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Bill allows contracts giving some shareholders more power

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Critics warn of rushed legislation without understanding

potential impact

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Court rulings prompted bill to address stockholder

agreements

By Tom Hals

WILMINGTON, Delaware, June 25 (Reuters) - Delaware is

poised to adopt changes to its widely used corporate law that

critics argue could weaken U.S. boards of directors in favor of

influential investors such as private-equity firms.

State lawmakers last week approved a bill that gives a

corporation the authority to enter into contracts with one or

more shareholders that give the investors power over key board

decisions.

The approval followed an unusually contentious debate that

included warnings from state judges and academics, who said

legislators were rushing ahead without understanding the

potential impact.

"This is a radical change in Delaware law," Usha Rodrigues, a

law professor from the University of Georgia, one of more than a

dozen opponents who spoke at a senate hearing on June 11.

Governor John Carney has said he will sign Senate Bill 313,

which addresses three recent rulings by the Delaware Court of

Chancery. It will become law Aug. 1.

The court plays a key role in interpreting the state's corporate

law. Most U.S. public companies are chartered in the state and

related fees provide around one-third of Delaware's general

budget revenue.

The bill comes at a difficult moment for the court, which has

been criticized repeatedly by Tesla CEO Elon Musk for voiding

his compensation and by political conservatives for allegedly

emphasizing social issues above investment returns.

The bill enshrines a common practice known as stockholder

agreements that a court ruling called into question.

In February, Travis Laster, a Court of Chancery judge,

invalidated a stockholder agreement that gave Ken Moelis veto

power over nearly every significant decision by the board of

Moelis & Co ( MC ), an investment bank he founded.

"The directors only manage the company to the extent

(Ken)Moelis gives them permission to do so," Laster wrote in his

133-page opinion.

Laster said the agreement violated a bedrock principle of

Delaware law that directors manage the business using their best

judgment for the benefit of all investors.

The ruling can be appealed and the bill excludes pending

cases.

Laster's ruling cast doubt on thousands of stockholder

agreements struck by venture capital and private-equity

investors and touched off a scramble in Delaware to amend the

law.

"Investors have invested millions of dollars in corporations

and they don't know if the rights they have are valid," Srinivas

Raju, a Delaware corporate lawyer who helped draft the bill,

told lawmakers.

The agreements are common among private companies and around 20%

of corporations that have gone public in recent years have done

so subject to a stockholder agreement, Gabriel Rauterberg, a law

professor at the University of Michigan, told Reuters.

Critics argue the agreements can be adopted without public

shareholder approval or consent.

Supporters said shareholders in public companies are on

notice because such agreements are disclosed in securities

filings and annual reports.

In addition, similar arrangements can be achieved by

including them in a certificate of incorporation or through

preferred stock.

The court's chief judge, Chancellor Kathaleen McCormick, who

wrote two of the rulings that prompted the bill, and Laster have

both spoken against the rush to pass the legislation, in an

unusual break with tradition.

In response, William Chandler, a former chancellor on the

court and now with the Wilson Sonsini law firm, urged Delaware

House members to ignore academics and judges and follow the

state bar, which drafted the bill.

"At the moment the corporate market is not feeling too good

about Delaware because of the uncertainty and unpredictability

of a few decisions by just two judges," Chandler told lawmakers

on June 20. "Judges don't need to intrude upon the process of

making law."