Earlier this month the Electrical Workers Pension Fund, Local 103, I.B.E.W. filed a verified class action complaint in the Delaware Court of Chancery against Fox Corporation. (Case No. 2022-1007-MTZ (filed Nov. 4, 2022)). The complaint challenges the recent amendment of Fox Corporation's Certificate of Incorporation to include a provision exculpating officers. Delaware amended Section 102(b)(7) of the Delaware General Corporation Law last summer to permit Delaware corporations to permit such amendments.
The complaint does not challenge the statutory amendment. Rather, it challenges the procedure by which Fox Corporation adopted the amendment. According to the complaint, Fox Corporation has a dual class share structure and the amendment was approved by the voting shares but not the non-voting shares. The plaintiff hinges its case on Section 242(b)(2) of the Delaware General Corporation Law which provides that holders of a class of stock are “entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would . . . alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.” According to the plaintiff, the right to seek judicial relief to hold officers accountable for reckless or grossly negligent behavior is a component of the “bundle of rights” appurtenant to the non-voting stock. Therefore, the amendment required the affirmative vote of the non-voting stock. It remains to be seen how the Court of Chancery will deal with this novel theory.
California does not presently permit the articles of incorporation to include a provision exculpating officers. If it did, I don't think that the plaintiff's argument would succeed in the case of a California corporation. Similar to the Delaware General Corporation Law, Section 903(a)(4) of the California Corporations Code requires the approval of a class, whether or not entitled to vote, if an amendment of the articles would "change the rights, preferences, privileges or restrictions of the shares of such class". However, Section 202(3)(3) and Section 400 of the California Corporations Code require that the articles of incorporation set forth the rights, preferences, privileges, and restrictions granted to or imposed upon the respective classes or series of shares or the holders thereof, or that the board, within any limits and restrictions stated, may determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued class of shares or wholly unissued series of any class of shares. Because a shareholder's right to sue officers is generally not set forth in the articles, the answer may be for purposes of the California General Corporation Law that the right to sue officers may not constitute a right, preference, or privilege within the meaning of Section 903.