ABSTRACT
When Ken Moelis, the founder, CEO and Chairman of the Board of Moelis & Company, organized his large investment bank as a public corporation, he also made the corporation sign into a shareholder agreement that effectively forced the board to get his consent for anything the board may do. Not long thereafter, shareholders who felt harmed by this managerial chokehold, represented by the West Palm Beach Firefighters’ Pension Fund, sued, and the Delaware Chancery Court deemed much of the shareholder agreement invalid – the court held the contract interfered with the statutory right of corporate managers to manage the corporation. This decision sent market participants and legislatures into panic mode. The Delaware State Bar quickly proposed legislation designed to enable a ‘freedom of contract’ approach to the managers right to manage the corporation. Shortly thereafter, other lodestar decisions, including in a suit alleging a breach of fiduciary duty by Meta’s Mark Zuckerberg, have chipped away at the decision guaranteeing managerial independence – the cases tried to draw a distinction between corporate charters, which would allow contracting around the manager’s right to manage, and bylaws and shareholder agreements, which would not.
This Article tackles this extraordinary legal development and argues that managerial independence must be immutable. Neither corporate charters nor bylaws and shareholder agreements should be a tool for circumventing managerial independence, as doing so would prevent one of the most ubiquitous and elementary forms of organization in today’s economy: the pooling of assets under a fiduciary who answers to the firm rather than individual investors.
Stein, Tomer, Corporate Law’s Coup de Grâce: The Case for Managerial Independence (May 26, 2024).
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