Interlocking Disharmony

This is an excerpt from Seavitt v. N-Able, Inc., 321 A.3d 516, 542–43 (Del. Ch. 2024), that illustrates the potential for conflicts among governance documents:

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As a threshold manner, reviewing the Charter, Bylaws, and Stockholders Agreement demonstrates the confusion that can result from attempting to address the same matters through multiple governance documents, rather than putting provisions in the governance documents where they belong. Here, the Company's Charter does not fix the number of directors. Instead, it empowers the Lead Investors to determine the size of the Board. It states:

Subject to any rights of the holders of any series of Preferred Stock then outstanding or the rights granted pursuant to the Stockholders Agreement to elect additional directors under specified circumstances, the number of directors which shall constitute the Board of Directors shall be fixed exclusively from time to time by,

(i) for so long as the Silver Lake Investors and Thoma Bravo Investors (collectively, the “Investors”) collectively beneficially own (directly or indirectly), in the aggregate, at least 40% of the outstanding Common Stock of the Corporation, the Investors, or

(ii) thereafter, resolution adopted by the affirmative vote of a majority of the directors then in office.

As discussed below, the language “[s]ubject to the rights granted pursuant to the Stockholders Agreement to elect additional directors under specified circumstances” cannot incorporate provisions of the Stockholders Agreement by reference and is a nullity. But the language giving the Lead Investors the exclusive right to set the number of directors as long as their aggregate ownership exceeds 40% is valid because it appears in the Charter.

The Bylaws establish yet another mechanism for determining board size, but it conflicts with the Charter and is invalid. It states “the number of directors shall initially be seven (7) and, thereafter, shall be fixed from time to time exclusively by the Board[.]”85 During the period when the Lead Investors have the Charter-based right to determine the size of the Board, that Bylaw conflicts with the Charter and is invalid. Once the Lead Investors’ ownership stake falls below 40%, the Bylaw conflicts with the Charter because the Bylaw contemplates a decision by a majority of the directors present at a meeting where a quorum exists, while the Charter requires “the affirmative vote of a majority of the directors then in office.” There are no circumstances when the Bylaw can operate validly.

The Size Requirement in the Stockholders Agreement contemplates a completely different mechanism. It states:

[T]he Board shall consist of eight (8) Directors; provided, that the Board shall further increase (a) the number of Independent Directors to the extent necessary to comply with applicable law and the Stock Exchange rules, or as otherwise agreed by the Board, subject to the rights of the Lead Investors under Section 5.4.7,87 or (b) the number of Directors as otherwise requested in writing by the Lead Investors.

Under this provision, the Board is always required to set the number of directors at the number requested by the Lead Investors, regardless of their holdings.

At present, the Size Requirement is doing nothing because the Charter gives the Lead Investors the exclusive right to set the number of directors as long as their aggregate ownership exceeds 40%, and the Lead Investors current ownership exceeds 60%.89 Because the Charter already contains a statutorily valid, Charter-based provision that constrain the Board, the Lead Investors can set the number of directors without relying on the Stockholders Agreement. The Size Requirement is currently superfluous.

But, as in Moelis, that does not mean the Size Requirement is not facially invalid. The Size Requirement can only become operative if the Lead Investors’ holdings drop below 40%. At that point Article VI(B)(ii) of the Charter would control, and it requires that “the number of directors which shall constitute the Board of Directors shall be fixed exclusively from time to time by ... resolution adopted by the affirmative vote of a majority of the directors then in office.” The language in the Stockholders Agreement requiring the Board to set the number of directors “subject to the rights of the Lead Investors under [the Size Requirement], or (b) the number of Directors as otherwise requested in writing by the Lead Investors” would conflict with the Charter and be invalid.

There is no setting where the Lead Investors could invoke the Size Requirement and have it operate validly. The only time it can operate is if the Lead Investors’ stock ownership falls below 40%, and the directors want to expand or contract the Board to a different size than the Lead Investors prefer. Only in that setting does the Size Requirement kick in, and in that setting, it operates invalidly to constrain the Board's authority under Section 141(a) and the Charter. The Size Requirement is therefore facially invalid.