Fox Corporation and Snap Inc. are Delaware corporations with multiple classes of stock. Since 2017, Snap has had a three-class stock structure, with publicly traded Class A common stock having no voting rights while privately held Class B and Class C common stock having one and ten votes per share, respectively. Since 2019, publicly traded Fox has had a dual-class stock structure, with Class A common stockholders having no voting rights, while Class B common stockholders having one vote per share.
In 2022, the voting stockholders of Fox and Snap approved charter amendments (the Amendments) exculpating the companies’ officers from breaches of the duty of care, following legislative amendments to Section 102(b)(7) of the Delaware General Corporation Law (DGCL) permitting such exculpation. Neither corporation’s non-voting stockholders (collectively, the Class A Stockholders) were allowed to vote.
The Class A Stockholders filed class action complaints in November 2022, which were eventually consolidated into a single action against Fox and Snap (the Companies). The Class A Stockholders argued that the DGCL required class voting on the amendments based on the plain language of Section 242(b)(2) and a 1969 amendment to Section 242 as well as the intent of the DGCL as a whole.
The Court of Chancery disagreed with the Class A Stockholders and granted summary judgment to Fox and Snap. The court found that the plan language of Section 242(b)(2) did not require separate class votes, basing its conclusion on a comparison of the language in Section 242(b)(2) to language in Sections 102(a)(4) and 151(a) of the DGCL regarding rights, preferences, and powers of classes of stock. The court also reject the Class A Stockholders reliance on prior case law, finding that the decisions in Dickey Clay and Orban required a class vote only to enact a charter amendment when it would impair a “peculiar, or special” characteristic of class shares rather than rights incidental to share ownership. The court also cited the lack of support for the Class A Stockholders’ position from commentators Delaware practitioners’ longstanding support for the Companies’ reading of Section 242(b)(2) as support for its determination.
The Class A Stockholders appealed to the Delaware Supreme Court, which affirmed the Court of Chancery’s decision. The Delaware Supreme Court analyzed both the legislative history of Section 242(b)(2) and the language in Section 242(b)(2), including in the context of Sections 104(a)(2) and 151(a). Section 104(a)(2) requires that the “powers, preferences, and rights” of class-based stock be set forth in the charter, while Section 151 authorizes class-based stock and requiring the inclusion of the “designations, preferences and relative, participating, optional or other special rights” of such stock in the charter. The Court noted that the terms “powers,” “preferences,” and “rights” are unique to these DGCL provisions, and held that the “word ‘powers’ in Section 242(b)(2) refers to specific class powers under Section 151(a), made express in the corporate charter as required by Section 102, and not to general powers incidental to stock ownership.”
The Court also held that the Class A Stockholders’ other cited DGCL provisions referencing the power to sue (Sections 122, 279, and 291) were not useful in defining the “powers . . . of the shares of such class,” because those sections did not relate to class-based stock rights, and expressly defined the ability to sue as a “power,” which Section 242(b)(2) does not. The court also rejected plaintiffs’ argument that treating the ability to sue as a power in certain contexts but not others would lead to unequal treatment of identical rights, reasoning that the ability to sue had different meanings under different statutory provisions.
The Court further discussed Dickey Clay, which concerned charter amendments that increase the number of shares of preferred stock, and Orban opinion, which concerned charter amendments that create new classes of preferred stock. Both opinions held that separate class votes were not required to approve the charter amendments because the amendments did not affect “peculiar, or special” rights of the stockholders. The Court affirmed the Court of Chancery’s reliance on these opinions in granting summary judgment, despite being based on prior iterations of Section 242(b)(2).
Finally, the Court rejected the plaintiffs’ argument that the Court of Chancery improperly considered evidence of commercial custom and practice in reaching its ruling, including evidence that nine other multi-class corporations had not sought a separate class vote when amending their charters to include officer exculpation. The Court also found no error with the Court of Chancery’s observation that in the nearly forty years since Section 102(b)(7) was adopted in 1986, no one had taken the position that an exculpation amendment required a class vote.
Authored by Allison M. Wuertz, David Michaeli, Jordan Teti, and Sean MacDonald.
