Type: Shareholder Class Action

Case Summary

On March 13, 2023, Saxena White filed a class action complaint alleging that Moelis & Company had entered into a stockholders agreement that improperly entrenched and perpetuated the control of the Company’s founder, CEO, and Chairman, Kenneth Moelis over Moelis’s affairs. The Complaint alleges that these arrangements violated the statutory and common law rights of Moelis’ other public stockholders and their duly elected representatives on the Company’s Board of Directors to control and make the key decisions for the Company. Plaintiff, West Palm Beach Firefighters’ Pension Fund, sought declaratory relief in the Delaware Court of Chancery that the stockholders agreement violated Delaware law and is unenforceable.

More specifically, the Complaint alleged that provisions of the stockholders agreement violated Section 141 of the Delaware General Corporation Law (“DGCL”), which provides that “[t]he business and affairs of every corporation . . . 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.” The stockholders agreement required that, so long as K. Moelis’ stock holdings remained above a minimal threshold (around 7%), the Board must receive his prior approval for many of the company’s most essential corporate actions. Those actions included, among other things, adopting annual budgets and business plans, hiring and firing senior officers, amending the Company’s governing documents, issuing stock, paying dividends, and entering into or amending material contracts.

The Complaint asserted that these “Pre-Approval Requirements” in the stockholders agreement improperly limited the power of the Board by providing K. Moelis with veto power, and thus effective control, over the most important decisions and functions of the Board.

The Complaint further alleged that other sections of the stockholders agreement violated DGCL Section 141 by requiring the Company’s directors to recommend for election to the Board the director nominees designated by K. Moelis; to include such designees in the slate of nominees; and to fill any vacancy on the Board with K. Moelis’s designees (the “Board Composition Provisions”). The Complaint alleged that, by requiring the Board to recommend nominees designated by K. Moelis, these provisions improperly infringed upon the Board’s power and responsibility to exercise independent fiduciary judgment in recommending to stockholders who should be elected to the Company’s Board, regardless of whether the Board actually believed it would be in the best interest of the Company for such a designee to be elected to the Board.

With no facts in dispute, each side filed competing motions for summary judgment. After full briefing and oral argument, Vice Chancellor Laster issued two separate opinions. On February 12, 2024, the Court denied the Company’s motion for summary judgment on the basis of laches and ripeness in a 40-page opinion. See West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 2024 WL 550750 (Del. Ch. Feb. 12, 2024). Then, on February 23, 2024, the Court issued its blockbuster, 132-page opinion granting summary judgment in favor of the Plaintiff, holding that nearly all the challenged provisions in the stockholders agreement were invalid. See West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 2024 WL 747180 (Del. Ch. Feb. 23, 2024). The opinion’s memorable opening line set the tone:

“What happens when the seemingly irresistible force of market practice meets the traditionally immovable object of statutory law? A court must uphold the law, so the statute prevails.” Id. at *1.

The Court held:

The Pre-Approval Requirements are so all-encompassing as to render the Board an advisory body. Moelis, not the Company, is running the show. The directors can only act to the extent Moelis lets them. The Pre-Approval Requirements have the effect of removing from the directors in a very substantial way their duty to use their own best judgment on virtually every management matter. They are therefore facially invalid under the Abercrombie test.

Id. at *46. The Court invalidated the Pre-Approval Requirements of the stockholders agreement.

The Court then considered the Board Composition Provisions, holding three to be facially invalid. In short, the opinion was a major win on all the central claims in the action.

Vice Chancellor Laster’s Moelis opinion is one of the most significant corporate governance opinions to come out of Delaware in years. Stockholders agreements like the ones in Moelis are a growing trend for public companies, enabling powerful insiders to maintain their grip on power long after their voting control falls to a minority position. These agreements have been in place for years and had largely been accepted as market practice—just another tool empowering management at the expense of the public stockholders. The immediate result in the Moelis case will be the invalidation of the challenged provisions, transferring power from K. Moelis to the Board and eliminating the chilling effect that these provisions had over Board actions. The goal of this case included changing market practices at Moelis and other public companies with similar stockholders agreements, and Vice Chancellor Laster’s opinion helped strengthen the important statutory principles at issue.

On March 15, 2024, Plaintiff’s motion for an award of attorneys’ fees and expenses was filed. On April 23, 2024, Defendant filed an opposition to Plaintiff’s motion. The hearing on the motion for an award of attorneys’ fees and expenses is scheduled for July 18, 2024.