U.S. M&A Newsletter — July 2, 2024

In Ruby Wagner et al., v. BRP Group Inc. (Del. Ch., May 28, 2024) the Delaware Court of Chancery (the “Court”) held that certain pre-approval rights conferred to a founder of a Delaware corporation pursuant to certain stockholders’ and voting agreements were facially invalid, because they violated Sections 141(a), 142(a) and (e), and 242 of the DGCL. The Court found that the Section 141(a) defect was cured by the consent agreement entered into by the parties to the stockholders’ agreement, which provided that the pre-approval requirements can be overridden by a unanimous vote of an independent committee of the board, but the provisions which violated other sections of the DGCL remained invalid. Notably, the decision came out after Council of the Corporation Law Section of the Delaware State Bar Association recommended amendments to the Delaware General Corporation Law specifically to address the holding in Moelis (the amendments have been adopted and will become effective on August 1, 2024).

Background

In 2019, the founders, partners and executives (together, the “Partners”) of Baldwin Risk Partners, LLC (“BRP LLC”), an insurance business, decided to take their company public. The Partners incorporated BRP Group, Inc. (the “Company”) to serve as the publicly listed vehicle of BRP LLC. The Partners received Class B shares, which carried one vote per share but no claim on the Company’s economic value, and entered into a stockholders’ agreement (the “Stockholders Agreement”), which provided that certain corporate actions relating to the Company required prior written approval of the Partners holding the majority of Class B shares (the “Pre-Approval Requirements”). In particular, the following corporate actions were subject to Pre-Approval Requirements and were challenged by the plaintiff:

(i)         any hiring or termination of the Company’s officers, senior management or key employees (the “Officer Pre-Approval Requirement”); 

(ii)        the occurrence of any amendments to the certificate of incorporation (the “Charter”) of the Company (the “Charter Pre-Approval Requirement”); and 

(iii)       certain transactions involving BRP LLC (e.g., merger, consolidation or sale of all, or substantially all, of the assets of BRP LLC, any dissolution, liquidation or reorganization of BRP LLC) and transactions at the Company level resulting in any acquisition or disposition of any asset for consideration in excess of 5% of the total assets of the Company and its subsidiaries (the “Transaction Pre-Approval Requirement” and, together with the Officer Pre-Approval Requirement and the Charter Pre-Approval Requirement, the “Challenged Provisions”).

Under a separate voting agreement, the Partners committed to vote as one of the founders, Lowry Baldwin, directed. Therefore, Lowry Baldwin controlled the exercise of the Pre-Approval Requirements. 

The plaintiff filed the complaint on February 8, 2023, challenging the Challenged Provisions but not the other Pre-Approval Requirements. In response, in May 2023, the Company and the Partners entered into a Consent and Defence Agreement (the “Consent Agreement”), pursuant to which the Partners agreed to approve any matter requiring consent under the Stockholders Agreement if the matter received unanimous approval from all of the members of a committee comprising all of the Company’s independent directors (the “Independent Committee”).

Court’s Analysis

The Court held that the Challenged Provisions violated various requirements of the DGCL and were facially invalid.  Additionally, the Court found that the Consent Agreement did cure the Section 141(a) violations, but not other violations of the DGCL.

Each of the Challenged Provisions violated Section 141(a) of DGCL

Section 141(a) of the DGCL provides that the business and affairs of a corporation shall be managed by or under the direction of a board of directors, except as may be otherwise provided in the DGCL or its certificate of incorporation.

The Court relied on its holding in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.¹, in which it concluded that Delaware law recognizes a Section 141(a) challenge to a nominally third-party agreement that restricts board authority.

To determine whether each of the Challenged Provisions have nominally restricted the board’s authority the Court applied a two-part test discerned in Moelis: 

(i)         whether the challenged provision was part of corporation’s internal governance arrangement, and if yes,

(ii)        whether the governance restrictions had the effect of removing from the directors in a very substantial way their duty to use their own best judgement on management matters or tended to limit in a substantial way the freedom of director decisions on matters of management policy.

The Court concluded that the Challenged Provisions satisfied both parts of the test as (i) the Challenged Provisions were an arrangement by the stockholders which governed the Company’s internal affairs, and (ii) the Challenged Provisions improperly restricted the board’s authority in a substantial way. The Court provided detailed analysis on each of the Challenged Provisions and how such provision restricted the board’s authority. According to the Court, such restrictions imposed by the Challenged Provisions must appear in the Charter and the attempt to impose them through the Stockholders Agreement contravened Section 141(a). 

However, the Court agreed that the Consent Agreement introduced an override of the Pre-Approval Requirements by the unanimous vote of the Independent Committee and, therefore, resolved the Section 141(a) problem by enabling the board to exercise its statutory authority. 

The Officer Pre-Approval Requirement and the Charter Pre-Approval Requirement violated Sections 142(a) and (e) and Section 242, respectively

The Court further held that:

1.         The Officer Pre-Approval Requirement violated Sections 142(a) and (e) 

Pursuant to Sections 142(a) and (e) of the DGCL, the designation, manner and terms of officers are prescribed by the bylaws or determined by the board or other governing body and vacancies of any office are filled as provided by the bylaws. 

The Court found that the Officer Pre-Approval Requirement was a process that governed appointing, replacing, or making any significant decisions regarding senior officers which was not authorized by the DGCL, the Charter, or the bylaws. The Consent Agreement did not resolve the lack of authority and so the Officer Pre-Approval Requirement remained in violation of Section 142 of the DGCL. 

2.         The Charter Pre-Approval Requirement also violated Section 242

Pursuant to Section 242 of the DGCL, effectuating a charter amendment requires the following two steps to occur in order: (i) the board must adopt a resolution declaring the advisability of the amendment and calling for a stockholder vote; and (ii) a majority of the outstanding stock entitled to vote must vote in favor of the amendment. 

The Court found that in requiring Lowry Baldwin’s consent for the amendment of the Charter, the Charter Pre-Approval Requirement displaced the sequence required by Section 242 of the DGCL. The Consent Agreement did not remedy the violation, as it required the Company to appeal first to Lowry Baldwin for written permission to proceed and then submit to the vote of the Independent Committee, which could unanimously approve the Charter amendment. This process continued to violate the statutory process established by Section 242 of the DGCL.

Our Take 

BRP Group expands the analysis of corporate governance matters included in stockholders agreements that the Court provided in Moelis. The strong public disagreement among academics, judges and practitioners with respect to the impending amendments to the DGCL that would override the Moelis and BRP Group decisions suggest that this area of Delaware law will be closely watched and discussed. Our previous newsletter on the proposed amendments to the DGCL can be found here.

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¹  West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (Del. Ch. Feb. 23, 2024).