A new Delaware law effective August 1 but applying retrospectively, overturning a contrary court decision, makes it clear that when investors in a Delaware-formed company obtain contractual rights which limit what that corporation  can do, those “negative covenants” are in fact enforceable.

Professional investors typically want some sort of control over how a company will be operated, before they make a significant investment.  The practice has grown to include a set of so-called negative covenants, which specifically would prevent a board from taking actions without agreement of certain shareholders, or a certain percentage of shareholders, or of a director representing a particular class of shareholders.  The earlier, now-over-ruled Delaware court decision struck down an  agreement vesting stockholders with a veto right over taking certain corporate actions, since the Delaware corporate law specified that the business of a corporation was subject to the control of the directors unless set forth in the Certificate of Incorporation (charter).  Such agreements also may contain not a veto right but rather compel future action without board vote provided a certain trigger event occurs.

While there can be a wide variety of negative covenants on virtually any subject, and often reflects the maturity of the company involved, generally the list of prohibited transactions includes charter amendments affecting the voting or financial rights of shares, the incurrence of debt or guarantees, transactions that suggest self-dealing by management, changes in business conducted, and changes in key personnel.

This site, in a  July 3 post, noted the pendency of the above change in the Delaware corporation law, as it awaited signature by the Governor (now obtained).

Other, technical changes affecting M&A and investment practice also have been adopted, for which I respectfully refer you to the July 18 alert at https://duanemorris.com/alerts/2024