A recent opinion from the Delaware Court of Chancery reaffirmed a Delaware corporation’s ability to create a class of stock with voting power that is based on a formula in the certificate of incorporation (Charter) or on facts ascertainable outside the Charter (including the identity of the holder), even if it generates different results for different holders, so long as it applies across all shares of such class. Colon v. Bumble, Inc., No. 2022-0824-JTL, 2023 WL 5920100 (Del. Ch. Sept. 12, 2023). This case serves as a reminder of the flexibility afforded to Delaware corporations in allocating voting power amongst stockholders, even stockholders within the same class of stock.

In Depth

FACTS AND HOLDING

Bumble, Inc., a Delaware corporation, went public with a Charter using a governance structure that provided superior voting rights to the “Principal Stockholders”—defined as the parties to a publicly disclosed stockholders’ agreement. Those parties are Bumble founder Whitney Wolfe Herd and Bumble’s primary investor, Blackstone, Inc. The Charter authorizes two classes of common stock: Class A stock and Class B stock. Each share of Class A stock carries one vote per share unless that share is held by a Principal Stockholder in which case it carries 10 votes per share and economic rights in Bumble. The Class B stock, the only two shares of which were issued to Herd and Blackstone, carries one vote per share unless that share is held by a Principal Stockholder in which case it carries 10 votes per share and no economic rights in Bumble. As a result, Herd and Blackstone hold 92.2% of the outstanding voting power in Bumble.

The plaintiff asserted that the Charter created an identity-based capital structure that granted disparate voting rights among holders of the same class of stock and violated (i) Section 212 of the General Corporation Law of the State of Delaware (DGCL) because Section 212 ties a stock’s attributes to the stock itself—not the holder of the stock—and, therefore, special voting power may not be granted to individuals as a personal right irrespective of stock ownership, and (ii) Section 151 of the DGCL because it requires that each share of a class or series of stock have identical rights. The parties filed cross-motions for summary judgment.

The Court explained that a Charter can modify, enhance, limit or eliminate some of the default rights under the DGCL and voting rights of stock are one of those rights. Although Section 212(a) provides a default right of one vote per share, such right can be altered in a Charter. Furthermore, “[n]othing in Section 102(a)(4), 151(a), or 212(a) requires that the charter frame the voting power appurtenant to a share in terms of a specific number of votes per share. Not only that, but Section 151(a) permits special attributes, including voting rights, to depend on facts ascertainable outside of the certificate of incorporation.” Section 151(a) defines “facts” broadly by providing a nonexclusive list of what constitutes as “facts,” including “the occurrence of any event, including a determination or action by any person or body, including the corporation.”

The Court discussed long-standing Delaware precedent holding Charter provisions that allocated voting power using a formula or procedure (i.e., tenured voting rights based on how long the shares were owned, scaled voting rights depending on the number of shares owned and per capital voting rights regardless of the number of shares owned) as valid under the DGCL. Based on this precedent and the DGCL, the Court held that the challenged provisions were valid since, as required by Sections 102(a)(4) and 151(a), the Charter provides for a formula that applies to all shares of a class and such formula specifies how voting power is allocated. The Charter may rely on facts ascertainable outside of it, which in this case was the identity of the holder of shares (i.e., the Principal Stockholders). The Court also held (consistent with precedent) that a formula need not result in the same outcome for each share of stock so long as the formula is applied identically across all shares. Therefore, the Court granted Bumble’s motion for summary judgment. Importantly, the Court noted that while the challenged provisions were valid under the DGCL, the Court was not ruling on whether identity-based voting structures would always be equitable.

TAKEAWAYS

  • This case is a helpful reminder that a Delaware corporation can provide for different rights among shares of the same class or series in its Charter, including different voting rights, as long as the method for determining such rights is applied consistently among such shares.
  • The powers and rights of any class or series of stock can be made dependent on facts ascertainable outside the Charter, including agreements or documents, the occurrence or non-occurrence of an event, or the determination or action of any person.
  • Although a provision contained in a Charter (like the provisions in this case) will be found to comply with the DGCL, such a provision or its application can still be challenged as being inequitable since corporate action under Delaware law is always twice tested—once for legal compliance and again for equity.