Legislation proposing to amend the General Corporation Law of the State of Delaware (the “DGCL”) has been submitted to the Corporation Law Section of the Delaware State Bar Association for approval. If enacted, the proposed amendments would become effective on August 1, 2014 (except for the amendments to Section 251(h), as further described below) and would address the following:
Section 251(h) Mergers
In 2013, the DGCL was amended to eliminate, subject to certain conditions, the need for a back-end merger vote in a two-step merger involving a front-end tender or exchange offer. Early experience with Section 251(h) demonstrated the statute’s utility, but also gave rise to various questions among practitioners regarding certain aspects of its use and application. The proposed amendments to the DGCL are designed to address those questions.
The proposed amendments would eliminate the prohibition against the statute’s use in circumstances where a party to the merger agreement is an “interested stockholder” (as defined in Section 203 of the DGCL). This change would, among other things, eliminate any question as to whether an offeror’s entry into certain voting agreements or other arrangements with existing stockholders would render the offeror an “interested stockholder” and therefore incapable of taking advantage of Section 251(h). The proposed amendments would also clarify various timing and other requirements in respect of the back-end merger. The proposed amendments would replace the existing “ownership” requirement in respect of the target’s stock with a requirement that, following the offer, the stock irrevocably accepted for purchase or exchange and received by the depository prior to the expiration, plus the stock owned by the consummating corporation, must equal at least the percentage of stock (and of each class or series) that, absent Section 251(h), would be required to adopt the merger. The proposed amendments would also replace the existing language requiring that shares of the target corporation “not to be canceled in the merger” receive the same consideration paid to holders of shares of the same class or series upon the consummation of the offer with language providing that shares that are the “subject of and not irrevocably accepted for purchase or exchange in the offer” must be converted into the same consideration paid for shares of the same class or series irrevocably accepted for purchase or exchange in the offer.
In addition, the proposed amendments would clarify that the merger agreement in respect of a transaction under Section 251(h) may either permit or require the merger to be effected under Section 251(h). Thus, the proposed amendments expressly enable the parties to provide in the merger agreement that the proposed merger under Section 251(h) may be abandoned in favor of a merger accomplished under a different statutory provision. As a related matter, the proposed amendments would clarify that the merger agreement must provide that the back-end merger shall be effected as soon as practicable after the offer if the merger is effected under Section 251(h). The proposed amendments would also clarify that the offeror’s tender for all of the target corporation’s outstanding voting stock may exclude stock that, at the commencement of the offer, is owned by the target corporation, the offeror, persons that directly or indirectly own all of the stock of the offeror, and direct or indirect wholly-owned subsidiaries of the foregoing parties.
In furtherance of the foregoing changes, the proposed amendments would add a new paragraph to Section 251(h) setting forth the meaning of certain terms used in Section 251. Of particular note, the term “consummates” (and correlative terms) would be expressly defined to mean the time at which the offeror irrevocably accepts for purchase or exchange stock tendered pursuant to a tender or exchange offer, to help eliminate questions regarding the time at which the conditions to effecting the back-end merger have been satisfied. As with the legislation originally enacting Section 251(h), the synopsis to the proposed amendments states that the amendments to the subsection do not change the fiduciary duties of directors in connection with any merger accomplished under the subsection or the judicial scrutiny applied to any decision to enter into a merger agreement under the subsection.
If enacted, the amendments to Section 251(h) will be effective with respect to merger agreements entered into on or after August 1, 2014.
Escrowing Director Consents
Section 141(f) of the DGCL would be amended to clarify that any person, whether or not then a director, may provide, by instruction or otherwise, that a consent to board action will be effective at a future time, including a time determined upon the occurrence of an event, no later than 60 days after the instruction is given or other provision is made, and that the consent will be deemed to have been given at that effective time as long as the person is then a director and did not, prior to the effective time, revoke the consent. The proposed amendment to Section 141(f) was adopted in response to concerns, stemming from AGR Halifax Fund, Inc. v. Fiscina, 743 A.2d 1188 (Del. Ch. 1999), over the validity of consents executed by persons who have not yet become directors at the time they execute board consents. The proposed amendments would, among other things, enable acquisition financing transactions to be structured such that the person or persons who are to become the directors of the surviving corporation may execute consents, to be held in escrow, authorizing the financing and security transactions and related documents, which consents will become effective upon the signing person’s or persons’ election to the board of the surviving corporation concurrently with the closing of the transaction.
Escrowing Stockholder Consents
Consistent with the bases for the proposed changes to Section 141(f), Section 228(c) would be amended to clarify that any person executing a stockholder consent may provide, by instruction or otherwise, that the consent will be effective at a future time, including a time determined upon the occurrence of an event, no later than 60 days after the instruction is given or other provision is made and, if evidence of the instruction or provision is given to the corporation, the later effective time will constitute the date of signature.
Amendments to the Certificate of Incorporation
The proposed amendments would effect two substantive changes to Section 242 of the DGCL, which deals with amendments to the corporation’s certificate of incorporation. First, the proposed amendments would eliminate the requirement that the notice of the meeting at which an amendment to the certificate of incorporation is to be voted on contain a copy of the amendment itself or a brief summary of the amendment when the notice constitutes a notice of internet availability of proxy materials under the Securities Exchange Act of 1934. Second, the proposed amendments would authorize a corporation, by action of its board of directors, to amend its certificate of incorporation to change its name or to delete historical references to its incorporator, its initial board of directors or its initial subscribers for shares, or to provisions effecting changes to its stock (e.g., language effecting an earlier stock split), without the need to submit the amendment to a vote of stockholders.
Section 218 of the DGCL currently requires that a voting trust agreement, or any amendment thereto, be filed with the corporation’s registered office in the State of Delaware. The proposed amendments to Section 218 would provide that a voting trust agreement, or any amendment thereto, may be delivered to the corporation’s principal place of business instead of its registered office.
The proposed amendments would accomplish two changes to address issues that arise when a corporation’s incorporator has become unavailable before completing his, her or its statutory functions. Section 103(a)(1) currently provides that if the incorporator is unavailable by reason of death, incapacity, unknown address or refusal or neglect to act, a person for whom or on whose behalf the incorporator was acting may, subject to certain conditions, execute any such certificate with the same effect as if it were executed by the incorporator. The proposed amendments to Section 103(a)(1) would eliminate any limitation arising from the reason for the incorporator’s unavailability. In addition, the proposed amendments would add a new Section 108(d) that renders the concepts embodied in Section 103(a)(1) applicable to instruments in addition to certificates filed with the Delaware Secretary of State. Thus, new Section 108(d) would provide that if an incorporator is not available to act, any person for whom or on whose behalf the incorporator was acting may, subject to certain conditions, take any action that the incorporator would have been entitled to take under Sections 107 or 108 of the DGCL.