In re Fox Corporation/Snap Inc. Section 242 Litigation, C.A. Nos. 2022-1007, 2022-1032, 120 (Del. Jan. 17, 2024) (Seitz, C.J.)
In a decision driven by long-standing precedent and a close adherence to historical interpretations of the Delaware General Corporation Law (“DGCL”), the Delaware Supreme Court (the “Court”) affirmed the Court of Chancery’s holding that Section 242(b)(2) of the DGCL did not require a separate class vote of nonvoting shares for a certificate of incorporation amendment to provide for officer exculpation under Section 102(b)(7).
In 2022, the board of Fox Corporation (“Fox”) adopted a certificate of incorporation amendment in accordance with the recent revisions to Section 102(b)(7). The capital stock of Fox was comprised of two classes: Class A Common Stock and Class B Common Stock. The holders of Class A Common Stock did not have voting rights. The holders of Class B Common Stock were entitled to one vote per share, and they were the only class to vote on the amendment, which was ultimately approved.
The board of Snap Inc. (“Snap”) adopted a similar certificate of incorporation amendment. Like Fox, Snap had a multi-class capital structure. The holders of Class A Common Stock did not have the power to vote, the holders of Class B Common Stock were entitled to one vote per share, and the holders of Class C Common Stock were entitled to ten votes per share. The Class C stockholders executed a written consent approving the amendment.
A Class A Fox stockholder and a Class A Snap stockholder filed suit against their respective companies, seeking a “declaration that the charter amendments did not comply with Section 242(b)(2) and were invalid.” The matters were consolidated.
Section 242(b)(2) provides, in relevant part:
The holders of the outstanding shares of a class shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely. (Emphasis added.)
Relying on this language, the plaintiffs asserted that stockholders have three fundamental powers—the power to vote, to sell, and to sue. As such, the plaintiffs argued that, by depriving stockholders of the ability to sue officers for duty of care violations, the amendment infringed on one of those powers and therefore triggered a class vote of each class of capital stock pursuant to Section 242(b)(2).
At the subsequent summary judgment hearing in this matter, the plaintiffs argued: (i) that the word “powers” should be read broadly, and in conjunction with other, unrelated sections of the DGCL, and (ii) that Hartford Accident & Indemnity Co. v. Dickey Clay Mfg. Co. (“Dickey Clay”) and Orban v. Field (“Orban”), two seminal cases interpreting Section 242(b)(2), were inapplicable to the present dispute because those cases did not, at their core, deal with “the elimination of a personal power.” By contrast, the defendants asserted that: (i) the word “powers” only referred to “special characteristics of the class” and that the term needed to be closely analyzed in conjunction with the phrase “preferences, or special rights of the shares of such class” and (ii) the long-standing precedent of Dickey Clay and Orban provided strong support that Section 242(b)(2) should apply to only the “peculiar” or “special” characteristics of stock.
The Court of Chancery, while hesitant to do so, granted summary judgment in favor of the defendants and held that “the officer exculpation amendment d[id] not require a class vote of the company’s non-voting stock because the officer exculpation amendment d[id] not affect a power, preference, or special right that appears expressly in the charter.” The Court of Chancery arrived at this conclusion by conducting a textual analysis of Sections 242(b)(2) and 102(a)(4) of the DGCL and reviewing precedent as well as practitioner understanding and commentary.
More specifically, the Court of Chancery first concluded that while the plaintiffs attempted to shape the right to sue officers for monetary damages for a breach of the duty of care as a power specially granted to stockholders, such a power was not set forth in the certificate of incorporation or in the DGCL, and, accordingly, the Fox and Snap amendments did not require a separate Class A stockholder vote. Second, the Court of Chancery drew upon Dickey Clay and Orban, which stand for the proposition that a Section 242(b)(2) vote is only necessary when the amendment “adversely affect[s] a peculiar attribute of the class of stock rather than rights incidental to stock ownership.” Lastly, the Court of Chancery concluded that the plaintiffs’ argument was not well-supported by treatises, general commentary, or practice.
On appeal, the plaintiffs argued that the Court of Chancery: (i) improperly rejected the plaintiffs’ interpretation of the word “powers” and their argument that the right to sue officers falls under the powers referenced in Section 242(b)(2); (ii) incorrectly relied on Dickey Clay and Orban; and (iii) wrongfully considered the legal community’s understanding of Section 242(b)(2) as part of its analysis. The Court addressed, and rejected, each of these arguments.
First, after diving into the lengthy history of Section 242(b)(2) and the case law interpreting it, the Court analyzed Section 242(b)(2) in conjunction with two additional provisions of the DGCL: Sections 102(a)(4) and 151(a). Section 102(a)(4) provides that the “powers, preferences and rights” of class-based stock must be included in a corporation’s certificate of incorporation. Section 151(a) discusses the “powers,” “preferences,” and “special rights” that may be granted to specific classes of stock and provides that such powers “shall be stated and expressed in the certificate of incorporation or of any amendment thereto . . . .” As the Court noted, Section 242 directly references amendments to the certificate of incorporation, thereby connecting it to Section 151(a).
The Court continued by explaining that the “powers, preferences, and rights” that are incorporated into all three of the above-mentioned statutes are not defined in Section 242(b)(2), but that Sections 102(a)(4) and 151(a) shape the understanding of Section 242(b)(2) as “limit[ing] the ‘powers, preferences, or special rights’ of a class to those authorized by Section 151(a) and expressed in the charter under Sections 151(a) and 102(a)(4).” Importantly, these powers may either be expressly set forth in the certificate of incorporation or may be incorporated pursuant to Section 394, which provides that the DGCL is part of the certificate of incorporation of every Delaware corporation.
Then, the Court, disagreeing with the plaintiffs’ introduction of rather selective definitions of the word “power,” again explained the importance of understanding Section 242(b)(2) in relation to Sections 102(a)(4) and 151(a), and further explained that the term “powers” is meant to refer to “specific class powers . . . and not to general powers incidental to stock ownership.” The Court also dismissed plaintiffs’ argument that “power” should be read in conjunction with other provisions of the DGCL. Specifically, the Court explained that plaintiffs’ cited provisions only referred to the power to sue in certain contexts, rather than defining the right to sue as a power specific to the shares of a class. The Court also declined to accept plaintiffs’ argument that requiring a class vote for powers stated in the certificate of incorporation, but not requiring such a vote for identical powers stemming from the DGCL, creates an inequality. As the Court had noted earlier, the DGCL, through Section 394, makes it clear that the DGCL is part of the certificate of incorporation of every Delaware corporation, thereby eliminating any potential inequality.
Second, the Court summarily dealt with plaintiffs’ precedent argument, concluding that “for three quarters of a century, Dickey Clay has stood for two points: 1) that rights incidental to stock ownership are not a peculiar characteristic of the shares of a class of stock, and 2) that Section 242(b)(2) should be read considering other provisions of the DGCL.” Fifty years later, Orban confirmed the value of Dickey Clay. As such, the Court affirmed the Court of Chancery’s reliance on, and application of, Dickey Clay.
Finally, the Court also rejected plaintiffs’ third argument. The Court briefly recognized legal practitioners’ near-unanimous understanding of how Section 242(b)(2) operates, as evidenced by the fact that nine multi-class corporations that amended their certificates of incorporation to include director exculpation provisions under Section 102(b)(7) concluded that a multi-class vote was not necessary, a point raised during summary judgment. Further, the Court highlighted the Court of Chancery’s statement that since Section 102(b)(7) was adopted nearly forty years ago, the plaintiffs were the first to argue that an exculpation amendment required a class vote. Lastly, the Court explained that the Court of Chancery’s observation of practitioner commentary did not substantially contribute to its ultimate holding.
