On March 16, 2023, Saxena White filed a class action complaint on behalf of a stockholder in N-able, Inc., alleging that N-able had entered into a stockholders agreement that improperly entrenched and perpetuated certain favored stockholders’ control over N-able’s business and affairs. The Complaint alleges that these arrangements violated the statutory and common law rights of N-able’s other public stockholders and their duly elected representatives on the Company’s Board of Directors. Plaintiff sought declaratory relief in the Delaware Court of Chancery that the stockholder agreement violated Delaware law and is unenforceable.
As alleged in the Complaint, the stockholders agreement violated Delaware law by providing certain favored stockholders with contractual pre-approval rights over the most important decisions and functions properly entrusted to the Board, referred to as “Pre-Approval Rights.” Indeed, the stockholders agreement between the Company and these stockholders goes so far as to deny the Board its due power over certain business strategies and core directorial functions such as the hiring and firing of the Company’s CEO, change of control transactions, and other large transactions. The stockholders agreement also violated Delaware law by providing the same favored stockholders with a contractual right to require the Board to recommend to shareholders the favored stockholders nominees for seats on the Company’s Board, as well as requiring membership on committees of the Board, so long as the favored shareholders continued to hold 30% of the Company’s total outstanding shares. The Complaint further alleged that N-able’s operative certificate of incorporation violated Delaware law by providing the favored stockholders with the right to remove directors from the Board, even when they are minority stockholders, so long as they own at least 30% of the Company’s total outstanding shares.
With no facts in dispute, each side filed competing motions for summary judgment. After full briefing and oral argument, Vice Chancellor Laster issued an opinion on July 25, 2024, granting summary judgment in favor of the Plaintiff, holding that nearly all the challenged provisions in the stockholders agreement were invalid. Seavitt v. N-able, Inc., — A.3d —-, 2024 WL 3534476 (Del. Ch. July 25, 2024). The Court explained at the beginning of the Opinion that “Governance arrangements that do not appear in the charter and deprive boards of a significant portion of their authority contravene Section 141(a).”
The Court in holding the pre-approval provisions invalid stated:
The Pre-Approval Requirements are sufficiently encompassing to render the Board an advisory body on many of the most significant actions that directors can take. In those instances, the Lead Investors, not the Board, are running the show, and the directors can only act to the extent that the Lead Investors let them. Collectively, 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 management matters. Taken as a whole, they are facially invalid under Section 141(a).
The Court further held that the corporate charter could not incorporate the stockholders agreement by reference:
. . . the Charter cannot incorporate the Stockholders Agreement by reference through the simple device of mentioning in three provisions that they are “subject to” the Stockholders Agreement. The DGCL does not permit the wholesale inclusion of provisions from private agreements into charters through incorporation by reference. Because the operative provisions of a certificate of incorporation must appear in the certificate, the references to the Stockholders Agreement are nullities.
The Court next held as invalid several provisions of the stockholder agreement that sought to interfere with the recommendation, appointment, and structure of the Board.
Finally, the Court held invalid the challenged provision of N-able’s charter, which purported to give the favored shareholders the right to remove directors from the Board so long as they held at least 30% of the stock of the Company. The Court held this provision was invalid as conflicting with Section 141(k) of the DGCL, both for allowing a director to be removed by holders of less than a majority of the share entitled to vote and for providing for removal of a director of a company with a classified board without cause.
The Court subsequently entered final judgment in favor of the plaintiff. N-able declined to appeal that judgment, bringing the matter to a conclusion.
