Private Equity and Stockholder Agreements: Empirical Insights for the Moelis Debate

In 2024, the landmark Moelis opinion from the Delaware Court of Chancery invalidated certain contractual control provisions that allowed insider stockholders to override a board’s statutory role. This decision sparked intense debate over the ways in which insider stockholders should be allowed to control corporations and their boards of directors. The Delaware legislature quickly enacted Delaware Senate Bill 313 (S.B. 313) that created new section 122(18) of the DGCL, effectively overturning Moelis and fundamentally altering Delaware’s traditional board-centric governance model. Proponents claimed the legislation merely codified established market practice, while critics argued it overreacted to a single trial-level decision in ways that could harm public markets.

Both sides, however, lacked empirical data on how common such contractual control rights are, who holds them, and what actual “market practice” entails. Our recent empirical study of 1,362 IPOs from 2010-2021 provides essential context to this debate and a view on what 122(18) is likely to mean going forward. Although the drafters of S.B. 313 claimed they were aiming to validate only those contracts “common” in the market, our data reveal a mismatch between those claims, actual market practice, and the broad scope of the new statutory language.

Key Findings: Who Uses Contractual Control Rights and How

Our research reveals several significant insights about contractual control rights in public companies:

1. Private equity dominance: Private equity firms—not founders or venture capitalists—are overwhelmingly the primary beneficiaries of contractual control rights. For every type of control right we examined, PE firms were many times more likely to be the sole holders than founders or other pre-IPO stockholders.
2. Veto rights are relatively rare: The broad veto rights present in the Moelis case (allowing one stockholder to block nearly any significant board action) are relatively uncommon. Only 91 companies in our sample (6.7%) granted pre-approval or veto rights to stockholders, with most granting far less extensive rights than those at issue in Moelis.
3. Board nomination rights are common: While aggressive veto rights are rare, board nomination rights (which were not invalidated by Moelis) are widespread, appearing in roughly 25% of IPOs.
4. Limited duration: Contractual control rights typically phase out quickly—within about 3 years of IPO on average—as private equity investors reduce their ownership stakes post-IPO. By the time Moelis was decided, most of the rights we found in our sample had already phased out.
5. Valid alternatives: Approximately 23% of companies that granted pre-approval or veto rights did so in ways that would not have been invalidated under Moelis. Most commonly, stockholders achieve a similar result by allowing a board member nominated by the stockholder, but not the stockholder itself, to veto a board action. Apollo alone used this formulation in 6 of its portfolio companies that went public.  We also found companies that granted rights through other valid methods, including granting rights directly in a certificate of incorporation or through a separate class of stock.  We also found some companies that use fiduciary outs that would likely render otherwise invalid provisions valid.

Why Private Equity Prefers Contractual Control

Understanding private equity’s dominance in using contractual control rights requires appreciating their distinctive business model and incentives. Unlike founders who typically maintain long-term interests in their companies, private equity funds operate on compressed timelines. They must exit investments and return capital to their investors, usually within 10 years of raising a fund.

This creates a powerful incentive structure for private equity firms following an IPO:

• They need to liquidate their investment relatively quickly (typically within 3 years post-IPO)
• Fund managers receive a percentage of profits as compensation
• They want to maximize the company’s short-term stock price during their exit period

These incentives explain why private equity firms prefer customized contractual control rights over high-vote dual-class structures. While dual-class stock provides long-term voting control (preferred by founders), contractual control rights enable private equity funds to exercise granular authority over specific decisions during their brief post-IPO holding period without the procedural hurdles or fiduciary complexities of dual-class structures.  Nearly all of the contractual control rights have ownership-based phase outs. We found that contractual rights generally phase out around three years after IPO – consistent with the fact that the rights are held by private equity firms in their sell down phase. Because of this, most of the rights in our sample that would have been invalidated by the Moelis decision had already phased out.

The data starkly illustrates private equity’s preference for contractual control and founders’ preference for traditional high-vote dual class structures. Of the 197 high-vote dual-class corporations in our sample, 178 grant high-vote stock to founders and 91 grant high-vote stock to private equity firms. However, only 8 granted high vote stock to private equity firms alone compared to 87 companies that granted high vote stock to founders alone.  Even when private equity firms receive high-vote stock they also often receive contractual control rights, with 41 of these 91 companies granting private equity funds both types of control.

Potential Concerns: Conflicts of Interest

When a private equity fund holds contractual control rights in a public company, it creates an inherent conflict of interest. The fund manager has fiduciary duties to generate short-term gains for the fund’s investors, which may not align with the interests of other public stockholders who have a longer investment horizon.

This conflict could manifest in several concerning ways. Private equity funds could:

• Use contractual rights to maximize short-term profits at the expense of long-term value
• Block investments in R&D or other long-term initiatives
• Extract value through complex contracting arrangements with affiliates
• Use inside information obtained through board positions to time their exit

Recent lawsuits exemplify these concerns. In cases involving Bumble Inc. and Vista Equity Partners, plaintiffs have accused private equity investors of using inside information to sell shares ahead of unfavorable news, generating hundreds of millions in alleged improper gains. Our research also shows that Up-C IPO structures (which provide insider stockholders with disproportionate economic rights, including through tax receivable agreements) are disproportionately used by private equity-backed companies and strongly correlated with contractual control rights. This suggests private equity firms may use control rights to protect their disproportionate economic benefits.

Notwithstanding these conflicts, studies tend to show that private equity-backed IPOs have abnormally strong stock price performance (Cao & Lerner 2009, etc.) and operating performance (Dong, Slovin & Sushka 2020). This could be explained by the fact that private equity firms have high-powered incentives to increase company profits before exit, and the positive effect of those incentives on other public stockholders could, in the aggregate, outweigh the negative effect of the conflicts described above.

This finding is generally consistent with studies on the impact of activist hedge funds on company performance (Bebchuk et al. 2015). However, the hedge fund literature also shows that all forms of activism are not equal – some generate abnormally high long-term returns and others do not (Becht et al. 2017). If the same is true of private equity-held contractual control rights in public companies, it would support an approach to research and policy that carefully distinguishes between different types of control rights. Instead, academics and policymakers have largely lumped all contractual control rights together and treated them the same. Given the variation in how these rights are structured and implemented, more granular analysis is needed to determine which rights benefit companies and which potentially harm public stockholders.

Was Moelis Worth Overruling?

Our findings challenge key justifications for S.B. 313’s rapid passage:

1. Moelis was an outlier: Very few companies grant rights that were as extensive in nature and scope as did Moelis.  In particular, Moelis granted virtually every type of existing contractual control right to Mr. Moelis while also granting him high-vote stock through a dual-class structure.  Moelis was also atypical in that it granted contractual control rights to a founder, not a private equity firm.  We found only five companies, including Moelis and BRP Group (the company that was the subject of the Ruby Wagner Delaware case), that granted any veto right only to a founder. Because Moelis granted rights to a founder who did not need to exit after IPO like private equity funds do, Mr. Moelis’s contractual control rights lasted for far longer than in a typical company.
2. Urgency was overstated: Proponents claimed “thousands” of agreements were at risk, necessitating immediate legislative action. However, our data show that only a small fraction of companies still had active veto rights and other invalidated rights at the time of the Moelis decision. This is confirmed by the lack of lawsuits following the release of the Moelis decision and before the enactment of S.B. 313, which explicitly allowed new lawsuits to be brought through August 1, 2024. If the use of these types of aggressive provisions was truly “market practice” then we would have expected a flood of lawsuits following the Moelis decision. We find the lack of a flood of lawsuits unsurprising because, as our findings show, there were not many companies to sue.  Most stockholder agreements had either already phased out, included only valid provisions, or were much weaker than Mr. Moelis’s stockholder agreement.
3. Poorly-tailored solution: Our research illustrates that, especially for public companies, the legislation goes far beyond merely validating existing market practice. 122(18) allows corporations to enter into contracts that allocate virtually any board-level governance power to insiders—extending beyond the already aggressive rights discussed in the Moelis decision.
4. Private equity influence: The Corporation Law Council that drafted S.B. 313 acknowledged lobbying from unnamed sources. Our data indicate that one likely source of lobbying was private equity firms.  Private equity funds are repeat players in the IPO world and have a strong interest in continuing to be able to take new companies public with stockholder agreements. That members of the Corporation Law Council would be responsive to private equity lobbying is unsurprising given how much legal work private equity creates.

122(18) and S.B. 21

Our findings also provide novel insight into the debate surrounding S.B. 21, which would statutorily restrict the definition of a controlling stockholder to circumstances where a stockholder (i) holds a majority of voting power, (ii) has the right “to cause the election of nominees who are selected at the discretion of such person” and that constitute a majority of the board, or (iii) has “power functionally equivalent to that of a stockholder” with majority voting power by virtue of holding “at least one-third in voting power” of the corporation and the “power to exercise managerial authority” over the company. 

With respect to the second prong, our research shows that the language “to cause the election of nominees” does not apply to any real-world scenarios and therefore is, at best, irrelevant and, at worst, misleading. In particular, our research examined contractual control rights among 1,362 companies and did not find any instance where an insider had the right to “cause the election” of their nominees. Although many stockholder agreements, including the one at issue in the Moelis case, allow insiders to nominate members of the board, we found that those nominees are always voted on by stockholders generally.  While the right to nominate a member to the board virtually guarantees that an insider’s nominees will be elected, it does not allow the insider “to cause the election” of their nominees. Because this was the only prong of the statute to consider how contractual control rights could cause a stockholder to become a controlling stockholder, our Article demonstrates that this definition is a poor fit for the way stockholder agreements are currently used and how they could be used in the future under the expansive language of 122(18).

The third prong of the definition of controlling stockholder, which provides that a stockholder must hold “at least one-third in voting power” to be considered a controller, writes stockholder agreements out of the control analysis when stockholders hold less than a third of the voting power.  Therefore, under 122(18) an insider with less than one-third of a corporation’s vote could receive extensive control rights that displace a board’s decision-making process while avoiding being treated as a controller.  To illustrate, BRP Group, Inc. granted its founder Lowry Baldwin a set of veto rights, similar to the rights at issue in the Moelis case, that gave him power to override virtually any significant board-level decision as long as he held at least 10% of the company’s stock.  For example, Baldwin could, among other things, veto any merger, acquisition, sale of assets exceeding 5% of the company’s value, issuance of debt or stock, payment of dividends, alteration of the size of the board, amendment to BRP’s governing documents, and hiring, termination, and compensation decisions relating to senior management and other key employees.  However, unlike Moelis, BRP did not grant Baldwin high-vote stock and he therefore held only approximately 22% of BRP’s voting power at the time his stockholders agreement was challenged in the Wagner case.  Under the statutory definition of controlling stockholder in S.B. 21, Baldwin could not be a controlling stockholder under any circumstance even though he effectively controlled all significant board-level decisions. With this definition of controlling stockholder Delaware is sending a clear message to controlling insiders that they can essentially avoid judicial review of their conflicted transactions if they simply structure their control in the form of a contract rather than high-vote stock.

Conclusion

As Delaware corporate law continues to evolve in response to 122(18), our findings provide essential context for understanding what’s at stake. By documenting who holds contractual control rights, how they operate, and how quickly they expire, we offer empirical grounding for ongoing policy discussions.

The data suggest that while Moelis may have disrupted certain private equity practices, it posed far less threat to broader market norms than legislative proponents claimed. Our data suggest the Delaware legislature could have crafted narrower legislation targeted at specific, commonly used rights rather than broadly enabling any contractual allocation of board power. Going forward, researchers, courts, and policymakers should take a more careful, right-by-right approach to analyzing contractual control and consider the distinctive incentives of private equity funds when evaluating how these rights affect public markets and the interests of all stockholders.