Moelis Arguments Threaten Founder Rights in Top Business Court

An appeals court is poised to resolve more than a year of debate over whether a judge went too far in invalidating a billionaire founder’s veto rights over board decisions.

Corporate attorneys say they want to see how Delaware’s courts will interpret a swiftly drafted law that effectively mooted a 2024 decision striking down most of the pact between Ken Moelis and his investment bank, Moelis & Co. While clients seeking stability found reassurance in the legislative moves to restore balance between controllers and minority shareholders, the Delaware Supreme Court’s opinion on the Moelis decision could signal what the law known as S.B. 313 will look like in practice.

“It may be that this case fills some gap that somebody concludes wasn’t properly filled in in the legislation itself,” said Shireen Barday of Pallas Partners LLP.

The state’s highest court hears oral argument Wednesday. Its analysis is what legislators and the Chancery Court’s critics should’ve waited for in the first place, said Charles Elson, a retired University of Delaware law professor, who testified against the Moelis-prompted changes.

Will it “continue on its effective and intelligent mission of protecting all investors? Or will it bow to political pressure?” he said.

Moelis Debate

The Moelis ruling stoked arguments the Chancery Court had tilted the core management powers of high-profile founders and corporate leaders too far in favor of minority shareholders. Amendments that took effect in August allow companies to use private contracts to grant stockholders the types of control that previously required a charter provision or special class of stock.

Many companies had stockholder agreements that “didn’t look all that different from the one in the Moelis case, so when that decision came down, there was a lot of uncertainty,” said Samantha Hale Crispin of Baker Botts LLP.

It was “a relief” to see Delaware lawmakers quickly provide clarity around contract practices that were considered commonplace, she said.

Moelis and the bank said in a brief the Chancery Court’s decision should be reversed because it disregarded “settled law and instead applied a new rule ungrounded in the relevant precedent” while also “relying on hypotheticals rather than evidence to conclude that the challenged provisions always operate unlawfully.”

The pension fund that challenged the pact said it was “not typical of any market practice,” according to a brief. The legislation that followed Vice Chancellor J. Travis Laster’s ruling, moreover, was “not devised for the purpose of validating Moelis’s own uniquely extreme agreement,” it said.

Laster publicly criticized S.B. 313. He had hoped lawmakers would provide “a list of provisions that wouldn’t be problematic,” he said in a Fordham University School of Law forum on March 26. Instead, the law takes “a more anything-goes approach,” he said.

The high court could limit its review to the case’s specific facts, but Moelis “doesn’t exist in a vacuum,” Pallas’s Barday said. When lower courts interpret the statutory changes rendered by S.B. 313, “it may be that they’re interpreted against the backdrop of what happens in this case,” she said.

Judicial Scrutiny

Delaware lawmakers over the last two years have responded properly to “interventionist judges supplanting their perspectives on independence and fairness for those that were adopted by a company’s board and its stockholders,” said Louis Lehot of Foley & Lardner LLP. It’s “absolutely relevant and necessary” for the state supreme court to do the same, he said.

“There’s a nagging doubt that the judges in the Delaware Chancery Court are going beyond the four corners of the law to impose their own concepts of fairness and justice that go beyond the statute,” he said.

The high court’s chief justice implored lawmakers earlier this year to respect judicial independence as they consider corporate law changes. The panel is known to be “unafraid” to deem a decision wrong even when it’s “the product of a good judge’s really hard work,” said John Lawrence, also of Baker Botts.

What corporate clients want to know is what the practical implications of the court’s decision will be, he said. Neither an affirmation nor a reversal of Laster’s decision will affect how directors and executives consider whether to keep a company incorporated in Delaware, he said.

“A lot of the more soap opera aspects of Delaware law that are of interest right now aren’t the things driving corporate decisions on these issues,” he said.

— With assistance from Mike Leonard.

The case is Moelis and Co. v. West Palm Beach Firefighters’ Pension Fund, Del., No. 340,2024, oral arguments 5/7/25.