Moelis and Private Equity in the Public Market

Abstract

In 2024, the landmark Moelis opinion invalidated certain types of contractual control provisions that allow an insider stockholder to supplant a board's statutory role. The Moelis opinion sparked a corporate law civil war, with proponents of Moelis arguing that insider control rights harmfully undermine Delaware's historical board-centric model. Critics claimed the decision upended long-established market practices and used that justification to support new, broad legislation overruling Moelis. The Delaware legislature, practitioners, and scholars invoked assertions about "market practice" without citing data on who uses these rights, how often they are used, how they operate, and whether and how they sunset. 

This Article draws on a novel dataset of 1,362 IPOs from 2010 to 2021, to provide the context and nuance that was missing from the Moelis debate. The study finds that the broad veto rights present in the Moelis case, which allowed one stockholder to block nearly any significant board action, are relatively rare, while board nomination rights, which were not invalidated by Moelis, are common. It also finds that private equity funds are the primary beneficiaries of these rights. Private equity funds' abbreviated investment timelines, coupled with their managers' compensation structures, create a unique set of characteristics, motivations, and incentives in an IPO that are unique from other pre-IPO owners and public investors. This Article examines those differences and the unexplored implications they have for public markets. 

The findings also challenge key justifications for overriding Moelis. Contrary to claims that Moelis urgently needed to be overruled because it threatened a vast number of stockholders agreements, our data show that aggressive stockholders agreements of the type invalidated Moelis are rare and phase out relatively quickly. Nevertheless, the debate surrounding Moelis ended with a legislative response that not only overruled Moelis, but went much further by allowing corporations to enter into contracts that can allocate virtually any board-level governance power to insiders. By extending well beyond existing market practice, the new law invites insider stockholders, and private equity firms in particular, to test the outer limits of contractual governance.