Stockholder Agreements, DExit and Contractarianism – Could There Have Been a Better Delaware Response to Moelis?

Delaware corporate law has for decades been characterized by a contractarian orientation. Market participants should, by private ordering, be able to tailor corporate governance arrangements to the specific needs of the relevant corporation and its stockholders. While Delaware has always imposed some constraints around private ordering, the 2024 Delaware case West Palm Beach v. Moelis created tremors across the business world when the court held that many terms commonly adopted in contractual stockholder agreements were unenforceable by virtue of infringing Delaware’s statutory default granting the board managerial authority: statute trumps contract. In response to practitioner backlash, Delaware enacted legislation proposed by senate bill “SB 313” reversing Moelis and reiterating the state’s contractarian foundations, which itself caused significant consternation in the academic community. Some 35 years prior to Moelis, the U.K., another jurisdiction with corporate contractarian overtures, had its Moelis moment in the case Russell v. Northern Bank, the O.G. of statutory primacy. Again, certain common stockholder agreement terms were rendered invalid with the stroke of a pen. Unlike Delaware, a SB313-esque legislative response expressly reconstituting contractarianism was not forthcoming. We explain why the U.K. took a different path to Delaware after its Moelis moment. Market dynamics, drafting fixes and common law jurisprudence meant that market practice private ordering was not heavily impacted and there was no urgency in the U.K. to reverse Russell. In contrast, in Delaware, a fear of losing incorporations, and the revenue derived therefrom – DExit – and the sheer breadth of the Moelis decision compelled a legislative response. Using the U.K. experience, though, we show that Delaware could have responded differently in a manner that would have respected Delaware’s contractarian fundamentals and not precipitated DExit, but with less of the controversy that followed SB 313.