Overview
On July 25, 2024, Vice Chancellor J. Travis Laster for the Court of Chancery of the State of Delaware issued a ruling, largely granting plaintiffs’ motion for summary judgment challenging the validity of nine provisions in a governance agreement N-able entered into with its lead investors at the time of its IPO. In his ruling, Vice Chancellor Laster concurred with Plaintiffs’ argument and stated that under Delaware General Corporation Law (DGCL) “many of the provisions are statutorily invalid.”
This ruling is significant because it is only the second time the court has addressed the validity of such provisions. The first being W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 311 A.3d 809 (Del. Ch. 2024) (“Moelis”), another case ruled on in a similar manner by Vice Chancellor Laster. Significantly, these cases address, in part, whether a company’s corporate charter can incorporate a private contract by reference. In the N-able case, Vice Chancellor Laster stated, “the structure of the DGCL forecloses that path.” He continued, “the public nature of a charter also means it cannot incorporate a private agreement by reference. The DGCL requires companies to publicly file their charters with the Delaware Secretary of State. Any amendments must be filed too. . . Permitting a charter to incorporate a private agreement by reference undermines the public nature of a charter, particularly for private companies.”
Vice Chancellor Laster found seven of the nine provisions invalid under the DGCL, including the lead investor requirement for controlling the board size of N-able, nomination vetoes, as well as requirements for lead investor approvals on many of N-able’s corporate actions and that of its subsidiaries.
Case Background
Before July 2021, N-able, Inc. existed as a wholly owned subsidiary of SolarWinds Corporation. Two private equity firms controlled SolarWinds: Silver Lake Group, LLC and Thomas Bravo, LLC. On July 19, 2021, SolarWinds spun off the company. In the spinoff, each stockholder of SolarWinds received one share of N-able common stock for every two shares of SolarWinds common stock. The spinoff marked the start of the N-able’s existence as a publicly traded corporation on the New York Stock Exchange (NABL).
Plaintiffs allege that while the two private equity firms, Silver Lake Group and Thomas Bravo (the lead investors) now own approximately 62% of N-able, they restructured N-able’s internal governance to unduly favor their vote and their interests in anticipation of the spinoff.
As part of that effort, Plaintiffs allege that the lead investors amended and restated the N-able’s certificate of incorporation and bylaws. Pertinent to this dispute, they then entered into a governance agreement with N-able, which they called the “stockholders agreement.”
Plaintiffs further allege that Silver Lake Group and Thomas Bravo included significant governance rights in the stockholders agreement, rather than putting them in the charter or bylaws. These nine provisions, which significantly favor Silver Lake Group and Thomas Bravo’s influence over the company, include:
- Pre-Approval Requirements: Requiring the prior approval of both lead investors before N-able or any of its subsidiaries can take a wide range of actions that otherwise would fall within the board’s plenary authority.
- The Board Composition Covenants: Providing the lead investors with the ability to determine the composition of the board, including size, nominations, nomination vetoes, removal, as well as recommendation covenants obligating the board to recommend lead investor nominees for election as directors, among other provisions.
Plaintiff, as a holder of N-able’s common stock, sought the court’s determination that the challenged provisions are invalid.