The Council of Institutional Investors is respectfully requesting that Delaware Gov. John Carney veto Senate Bill 313.
CII is a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $5 trillion.
Our members are major long-term shareholders with a duty to protect retirement savings of millions of workers and their families, including public pension funds with more than 15 million participants- true “Main Street” investors through their pension funds.
Our associate members include non-U.S. asset owners with about $4.8 trillion in assets, and a range of asset managers with approximately $55 trillion in assets under management. CII is a leading voice for effective corporate governance, strong shareowner rights and sensible financial regulations that foster fair, vibrant capital markets. CII promotes policies that enhance long-term value for U.S. institutional asset owners and their beneficiaries.
In our view, the Delaware legislature should not have rushed to judge whether the opinion in the West Palm Beach Firefighters’ Pension Fund v. Moelis & Company was correct. The opinion is subject to review by the Delaware Supreme Court, which may or may not agree with the decision.
As legislators are aware, SB 313 was drafted in response to the opinion by Delaware Chancery Court Vice Chancellor Travis Laster in late February that upheld the facial validity of some provisions – but not others – in an agreement between Moelis & Company and its founder, who was also the controlling shareholder. The opinion characterized that agreement as part of a “new wave” of agreements between companies and certain minority shareholders or, as in the Moelis case, a controlling shareholder.
Vice Chancellor Laster noted that such agreements do not “involve stockholders contracting among themselves about how they will exercise their stockholder rights,” but instead “contain extensive veto rights and other restrictions on corporate action.”
CII and its members strongly believe that permitting stockholder agreements to contain the provisions invalidated in the Moelis case as authorized by SB 313 would disadvantage long-term investors.
One of the core principles of corporate governance is the principle of one share, one vote. Currently, for a powerful founder to have full control rights — of the sort granted to Mr. Moelis and authorized by SB 313 — a company generally must put those provisions into its certificate of incorporation and go public with a multi-class capital structure.
The principle of one share, one vote is such an important protection for investors that both the New York Stock Exchange and the NASDAQ Stock Market prohibit companies traded on those exchanges from engaging in a “midstream” recapitalization that would create a new class of super-voting stock.
However, it appears that under the provisions of SB 313, a company could go public with a single-class capital structure and then, after the company’s IPO, confer comprehensive control rights by contract without any shareholder vote. We believe many CII members and other long-term investors – whether they object to multi-class capital structures or not – would find troubling this post-IPO transformation to a stealth multi-class capital structure without a shareholder vote.
A hallmark of Delaware General Corporation Law is the careful and deliberate nature in which it is adopted and enforced, as well as the ways in which Delaware law balances boards’ decision-making with accountability to shareholders.
That reputation could be seriously impaired by a perception that influential actors can easily change the law whenever the Delaware Court of Chancery has the temerity to rule against them and their short-term, special interest views.
Jeffrey P. Mahoney is the general counsel for the Council of Institutional Investors, a nonpartisan association of U.S. pension funds and other long-term institutional investors.
Editor’s note: this viewpoint is edited from a letter sent to Gov. John Carney on July 10. It has been edited with the author’s permission.
