Delaware court finds corporate charter cannot incorporate private agreement by reference

In July 2021, N-able, Inc., (the Company), formally a subsidiary of SolarWinds Corporation, was established following a spinoff. The spinoff involved significant governance restructuring orchestrated by two private equity firms, who controlled SolarWinds. Following the spinoff, these private equity firms became the “Lead Investors” in N-able. In preparation for the initial public offering (IPO), the Lead Investors restructured the Company’s charter and bylaws, and negotiated a stockholders agreement that granted them extensive governance rights over the Company’s operations. This agreement included provisions that required the Company to obtain prior written consent from both Lead Investors for a wide range of corporate actions, effectively limiting the board of directors’ authority to manage the business. the restructured charter also contained provisions that were “subject to” the Lead Investor’s rights under the external agreement. 

On March 16, 2023, the plaintiff, a stockholder in N-able, brought claims challenging the facial validity of the granted governance rights. The parties filed cross-motions for summary judgment. 

Plaintiff contended that the provisions generally ran afoul of Section 141(a) of Delaware General Corporate Law (DCGL) because they improperly restricted the board’s duty to manage the business and affairs of N-able. In accordance with W. Palm Beach Firefighters Pension Fund v. Moelis & Co., and Wagner v. BRP Grp., Inc., the court agreed, noting the restrictions “have the effect of removing from the directors, in a very substantial way, their duty to use their own best judgment on management matters” and invalidated the stockholder agreement provisions as facially invalid.

Unlike in Moelis or BRP, Seavitt contained an additional wrinkle. Certain provisions in the charter and bylaws contained language that stated that the provisions were “subject to” the Lead Investors’ rights under the Stockholders’ Agreement. The court found that this raised the threshold question of whether, under Delaware law, a corporation’s charter or bylaws could incorporate by reference the substantive provisions of an external agreement. The court found that the DGCL does not permit such incorporation.  The court explained that the DGCL allows a charter to contain provisions dependent on “facts ascertainable” outside of the document (e.g., dates or parties), but does not permit provisions looking to “provisions ascertainable” (e.g., the substantive terms of other agreements). The court also noted that the incorporation of a private agreement into the charter ran afoul of Delaware law because Delaware law requires charters to be publicly filed, but private agreements are not always public. The court observed that the company’s attempt to fuse a private contract into a public charter would “spawn a corporate minotaur” and “[t]he DGCL does not permit the creation of a corporate mutant.” Accordingly, the court granted the plaintiff’s motion for summary judgment in part, striking down the bulk of the provisions as facially invalid. 

Importantly, as of August 1, 2024, changes to the law mean that future cases under similar fact patterns will be judged differently. As of that date, the DCGL was amended to add a new Section 122(18) which expressly authorizes stockholders agreements like those in Seavitt, and its predecessor cases Moelis and BRP, notwithstanding Section 141(a), including obviating the need for any incorporation-by-reference workaround. However, while the amendments to the DGCL apply retroactively, the legislation mandated that they will not apply to proceedings completed or pending on or before August 1, meaning that Seavitt was analyzed under the pre-amendment regime. 

Authored by Allison M. Wuertz, Jordan Teti, and Jason Chohonis.