The Supreme Court of Delaware recently issued a decision upholding long-standing precedent regarding Delaware’s class vote requirement. The case, In re Fox Corporation/Snap Inc. Section 242 Litigation, concerned amendments to a corporation’s certificate of incorporation that alter or change the powers, preferences or special rights of the shares of a class so as to affect them adversely. This dispute highlights one of the ways in which Maryland law provides greater flexibility than Delaware, as the Maryland General Corporation Law (the “MGCL”), contrary to the Delaware General Corporation Law (the “DGCL”), does not require any minimum voting rights for stock.
The In re Fox plaintiffs were non-voting stockholders of corporations that adopted amendments to their respective certificates of incorporation providing for officer exculpation for duty-of-care violations without the vote of certain classes of stock, including stock owned by the plaintiffs. The plaintiffs argued that the reduction of their power to sue officers of the defendant corporations adversely affected their power as stockholders of their respective classes, even though the right to sue officers for duty-of-care violations was uniform among all holders of all classes of stock of the corporations. The In re Fox court rejected this argument, noting “that a separate class stockholder vote [is] required only when the charter amendment adversely affect[s] a peculiar attribute of the class of stock rather than rights incidental to stock ownership” and holding that Section 242(b)(2) of the DGCL instead implicates the specific class powers that are “authorized for a class by Section 151(a) and expressed in the charter as required by Sections 102(a)(4) and 151(a).” The court clarified that the default provisions of the DGCL are only covered by Section 242(b)(2) when a corporation does not specify rights, powers or preferences of a particular class (e.g., when voting rights are not discussed at all).
While In re Fox clarifies that class voting rights are somewhat limited under Delaware law, Maryland corporations may avoid the issue completely. Indeed, the MGCL specifically permits the complete denial of voting rights, although such denial must be explicit in the terms of the stock as set forth in the charter; silence on the issue will result in a class or series having voting rights of one vote per share. As such, the MGCL allows the creation of true nonvoting stock (so long as there is at least one class of voting stock).
Although directors of Delaware corporations post In re Fox can still propose to amend a corporation’s charter without triggering a class vote so long as a charter amendment does not implicate a unique attribute of a class of stock, Section 242(b)(2) of the DGCL still represents a hurdle where a charter amendment adversely affects the rights, powers and preferences of a class of stock. Requiring separate class votes may come with increased expenses and difficulty in soliciting and obtaining stockholder approval, especially for corporations with large retail ownership, for what could be beneficial or even necessary changes to a charter. Maryland law, unlike Delaware law, allows Maryland corporations to avoid such increased expenses and difficulty.
As always, our colleagues and we are available at any time to discuss these or other matters of Maryland law.