CURRENT MONTH (September 2024)
Corporate Charters May Not Incorporate Substantive Provisions of Other Agreements by Reference
In Seavitt v. N-Able, Inc., C.A. No. 2023-0326-JTL, 2024 WL 3534476 (Del. Ch. July 25, 2024), the Delaware Court of Chancery invalidated provisions contained in a certificate of incorporation of N-able, Inc., a Delaware corporation (N-able), which purported to incorporate by reference substantive provisions of a stockholders’ agreement. Specifically, the certificate of incorporation provided that some of its provisions relating to, among other things, the election and removal of directors were “subject to” the provisions of a stockholders’ agreement between N-able and its two largest investors, Silver Lake Group, LLC and Thoma Bravo, LLC (the Lead Investors).
The Lead Investors and N-able entered into the stockholders’ agreement in anticipation of an initial public offering of N-able. While N-able argued that Section 102(d) of the General Corporation Law of the State of Delaware (the DGCL) authorized the incorporation of the terms of the stockholders’ agreement by reference, the Court rejected the argument. Section 102(d) provides, in pertinent part, that “any provision of the certificate of incorporation may be made dependent upon facts ascertainable outside such instrument, provided that the manner in which such facts shall operate upon the provision is clearly and explicitly set forth therein.” Section 102(d) of the DGCL provides that the term “facts” “includes, but is not limited to, the occurrence of any event, including a determination or action by any person or body . . . .” The Court distinguished between “facts” as used in Section 102(d) and the substantive provisions of the stockholders’ agreement at issue, noting that a “fact” is “[s]omething that actually exists; an aspect of reality” or “[a]n actual or alleged event or circumstance, as distinguished from its legal effect, consequence, or interpretation.” A “provision,” by contrast, is a “clause in a statute, contract, or other legal instrument.”
The Court also found that the incorporation by reference of the substantive provisions of a private agreement into a publicly filed certificate of incorporation was contrary to public policy. Delaware requires that certificates of incorporation be filed with the Secretary of State in order that stockholders and third parties are on notice of the basic governance terms of the corporation. In addition, the Court noted that if the parties to a stockholders’ agreement could effectively change the terms of the certificate of incorporation by amending the substantive provisions of a private agreement, the non-signatory stockholders would be disenfranchised because an amendment to the certificate of incorporation generally requires stockholder approval. The Court left open the possibility that the incorporation by reference into a certificate of incorporation of a publicly available rule or regulation that was not susceptible to being changed by private parties without stockholder action, such as a federal securities regulation, might pass muster under Delaware law.
