Delaware DGCL Section 122(18): The Post-Moelis Revolution in Stockholder Governance Agreements
In corporate transactional practice, few statutory developments in the past half-century have generated as much intense debate, academic commentary, and rapid legislative action as the enactment of Section 122(18) of the Delaware General Corporation Law (DGCL). Signed into law via Delaware Senate Bill 313 (SB 313) on July 17, 2024, and effective August 1, 2024, subsection (18) represents the Delaware General Assembly’s decisive response to the Court of Chancery’s controversial decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.(311 A.3d 807).
1. The Moelis Decision and the Crisis of Customary Governance
For decades, private equity sponsors, venture capital partnerships, and serial corporate acquirers routinely negotiated bilateral Stockholder Agreements (also styled as Investor Rights Agreements, Shareholder Pacts, or Governance Agreements). These contracts routinely granted significant investors extensive negative controls—vetoes over mergers and acquisitions, debt incurrence, executive hiring and firing, operating budgets, and dividends—alongside board seat designation rights and committee composition mandates. Deal practitioners largely assumed that as long as the board of directors approved the agreement, these governance protections were fully enforceable.
On February 23, 2024, Vice Chancellor J. Travis Laster disrupted this standard market consensus in Moelis. Applying the foundational statutory mandate of DGCL § 141(a)—which establishes that the business and affairs of every Delaware corporation shall be managed by or under the direction of a board of directors, except as otherwise provided in the Certificate of Incorporation—the Court of Chancery held that customary negative consent rights facially violated Delaware law. Because the contractual vetoes stripped the board of its statutory management prerogatives without being embedded in the Certificate of Incorporation, Chancellor Laster deemed the covenants void ab initio.
2. The Legislative Fix: Delaware Senate Bill 313 and Codification of § 122(18)
Recognizing that thousands of existing corporate agreements across public and private Delaware entities faced immediate cloud of invalidity, the Delaware State Bar Association Corporation Law Council proposed, and the General Assembly enacted, SB 313. The statute introduced 8 Del. C. § 122(18), expressly declaring that a Delaware corporation possesses the corporate power and authority to:
- Covenant to take or refrain from specified actions: Agree in contract that the corporation or board will act or refrain from acting in the future, even if such decisions would traditionally require future board deliberation.
- Condition corporate actions on third-party consent:Require the pre-approval or consent of one or more persons or bodies (expressly including stockholders) before the corporation may consummate specified transactions (such as M&A, debt issuances, or reorganizations).
- Promise procedural board governance actions: Covenant that the corporation or its board will take specified administrative or procedural steps, such as recommending transactions to stockholders or nominating sponsor designees.
3. Statutory Boundaries and the Crucial Proviso: What § 122(18) Does NOT Allow
While § 122(18) grants broad contractual latitude, it is not an unlimited safe harbor. Transactional attorneys and corporate boards must navigate three critical statutory and common law guardrails:
- Certificate of Incorporation Supremacy (The Statutory Proviso): The statute expressly states:"provided, however, that no provision of such contract shall be enforceable to the extent that such provision would be contrary to the certificate of incorporation if contained therein." If a corporate charter reserves exclusive authority over dividend declarations or stock issuances to the board, a contractual veto granted to a stockholder that contradicts that charter clause is void and unenforceable. Parties cannot contract around the charter without a formal § 242 amendment.
- Consideration Requirement: The contract must be supported by valid legal consideration approved by the board (such as equity investment, debt financing, commercial commitments, or rollover equity). Gratuitous post-closing governance gifts remain unenforceable.
- Fiduciary Duty Non-Waivability & Equitable Scrutiny: Crucially, § 122(18) resolves the question of corporate power, not fiduciary propriety. As emphasized in the official legislative synopsis, directors who enter into or perform under a stockholder agreement remain fully subject to their non-waivable duties of care and loyalty. If executing an agreement or complying with a veto violates fiduciary duties (e.g., in a Revlon sale of the company or an interested controller transaction under In re Match Group, Inc.), equitable scrutiny applies.
4. Specific Performance vs. Monetary Damages: The Remedy Divide
One of the most consequential nuances of post-SB 313 practice is the bifurcation of contract remedies. Under established Delaware jurisprudence, a court of equity may decline to grant specific performance if compelling the board to comply with an agreement would force directors to breach their fiduciary obligations to the corporation and its minority stockholders.
In such cases, while specific performance or injunctive relief may be denied, the corporation may remain liable for monetary expectation damages for breach of contract. For this reason, sophisticated sponsors and target boards frequently negotiate express fiduciary out provisions and liquidated damages caps to manage balance-sheet exposure while preserving board agility.
5. Best Practices for Drafting Post-2026 Stockholder Agreements
To ensure maximum enforceability under DGCL § 122(18) and withstand scrutiny in the Delaware Court of Chancery, legal counsel should adhere to the following gold-standard drafting protocols:
- Audit the Charter Ab Initio:Review the target corporation's Certificate of Incorporation to verify that negative consent rights do not conflict with existing charter allocations of board authority, authorized share provisions, or class voting rights.
- Embed Express Fiduciary Out Clauses: Incorporate unambiguous fiduciary carve-outs enabling directors to act contrary to contractual covenants if the board determines in good faith, after consulting outside counsel, that failure to do so would breach its fiduciary duties.
- Document Business Justification in Minutes: Ensure board minutes reflect the valid, quantifiable consideration received by the corporation in exchange for granting governance rights (e.g., capital infusion, critical debt restructuring, or strategic commercial alliance).
- Utilize MFW Safeguards with Controllers: If entering into or amending a stockholder agreement with a controlling stockholder who receives unique governance prerogatives, condition the transaction from the outset (ab initio) on independent Special Committee approval and a fully informed majority-of-the-minority stockholder vote under Kahn v. M&F Worldwide (MFW) and Match Group.