As summarized in an earlier post, a recent bench ruling from Vice Chancellor Laster (in the coordinated Fox & Snap actions) contained a careful exposition of how Delaware courts have interpreted when, pursuant to Section 242(b)(2), a class vote is required to amend a multi-class corporation's certificate of incorporation. See generally Elec. Workers Pension Fund, Local 103, I.B.E.W. v. Fox Corp., C.A. No. 2022-1007-JTL (Del. Ch. Mar. 29, 2023) (TRANSCRIPT) (granting defendants' motions for summary judgment), appeal docketed, In re Snap Inc. Section 242 Litig.,No. 120,2023 (Del.).  

This follow-up post takes a closer look at the specific language of the bench ruling, which (absent further guidance from the Delaware Supreme Court) might become a key guidepost for Delaware practitioners and savvy in-house counsel looking to evaluate whether a class vote was (or is) required by statute.

The disputed charter amendments did not require a class vote

To recap, Section 242(b)(2) requires a separate class vote for any charter amendment that "would alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely."  8 Del. C. § 242(b)(2). According to the plaintiffs in the Fox & Snap actions, the disputed amendments (which added officer exculpation provisions) triggered Section 242(b)(2) because they curtailed the stockholders' right to sue (by eliminating their ability to recover damages from officers for, inter alia, breaches of the fiduciary duty of care). After beginning with some "legal level-setting" (discussed below), the Court rejected this argument, reasoning that it was foreclosed by two relevant precedents: Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Mfg. Co., 24 A.2d 315 (Del. 1942) (Dickey Clay) & Orban v. Field, 1993 Del. Ch. LEXIS 277 (Dec. 30, 1993) (Orban). 

Not all rights are created equal

Before grappling with the holdings and reasoning in Dickey Clay and Orban, Vice Chancellor Laster set the stage by delineating the different types of shareholder rights that Section 242(b)(2) might protect:

• Baseline rights: The rights that all stockholders possess, by default, as a matter of Delaware law. These rights include the "three basic rights" appurtenant to shares of stock—i.e., the right to vote, the right to sell, and the right to sue—as well as rights that exist under the DGCL (e.g., inspection rights)
• Superior rights and inferior rights: Rights held by stockholders, pursuant to charter provisions, that are either better than or worse than the corresponding baseline rights. For example, Vice Chancellor Laster noted that preferred stockholders might have superior voting rights if they enjoy more than one vote per share. On the other hand, a stockholder might have inferior voting rights if their right to vote has been eliminated or narrowed by the charter. All superior and inferior rights are, necessarily, special rights (defined below).
• Special rights: Per the bench ruling, "the term [special rights] refers to rights that are different from baseline rights. Special rights can be superior or inferior."
• Express rights and unexpressed rights: Express rights are any rights specifically set forth in a charter or certificate of designations—irrespective of whether such rights exist by default. Conversely, unexpressed rights are any rights that exist as a matter of law but are not specifically articulated in the charter or certificate of designations.

After defining the relevant types of rights, Vice Chancellor Laster addressed the core question implicated in the Fox & Snap actions: What types of rights are protected by the "powers, preferences, or special rights" language in Section 242(b)(2)?

Section 242(b)(2) protects rights expressly set forth in the charter

Vice Chancellor Laster granted the defendants' motions for summary judgment, reasoning that the "express right interpretation" of Section 242(b)(2) was supported by the language of Dickey Clay and Orban. According to Vice Chancellor Laster, "[f]ealty to those precedents dictate[d] the outcome" in the Fox & Snap actions.

In Dickey Clay, the Delaware Supreme Court held that a corporation's common stockholders were not entitled to a class vote (under Section 242(b)(2)'s predecessor, Section 26 of the DCGL) for a charter amendment that increased the number of authorized shares of Class A stock. As distilled by Vice Chancellor Laster, "[t]he holding of Dickey Clay is ... that relative position in the capital structure is not a right of the shares or, in the language of the [Supreme Court's] decision, a quality of the shares such that authorizing more of a senior class or series ... does not make an adverse change to the rights of a junior class or series." Similarly, in Orban, the Court of Chancery refused to find that a class vote was required, pursuant to Section 242(b)(2), with respect to the creation of Series C preferred stock. Just like the share increase in Dickey Clay, the creation of the Series C stock did nothing to change "the legal rights or powers associated with the common stock."

Vice Chancellor Laster observed that, between Dickey Clay and Orban, there is support for at least four different potential interpretations of Section 242(b)(2):

• Superior right interpretation: "[A] class vote is only required if the change affects a special right that is better than what the baseline right would be."
• Special right interpretation: To trigger a class vote, an amendment must adversely affect any type of special right (superior or inferior).
  
• Express right interpretation: Under this view, Section 242(b)(2) is triggered by any charter amendment that would have an adverse effect on any express right.
• Equal/same treatment interpretation: Under this interpretation, which stems exclusively from Orban, Section 242(b)(2) "does not provide a class vote when all shares are affected equally by an amendment."

Ultimately, the express right interpretation carried the day. As such, the charter amendments did not trigger Section 242(b)(2) because the right to sue was not made express in either company's charter. And even if the Court had adopted a "steel-man version of the express rights interpretation," which incorporated any power, preference, or special right prescribed in the DGCL, "the power to sue would [still] not be protected by Section 242(b)(2)" because no provision of the DGCL expressly provides for the right to sue. See 8 Del. C. § 394 ("This chapter and all amendments thereof shall be part of the charter or certificate of incorporation of every corporation.").