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Founders of dual-class companies—think Drew Houston at Dropbox or Mark Zuckerberg at Meta—should watch out. Delaware courts are starting to invalidate sharehold

Founders of dual-class companies—think Drew Houston at Dropbox or Mark Zuckerberg at Meta—should watch out. Delaware courts are starting to invalidate shareholder agreements where the founder has control of the board thing. The fun thing about the Moelis case is that the Delaware Court of Chancery in 2024 sided with a minority shareholder against Ken Moelis. Which is kind of wild when you think about it. You’re a minority shareholder. You invest in Moelis & Company, an investment bank that Ken Moelis—yes, that Ken Moelis (https://en.wikipedia.org/wiki/Ken_Moelis https://en.wikipedia.org/wiki/Ken_Moelis), the famous dealmaker whose name is literally the brand—controls through majority voting power and ownership. And then you go, “Wait a second, Ken Moelis has too much control over the board of Moelis & Company!” Yeah, that’s sort of the whole point. And this is where people start saying, “Huh, maybe this court is getting a little too activist.” Wasn’t the whole idea of incorporating in Delaware that it’s business-friendly? That it streamlines governance and makes it easier to run a company?

fullshark 2y ago
What's the point of owning a share of a company if you have no say over its board of directors?
- patrickhogan1 2y ago
  When I look at cases like this, I think about it from the perspective of the investor who is suing: 1. Were you aware that the stock you were buying was founder-controlled? In the Moelis case, this was fully disclosed to shareholders. 2. In a free market, shouldn’t investors be able to decide for themselves whether founder-controlled companies offer better returns—and invest accordingly? There are plenty of companies with traditional governance structures for those who prefer them. 3. If you own one share with one vote, should that give you the power to dictate the corporate structure for everyone else? I completely agree that shareholder protections matter. The question is whether these lawsuits are really about protecting shareholders—or if they’re more about generating profits for attorneys through litigation. Ultimately, the market provides options. We have 50 states, each with the ability to set its own corporate governance laws. Companies aren’t locked into one approach—they can choose the legal framework that best aligns with their needs. Delaware has long been the preferred choice, but as its legal environment shifts, states like Nevada, with their statute-driven approach, may become more attractive for businesses looking for stability. Competition among states is a feature of the system, not a flaw.
  - dkjaudyeqooe 2y ago
    "No one was mislead, I told him I 'd kill him if he slept with my wife, he knew what he was getting himself into to, he was free to choose."
- archagon 2y ago
  If you don’t want to be beholden to shareholders, don’t make your company public.
JumpCrisscross 2y ago
> Wasn’t the whole point of incorporating there that it’s business-friendly? Shareholder friendly. Also a deeply-developed body of law and efficient courts. There will absolutely be legal arbitrage opportunities between Delaware and Texas. Musk and Mark can sustain them; those who follow them may not.
nocoiner 2y ago
But then after that ruling the Delaware legislature changed the law, so it seems like the “awkward questions” you allude to have been mooted?
- patrickhogan1 2y ago
  Put yourself in Drew Houstons position. You are running Dropbox. Do you want to spend your time navigating legal uncertainty—or focusing on your business? This isn’t just one case. First, it was Musk’s pay package. Now, it’s TripAdvisor. What comes next? Each ruling seems to reshape long-standing corporate governance norms. And when that happens, how long will it take Delaware to provide clarity? How much will companies and shareholders spend on legal fees while they wait? Also who does this all benefit except for plaintiff-litigation attorneys?
  - JumpCrisscross 2y ago
    > Do you want to spend your time navigating legal uncertainty Texas is arguably more legally volatile than Delaware. Just look at statutory volume. Put another way, Texan lawmakers make headlines in ways Delaware lawmakers do not. > who does this all benefit except for plaintiff-litigation attorneys? Texan courts are slower than Delaware’s. Also, there is now a multi-billion dollar incentive to find the areas of law Texas hasn’t patched that Delaware has. Would be shocked if we don’t see a massive boom in Texan corporate litigation in the coming years. The proximate cause was the pay package. The root cause is these leaders don’t have influence in Delaware. They do in Texas, and they want to wield that. For their companies’ shareholders, that might wind up a win-win.
    - patrickhogan1 2y ago
      I agree with your point about the Musk case. I believe it will be litigated again. Regardless of the corporation's domicile or either of our opinions on that issue, there is ambiguity and a scale factor that will likely result in further litigation. The case that bothers me is the Moelis case. The West Palm Beach Firefighters' Pension Fund v. Moelis & Company case is troubling, because it’s a classic example of a Delaware court looking at a company’s governance structure and saying, “Wait a second, this seems bad,” even though it’s exactly what everyone signed up for. On February 23, 2024, the Delaware Court of Chancery ruled in favor of a minority shareholder against Ken Moelis. Yes, that Ken Moelis <https://en.wikipedia.org/wiki/Ken_Moelis https://en.wikipedia.org/wiki/Ken_Moelis>, the well-known investment banker whose name is literally the brand. Analysis of the case is located here: <https://clsbluesky.law.columbia.edu/2024/06/10/does-the-moelis-decision-warrant-a-quick-legislative-fix/?utm_source=chatgpt.com https://clsbluesky.law.columbia.edu/2024/06/10/does-the-moel...>. The court found that Moelis & Company’s governance structure—where Moelis, through his majority voting power, essentially controls the board—violated Delaware corporate law. Now, imagine you’re a minority shareholder. You buy stock in Moelis & Company, a firm run by a guy named Moelis, with a governance structure designed to keep him in charge. Then, at some point, you look around and say, “Hey, wait a minute, this Moelis guy has too much control over the board!” Yes. That’s the whole point. That’s why this company was set up in Delaware. And yet, the Delaware court said no, this arrangement is not okay. Which is interesting because Delaware is supposed to be the place where companies go for predictable, business-friendly rules. The whole appeal of Delaware incorporation is that it streamlines governance and makes it easier to run a company. If the court begins second-guessing these structures, is Delaware still the best place to incorporate? It also raises the question of who is the court protecting. Is it protecting minority shareholders, or is it creating ambiguity that fuels the plaintiffs' bar and leads to more litigation?
dkjaudyeqooe 2y ago
You seem to be reducing corporate governance to "caveat emptor". Why should shareholders be stripped or their rights? If you sell shares to others they should have the rights of owners such as votes on board members.
- patrickhogan1 2y ago
  It’s not about stripping shareholder rights—it’s about understanding what you’re buying. In the Moelis case, it was clear from the start that the company was founder-controlled. No one was misled. Investors had full transparency and chose to buy in with that structure in place. Shareholders absolutely have rights, but those rights depend on the governance structure they agreed to when they invested. If you buy non-voting shares or shares in a dual-class structure, you don’t get to retroactively demand different terms. The market offers plenty of companies with traditional governance—if that’s a priority, investors are free to choose them. The real question is: should courts be rewriting corporate structures after the fact, overriding agreements that were clear from day one?
inetknght 2y ago
> That founder control structures were safe? If you want founder control structures then you don't want a public company.
- patrickhogan1 2y ago
  Meta seems to be doing well with Zuck, as does Dropbox with Drew. I like the freedom to, but not the requirement to, invest in public founder led companies. Thinking back to 2022 - the market was ready to throw Meta out with the bath water. The voting protections kept Zuck in place and now we have consistent backing of Llama. When Zuck says he believes in open source and will continue to fund it I believe him because he is a software engineer who wrote Facebook on PHP which is open source.

fullshark 2y ago

What's the point of owning a share of a company if you have no say over its board of directors?

patrickhogan1 2y ago
When I look at cases like this, I think about it from the perspective of the investor who is suing: 1. Were you aware that the stock you were buying was founder-controlled? In the Moelis case, this was fully disclosed to shareholders. 2. In a free market, shouldn’t investors be able to decide for themselves whether founder-controlled companies offer better returns—and invest accordingly? There are plenty of companies with traditional governance structures for those who prefer them. 3. If you own one share with one vote, should that give you the power to dictate the corporate structure for everyone else? I completely agree that shareholder protections matter. The question is whether these lawsuits are really about protecting shareholders—or if they’re more about generating profits for attorneys through litigation. Ultimately, the market provides options. We have 50 states, each with the ability to set its own corporate governance laws. Companies aren’t locked into one approach—they can choose the legal framework that best aligns with their needs. Delaware has long been the preferred choice, but as its legal environment shifts, states like Nevada, with their statute-driven approach, may become more attractive for businesses looking for stability. Competition among states is a feature of the system, not a flaw.
- dkjaudyeqooe 2y ago
  "No one was mislead, I told him I 'd kill him if he slept with my wife, he knew what he was getting himself into to, he was free to choose."
archagon 2y ago
If you don’t want to be beholden to shareholders, don’t make your company public.

JumpCrisscross 2y ago

> Wasn’t the whole point of incorporating there that it’s business-friendly? Shareholder friendly. Also a deeply-developed body of law and efficient courts. There will absolutely be legal arbitrage opportunities between Delaware and Texas. Musk and Mark can sustain them; those who follow them may not.

nocoiner 2y ago

But then after that ruling the Delaware legislature changed the law, so it seems like the “awkward questions” you allude to have been mooted?

patrickhogan1 2y ago
Put yourself in Drew Houstons position. You are running Dropbox. Do you want to spend your time navigating legal uncertainty—or focusing on your business? This isn’t just one case. First, it was Musk’s pay package. Now, it’s TripAdvisor. What comes next? Each ruling seems to reshape long-standing corporate governance norms. And when that happens, how long will it take Delaware to provide clarity? How much will companies and shareholders spend on legal fees while they wait? Also who does this all benefit except for plaintiff-litigation attorneys?
- JumpCrisscross 2y ago
  > Do you want to spend your time navigating legal uncertainty Texas is arguably more legally volatile than Delaware. Just look at statutory volume. Put another way, Texan lawmakers make headlines in ways Delaware lawmakers do not. > who does this all benefit except for plaintiff-litigation attorneys? Texan courts are slower than Delaware’s. Also, there is now a multi-billion dollar incentive to find the areas of law Texas hasn’t patched that Delaware has. Would be shocked if we don’t see a massive boom in Texan corporate litigation in the coming years. The proximate cause was the pay package. The root cause is these leaders don’t have influence in Delaware. They do in Texas, and they want to wield that. For their companies’ shareholders, that might wind up a win-win.
  - patrickhogan1 2y ago
    I agree with your point about the Musk case. I believe it will be litigated again. Regardless of the corporation's domicile or either of our opinions on that issue, there is ambiguity and a scale factor that will likely result in further litigation. The case that bothers me is the Moelis case. The West Palm Beach Firefighters' Pension Fund v. Moelis & Company case is troubling, because it’s a classic example of a Delaware court looking at a company’s governance structure and saying, “Wait a second, this seems bad,” even though it’s exactly what everyone signed up for. On February 23, 2024, the Delaware Court of Chancery ruled in favor of a minority shareholder against Ken Moelis. Yes, that Ken Moelis <https://en.wikipedia.org/wiki/Ken_Moelis https://en.wikipedia.org/wiki/Ken_Moelis>, the well-known investment banker whose name is literally the brand. Analysis of the case is located here: <https://clsbluesky.law.columbia.edu/2024/06/10/does-the-moelis-decision-warrant-a-quick-legislative-fix/?utm_source=chatgpt.com https://clsbluesky.law.columbia.edu/2024/06/10/does-the-moel...>. The court found that Moelis & Company’s governance structure—where Moelis, through his majority voting power, essentially controls the board—violated Delaware corporate law. Now, imagine you’re a minority shareholder. You buy stock in Moelis & Company, a firm run by a guy named Moelis, with a governance structure designed to keep him in charge. Then, at some point, you look around and say, “Hey, wait a minute, this Moelis guy has too much control over the board!” Yes. That’s the whole point. That’s why this company was set up in Delaware. And yet, the Delaware court said no, this arrangement is not okay. Which is interesting because Delaware is supposed to be the place where companies go for predictable, business-friendly rules. The whole appeal of Delaware incorporation is that it streamlines governance and makes it easier to run a company. If the court begins second-guessing these structures, is Delaware still the best place to incorporate? It also raises the question of who is the court protecting. Is it protecting minority shareholders, or is it creating ambiguity that fuels the plaintiffs' bar and leads to more litigation?

dkjaudyeqooe 2y ago

You seem to be reducing corporate governance to "caveat emptor". Why should shareholders be stripped or their rights? If you sell shares to others they should have the rights of owners such as votes on board members.

patrickhogan1 2y ago
It’s not about stripping shareholder rights—it’s about understanding what you’re buying. In the Moelis case, it was clear from the start that the company was founder-controlled. No one was misled. Investors had full transparency and chose to buy in with that structure in place. Shareholders absolutely have rights, but those rights depend on the governance structure they agreed to when they invested. If you buy non-voting shares or shares in a dual-class structure, you don’t get to retroactively demand different terms. The market offers plenty of companies with traditional governance—if that’s a priority, investors are free to choose them. The real question is: should courts be rewriting corporate structures after the fact, overriding agreements that were clear from day one?

inetknght 2y ago

> That founder control structures were safe? If you want founder control structures then you don't want a public company.

patrickhogan1 2y ago
Meta seems to be doing well with Zuck, as does Dropbox with Drew. I like the freedom to, but not the requirement to, invest in public founder led companies. Thinking back to 2022 - the market was ready to throw Meta out with the bath water. The voting protections kept Zuck in place and now we have consistent backing of Llama. When Zuck says he believes in open source and will continue to fund it I believe him because he is a software engineer who wrote Facebook on PHP which is open source.