Navigating Board and Management Authority in WA Business Entities
Last year, the Delaware Court of Chancery issued a decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. 211 A.3d 809 (Del. Ch. 2024), striking down several provisions of a stockholder agreement that gave the founder sweeping control over corporate governance. The ruling sent ripples through the private equity and venture capital world, raising questions about how far shareholder agreements can go in shaping board behavior.
For Washington-based corporations and LLCs, the case offers a timely opportunity to revisit local governance rules and assess whether similar provisions would hold up under state law.
Case Summary: West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.
Moelis & Co. entered into a stockholder agreement with its founder, Ken Moelis, shortly before its IPO. The agreement granted Moelis extensive rights, including:
- Pre-approval over 18 categories of board actions
- Control over board size and composition
- Guaranteed representation on board committees
The plaintiff, a stockholder, challenged these provisions under Section 141(a) of the Delaware General Corporation Law, which requires that a corporation’s business be managed by or under the direction of its board of directors. The court agreed, holding that the agreement unlawfully constrained the board’s statutory authority. While Delaware law permits companies to customize their internal rules, such arrangements must be implemented through the certificate of incorporation, not merely by contract.
Washington Corporate Law: Can Shareholder Agreements Limit Board Authority?
Washington’s Business Corporation Act (RCW 23B) offers more flexibility than Delaware law in some respects. Under RCW 23B.07.320, shareholder agreements may:
- Restrict the board’s powers
- Transfer management authority to a shareholder
- Govern voting rights, officer selection, and even dissolution triggers
These agreements are enforceable even if they conflict with other provisions of the statute, provided they are not contrary to public policy and are properly disclosed.
However, there are guardrails. Such agreements must be in writing, signed by all shareholders, and noted on share certificates or information statements. They also cease to be effective if the corporation becomes publicly traded. In contrast to Delaware’s stricter stance, Washington law explicitly allows shareholder agreements to override board authority, at least for closely held corporations.
Washington LLC Law: Operating Agreements and Manager Authority
Washington’s LLC Act (RCW 25.15) is even more permissive, as the operating agreement governs nearly all aspects of internal affairs. Under RCW 25.15.018 and related provisions:
- Members may delegate or restrict managerial powers
- Operating agreements can override default statutory rules
Unlike corporations, LLCs are designed for flexible governance. The Moelis-style provisions, such as requiring pre-approval for certain actions or guaranteeing committee seats, could likely be implemented in a Washington LLC’s operating agreement without violating state law.
Takeaways for Washington Entities
- For Washington corporations, shareholder agreements can go further than Delaware allows, but only if properly executed and disclosed.
- For LLCs, operating agreements offer broad latitude to customize governance, making them ideal for founder-driven or investor-heavy structures.
As the Moelis decision shows, governance rights must be carefully structured to align with statutory frameworks. Washington law offers tools to do so, but only if used with precision.
To learn more about Navigating Board and Management Authority in Washington Business Entities, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.