West Palm Beach Firefighters' Pension Fund v. Moelis & Company
Not yet reported (2024)
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Rule of Law:
Equitable defenses, such as laches and acquiescence, cannot validate a corporate act that is void for violating a mandatory provision of the Delaware General Corporation Law (DGCL). A facial challenge to the statutory validity of an ongoing governance arrangement is timely under the continuing wrong or separate accrual methods and is ripe for adjudication even without a specific instance of the arrangement being enforced.
Facts:
- In 2007, Ken Moelis formed a boutique investment bank, Moelis & Company
- In 2014, Moelis decided to raise capital by taking the Company public through an Initial Public Offering (IPO)
- One day before the Company's shares began public trading, the Company and three entities controlled by Moelis executed a Stockholders Agreement
- The Stockholders Agreement contained an array of provisions (the 'Challenged Provisions') that granted Moelis expansive rights regarding the governance of the Company
- On November 19, 2014, West Palm Beach Firefighters' Pension Fund purchased shares of the Company's Class A common stock
- The plaintiff filed suit on March 13, 2023, nearly nine years after the IPO
Procedural Posture:
- West Palm Beach Firefighters' Pension Fund filed a lawsuit against Moelis & Company in the Delaware Court of Chancery
- The plaintiff's complaint alleged that certain provisions of a Stockholders Agreement between the Company and its founder were facially invalid under DGCL § 141(a)
- The parties filed cross-motions for summary judgment on the merits of the statutory claim
- The Company filed a motion for summary judgment based on the affirmative defenses of laches and ripeness
- The Court of Chancery denied the Company's motion for summary judgment on laches and ripeness
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Issue:
Is a stockholder's facial challenge to a stockholders agreement under DGCL § 141(a), filed nine years after the agreement's adoption, barred by the defenses of laches and lack of ripeness?
Opinions:
Majority - Vice Chancellor Laster
The court denied the Company's motion for summary judgment, holding that the stockholder's facial challenge is neither barred by laches nor unripe. First, if the Challenged Provisions violate Section 141(a), they are void ab initio, and equitable defenses cannot validate void acts. Second, even if laches could apply, the plaintiff did not unreasonably delay because the alleged statutory violation constitutes a continuing wrong that persists every moment the agreement remains in effect. Third, the Company demonstrated no prejudice from the timing of the suit. Regarding ripeness, the court distinguished between the Abercrombie test's two prongs: a 'Berle I' facial statutory challenge (testing whether corporate action complies with the DGCL) and a 'Berle II' as-applied fiduciary duty challenge (testing whether a specific exercise of power was equitable). The plaintiff brought a Berle I challenge, which is ripe upon adoption of the challenged provisions without requiring a specific harmful application.
Analysis:
This decision reinforces the critical distinction in Delaware law between statutory validity and equitable fiduciary review under the Abercrombie test framework. The Abercrombie test, derived from Abercrombie v. Davies and refined through subsequent cases, establishes that corporate action must be 'twice-tested': first for legal compliance with the DGCL (Berle I), then for equitable fairness (Berle II). By categorizing an ongoing illegal governance provision as a 'continuing wrong,' the court severely curtails companies' ability to use laches to insulate long-standing arrangements from statutory challenges. The court's application of the Abercrombie framework clarifies that facial statutory challenges are pure questions of law that are ripe immediately upon adoption, while as-applied fiduciary challenges require a specific exercise of the challenged power. This protects stockholder-plaintiffs as enforcers of corporate law norms and ensures mandatory DGCL provisions cannot be effectively nullified through the passage of time or stockholder acquiescence.
