Richards Layton & Finger
 

2015 Amendments to the General Corporation Law of the State of Delaware

April 13, 2015

Legislation proposing to amend the General Corporation Law of the State of Delaware (the “DGCL”) has been approved by the Corporation Law Section of the Delaware State Bar Association and is expected to be introduced to the Delaware General Assembly. If the amendments become effective, they would result in several significant changes to the DGCL.

If enacted, the amendments (other than the amendments to Section 204 (ratification of defective corporate acts and stock), Section 205 (proceedings regarding validity of defective corporate acts and stock), Section 262 (appraisal rights), and Section 363(b) (appraisal rights of stockholders of a corporation that is not a public benefit corporation in connection with certain amendments to the certificate of incorporation to become a public benefit corporation or certain mergers or consolidations involving a public benefit corporation)) would become effective on August 1, 2015. The amendments to Sections 204 and 205 would become effective with respect to resolutions adopted by the board ratifying defective corporate acts or stock on or after August 1, 2015. The amendments to Section 262 would become effective with respect to agreements of merger or consolidation entered into on or after August 1, 2015. The amendments to Section 363(b) would become effective with respect to agreements of merger or consolidation entered into on or after August 1, 2015 and with respect to amendments to the certificate of incorporation approved by the board of directors on or after August 1, 2015.

Prohibition on Fee-Shifting Provisions

The 2015 amendments to the DGCL would invalidate so-called fee-shifting provisions in certificates of incorporation and bylaws of stock corporations. The amendments are being proposed in response to the Delaware Supreme Court’s ruling in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014). In ATP, the Court held that a bylaw that made the members of a nonstock corporation liable for the corporation’s legal expenses in certain intra-corporate disputes was facially valid. The proposed amendments would limit the ATP Court’s ruling to nonstock corporations.

The proposed legislation would add new Section 102(f) to the DGCL, which would provide that a certificate of incorporation may not contain any provision imposing liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an “internal corporate claim,” as defined in new Section 115 (discussed below). A similar restriction on fee-shifting provisions would be added to Section 109(b) of the DGCL, which deals with the provisions that may be set forth in the bylaws. The proposed amendments would not prevent the imposition of a fee-shifting provision pursuant to a stockholders’ agreement or other writing signed by a stockholder against whom the provision is to be enforced. The proposed legislation would also amend Section 114 of the DGCL to provide expressly that such restrictions do not apply to nonstock corporations.

Forum-Selection Provisions

The proposed legislation would also add new Section 115 to the DGCL, authorizing the certificate of incorporation or bylaws to include forum-selection provisions. Consistent with the Delaware Court of Chancery’s holding in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), Section 115 would confirm that the certificate of incorporation or bylaws of the corporation may specify that “internal corporate claims” (i.e., claims, including those brought in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which the DGCL confers jurisdiction upon the Court of Chancery) must be brought solely and exclusively in the Delaware courts, including the federal court. New Section 115 does not expressly authorize or prohibit provisions of the certificate of incorporation or bylaws that select a forum other than the Delaware courts as an additional forum in which an internal corporate claim may be brought, but it would invalidate any such provision selecting courts outside of Delaware, or any arbitral forum, to the extent such provision would purport to prohibit litigation of internal corporate claims in the Delaware courts.

As with the proposed fee-shifting amendments, Section 115 would not prevent the application of a provision selecting a forum other than the Delaware courts pursuant to a stockholders’ agreement or other writing signed by the stockholder against whom the provision is to be enforced. In addition, the new section is not intended to shield the manner in which a forum-selection provision has been adopted from equitable review, nor is it intended to foreclose judicial review as to whether the terms of any such provision operate reasonably under particular factual circumstances. Finally, the new section is not intended to authorize a provision that would purport to foreclose suit in a federal court based on federal jurisdiction, nor is it intended to limit or expand the jurisdiction of the Delaware Court of Chancery or the Delaware Superior Court.

Appraisal Rights

Section 262 would be amended in two principal respects. First, the proposed amendments would seek to limit de minimis appraisal claims in certain public company transactions. Second, the proposed amendments would give corporations the option to pay each stockholder entitled to appraisal at an earlier stage of the appraisal proceeding as a means of cutting off the accrual of interest under the statute with respect to the amount paid.

To implement the first of these changes, the proposed legislation would provide that the Court of Chancery shall dismiss an appraisal proceeding as to all stockholders otherwise entitled to appraisal rights, unless (1) the total number of shares entitled to appraisal exceeds 1% of the outstanding number of shares of the class or series entitled to appraisal; (2) the value of the consideration for such total number of shares exceeds $1 million; or (3) the merger was effected as a “short-form” merger under Section 253 or Section 267 of the DGCL. The amendment is designed to mitigate the risk that a plaintiff will use the appraisal process solely to gain leverage in a settlement negotiation. That is, the amendment is designed to prevent stockholders from demanding an appraisal in cases where the number of shares (or the value of those shares) is minimal, but the surviving corporation may be inclined to settle the claim to avoid the litigation costs attendant to the appraisal proceeding. As noted above, however, “short form” mergers would not be subject to the de minimis carve-out, because appraisal may be the stockholders’ only remedy in such a merger. In addition, the de minimis carve-out would apply only in cases where the shares as to which appraisal is sought were listed on a national securities exchange immediately before the merger or consolidation.

To implement the second of the changes, the proposed legislation would amend Section 262(h) to provide corporations the option of limiting the accrual of statutory interest on appraisal awards by making an early payment to the appraisal claimants. Section 262(h) currently provides that, unless the Court of Chancery determines otherwise for good cause shown, interest on the amount that is determined to be the “fair value” of appraisal shares will accrue from the effective date of the merger through the date of payment of judgment, will be compounded quarterly, and will accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during that period. Since payment of the “fair value” in an appraisal proceeding is not made until such amount is determined after trial, interest accrues on the full amount of the award, even if the fair value is ultimately determined to be the same as or less than the consideration paid in the merger. The proposed amendments would permit the surviving corporation to pay the appraisal claimants, at any time before the entry of judgment in the proceeding, a sum of money that it determines to be appropriate. After making the payment, interest would no longer accrue from the date of such payment with respect to the amount paid. Any surviving corporation electing to make such a payment would be required to make the payment to all of the appraisal claimants, unless the surviving corporation has a good faith basis for contesting a particular claimant’s entitlement to an appraisal of such claimant’s shares, in which case the surviving corporation may elect to make payment only to those stockholders whose entitlement to appraisal is uncontested. The amount that the surviving corporation pays would not give rise to any inference as to the fair value of the shares as to which an appraisal is sought.

Stock Issuance

The proposed legislation would amend Section 152 to clarify that the board of directors may authorize stock to be issued in one or more transactions in such numbers and at such times as is determined by a person or body other than the board of directors or a committee of the board, so long as the resolution of the board or committee, as applicable, authorizing the issuance fixes the maximum number of shares that may be issued as well as the time frame during which such shares may be issued and establishes a minimum amount of consideration for which such shares may be issued. The minimum amount of consideration cannot be less than the consideration required pursuant to Section 153 of the DGCL, which, as a general matter, means that shares with par value may not be issued for consideration having a value less than the par value of the shares. The proposed amendments to Section 152 further clarify that a formula by which the consideration for stock is determined may include reference to or be made dependent upon the operation of extrinsic facts. The amendments would therefore confirm that the consideration may be based on, among other things, market prices on one or more dates or averages of market prices on one or more dates. Among other things, the amendments make clear that the board may authorize stock to be issued pursuant to “at the market” programs, and that the board or committee is not required to authorize separately each individual stock issuance pursuant to the program. In addition, the proposed amendments would allow the board to delegate to officers the ability to issue restricted stock on the same basis that the board may delegate to officers the ability to issue rights or options under Section 157(c) of the DGCL.

Consideration for Options and Rights

Consistent with the proposed amendments to Section 152, Section 157 of the DGCL, which deals with the creation and issuance of rights and options to purchase stock, would be amended to clarify that a formula by which the consideration for stock issued upon the exercise of rights and options in respect of stock is determined may include reference to or be made dependent upon the operation of extrinsic facts, such as market prices on one or more dates, or averages of market prices on one or more dates.

Ratification of Defective Corporate Acts

The proposed amendments to Section 204 of the DGCL, which sets forth the procedures for ratifying stock or corporate acts that, due to a “failure of authorization,” would be void or voidable, would clarify and confirm certain aspects of its operation and would provide greater guidance to corporations and practitioners as to the specific requirements for the filing of certificates of validation. The proposed legislation would make conforming amendments to Section 205 of the DGCL, which confers jurisdiction on the Court of Chancery to hear and determine, among other things, the validity of any ratification effected pursuant to Section 204 and the validity of any corporate act or transaction.

1. Multiple Defective Corporate Acts

The proposed amendments to Section 204 are intended to confirm that the board of directors may approve the ratification of multiple defective corporate acts in a single set of resolutions. Although most practitioners had assumed that the board of directors had the power to do so, there was some uncertainty on the point, given that Section 204(b) currently refers to a single resolution that is adopted by the board and, under certain circumstances, submitted to the stockholders for adoption. The proposed amendments largely dispense with the notion of a single “ratifying resolution” of the board and instead refer to the defective corporate act or acts that the board is ratifying. The proposed amendments make clear that the quorum and voting requirements applicable to the ratification of each defective corporate act adopted by virtue of a single set of board resolutions ratifying one or more defective corporate acts are those applicable to each defective corporate act, viewed on an act-by-act basis, at all relevant times.

In connection with such proposed changes, Section 204(c), which deals with the circumstances under which a defective corporate act must be approved by stockholders, would be revised to provide that each defective corporate act—rather than the board’s resolution ratifying a defective corporate act—that requires or required a vote of stockholders must be submitted to stockholders for their approval. In addition, Section 204(d), which specifies the voting standards applicable to the stockholders’ approval of a defective corporate act, would be revised to make clear that the quorum and voting requirements applicable to the ratification of each defective corporate act submitted to stockholders are those applicable to the particular defective corporate act, viewed on an act-by-act basis, at all relevant times.

2. Ratification of the Failure of the Incorporator to Elect the Initial Board

The proposed legislation would add new Section 204(b)(2) to address the situation in which the corporation’s initial directors have not been (and were not intended to be) elected in the original certificate of incorporation, and the original incorporator never executed a consent electing the initial directors or such consent cannot be located. The amendments would essentially permit the corporation’s “de facto” directors to adopt a resolution that ratifies the election of those persons who, despite having not been named in the certificate of incorporation or duly elected by the incorporator as the initial directors, first took action on behalf of the corporation as the board of directors. The amendments are not intended to preclude the filing of a certificate of correction pursuant to Section 103(f) of the DGCL to correct a certificate of incorporation that was intended to (but did not) name the initial directors, or having the incorporator’s statement signed in the manner permitted by Section 108 of the DGCL.

3. Stockholder Approval

Section 204, as originally adopted, was intended to provide that only the holders of valid stock would be entitled to vote on any ratifying resolution required to be submitted to stockholders for adoption. Due to the retroactive effect that Section 204 provides to defective corporate acts, some practitioners raised the concern that the ratification of a defective corporate act arguably would cause putative stock that is “outstanding” at the time of the record date for determining stockholders entitled to vote to be retroactively cured such that holders of putative stock would be deemed to be holders of valid stock entitled to vote as of the earlier record date—and their putative shares would be counted in the ratification vote for quorum and voting purposes. To eliminate this concern, Section 204(d) would be amended to clarify that the only stockholders entitled to vote on the ratification of a defective corporate act, or be counted for purposes of a quorum for such vote, are the holders of record of valid stock as of the record date for determining stockholders entitled to vote thereon. Section 204(f), which provides the retroactive effect to defective corporate acts, would also be amended to clarify the point.

4. Certificates of Validation

Section 204 currently provides that a certificate of validation must be filed with the Delaware Secretary of State whenever the underlying defective corporate act that is being ratified would have required the filing of an instrument under another section of the DGCL. Section 204 currently requires that the certificate of validation include a copy of the board’s resolutions ratifying the defective corporate act as well as the information that would have been required by such other section of the DGCL. Due to the significant variation in defective corporate acts and the resolutions used to ratify them, certificates of validation, unlike most other instruments filed under the DGCL, tend to lack uniformity. The proposed amendments to Section 204(e) are intended to clarify the requirements in respect of certificates of validation, with the ultimate goal of providing greater uniformity.

Section 204(e), as amended, would dispense with the requirement that the certificate of validation set forth the board’s resolutions ratifying the defective corporate act. Instead, the certificate of validation would set forth specified information regarding the defective corporate act and the related failure of authorization.

Additionally, Section 204(e), as amended, would require slightly different types of information to be set forth on or attached to the certificate of validation depending on the history of filings (or lack thereof) with the Delaware Secretary of State in respect of the applicable defective corporate act. First, where a certificate in respect of the defective corporate act had previously been filed and no changes are required to give effect to the ratification of such act, Section 204(e) would require the certificate as previously filed with the Delaware Secretary of State to be attached to the certificate of validation as an exhibit. Second, where a certificate in respect of the defective corporate act had previously been filed and changes are required to that certificate to give effect to the ratification of such act, Section 204(e) would require that a certificate containing all of the information required under the other section of the DGCL, including the changes necessary to give effect to the ratification of the defective corporate act, be attached to the certificate of validation as an exhibit. In that case, the certificate of validation must also state the date and time as of which the certificate attached to it would have become effective. Third, where no certificate had previously been filed and the filing of a certificate was required to give effect to the ratification of a defective corporate act, Section 204(e) would require that a certificate containing all of the information required under the other section of the DGCL be attached to the certificate of validation as an exhibit. In that case, the certificate of validation must also state the date and time as of which the certificate attached to it would have become effective.

5. Action by Written Consent and Notice

Section 204, as originally drafted, included concepts relating to the submission of the board’s ratifying resolution to stockholders at a duly called and held meeting. As with virtually all other sections of the DGCL, Section 204 did not specifically reference the stockholders’ power to act by written consent to approve any ratifying resolution, as it was understood that, pursuant to Section 228 of the DGCL, unless otherwise restricted by the certificate of incorporation, stockholders could act by written consent in lieu of a meeting with respect to any matter required or permitted to be acted upon by stockholders at a meeting. Nevertheless, the procedures for notice in cases where stockholders are acting by written consent in lieu of a meeting were viewed as fairly difficult to parse under existing Section 204. The proposed amendments attempt to clarify these procedures.

As amended, Section 204(g) would expressly provide that, where the ratification of a defective corporate act is approved by consent of stockholders in lieu of a meeting, the notice required by Section 204(g) may be included in the notice required to be given pursuant to Section 228(e). Section 204(g) would clarify that, where a notice sent pursuant to Section 204(g) is included in a notice sent pursuant to Section 228(e), the notice must be sent to the parties entitled to receive the notice under both Section 204(g) and Section 228(e). Section 204(g) would further clarify that no such notice need be provided to any holder of valid shares that acted by written consent in lieu of a meeting to approve the ratification of a defective corporate act or to any holder of putative shares who otherwise consented thereto in writing.

In addition, Section 204(g) would provide that corporations that have a class of stock listed on a national securities exchange may give the notice required by Section 204(g) by means of a public filing with the Securities and Exchange Commission.

6. Validation Effective Time

Section 204(h)(6) currently defines “validation effective time” as the later of (x) the time at which the ratification of the defective corporate act is approved by stockholders (or, if no vote is required, the time at which the notice required by Section 204(g) is given) and (y) the time at which any certificate of validation has become effective. As amended, Section 204(h)(6) would confirm that, in respect of the ratification of any defective corporate act that requires stockholder approval but does not require the filing of a certificate of validation, the “validation effective time” is the time at which the stockholders approve the ratification of the defective corporate act, whether the stockholders are acting at a meeting or by consent in lieu of a meeting pursuant to Section 228. Although the proposed amendment would clarify that, in such cases, the validation effective time commences upon the stockholders’ approval of the ratification of the defective corporate act, a corresponding amendment to Section 204(g) would be made to confirm that the 120-day period during which stockholders may challenge the ratification of a defective corporate act commences from the later of the validation effective time and the time at which the notice required by Section 204(g) is given. Section 204(h)(6) would also amend the definition of “validation effective time” in a manner that would permit the board of directors to fix a future validation effective time for any defective corporate act that does not require the filing of a certificate of validation. The board of directors would not be authorized to set a future validation effective time that precedes the time at which a defective corporate requiring a vote of stockholders is approved by stockholders. Again, the 120-day period during which challenges to the ratification may be brought would commence from the later of the validation effective time and the time at which the notice required by Section 204(g) is given. The amendments are intended to obviate logistical issues that may arise in connection with the delivery of notices in situations where multiple defective corporate acts are being ratified at the same time. As amended, Section 204(h)(6) enables the board to set one date on which the ratification of all defective corporate acts approved by the board will be effective, regardless of when the notice under Section 204(g) is sent or when each defective corporate act would otherwise become effective under Section 204(h)(6).

7. 120-Day Period

Consistent with the proposed amendments to Sections 204(g) and 204(h)(6) in respect of the validation effective time and the commencement of the 120-day period during which an action may be brought to challenge the ratification of a defective corporate act, Section 205(f) would be amended to provide that no such action may be brought after the expiration of 120 days from the later of the validation effective time and the time that notice of the ratification is given under Section 204(g), if notice is required to be given under such section.

Restatements of Certificates of Incorporation

In 2014, Section 242 of the DGCL was amended to eliminate the requirement to obtain a stockholder vote on an amendment to the certificate of incorporation to effect a change of the corporation’s name. In furtherance of that amendment, the proposed legislation would amend Section 245(c) to clarify that a restated certificate of incorporation need not state that it does not further amend the provisions of the corporation’s certificate of incorporation if the only amendment is to change the corporation’s name without a vote of the stockholders.

Corporate Name

The proposed legislation would permit the Division of Corporations of the Delaware Secretary of State (the “Division”) to waive, under limited circumstances, the requirement with respect to the use of a name that has been reserved for use with the Division or is on the Division’s records. Section 102(a)(1)(ii) provides that a Delaware corporation’s name as set forth in its certificate of incorporation shall be such as to distinguish it upon the Division’s records from the names that have been reserved for use with the Division and from the names on record with the Division of each other corporation, partnership, limited partnership, limited liability company or statutory trust organized or registered as a domestic or foreign corporation, partnership, limited partnership, limited liability company or statutory trust under the laws of the State of Delaware, except with the written consent of the person who has reserved the name or such foreign corporation or domestic or foreign partnership, limited partnership, limited liability company or statutory trust. The proposed legislation would add a further exception such that, without prejudicing any rights of the person who has reserved the name or of such foreign corporation or domestic or foreign partnership, limited partnership, limited liability company or statutory trust, the Division may waive the requirement if the corporation demonstrates to the satisfaction of the Delaware Secretary of State that (a) the corporation or a predecessor entity previously has made substantial use of the name or a substantially similar name, (b) the corporation has made reasonable efforts to secure such written consent, and (c) the waiver is in the interest of the State of Delaware.

Public Benefit Corporations

The proposed legislation would make several changes with respect to the provisions of the DGCL dealing with public benefit corporations. Section 362(c) would be amended to eliminate the requirement that a public benefit corporation include in its name a specific “public benefit corporation” identifier. If the identifier is excluded, however, the corporation must, before issuing or disposing of shares, provide notice to any person acquiring the shares so issued or disposed of that the corporation is a public benefit corporation, unless the issuance is being made pursuant to an offering under the Securities Act of 1933 or the corporation has at the time of issuance a class of stock registered under the Securities Exchange Act of 1934.

The proposed amendments to Section 363(a) and Section 363(c) would also relax the voting standards required to approve transactions in which a corporation that is not a public benefit corporation becomes a public benefit corporation or its stockholders become stockholders of a public benefit corporation, as well as transactions in which a public benefit corporation ceases to be a public benefit corporation or its stockholders become stockholders of a corporation that is not a public benefit corporation. Section 363(a) currently provides that a corporation that is not a public benefit corporation may not, without the approval of 90% of the outstanding shares of each class of stock, whether voting or nonvoting, approve an amendment to its certificate of incorporation that would permit it to become a public benefit corporation or merge or consolidate with another entity if as a result of such merger or consolidation the stockholders would become holders of, or become entitled to receive, shares or other equity interests in a domestic or foreign public benefit corporation or similar entity. The proposed amendments would reduce the voting standard on these matters to 66 2/3% of the outstanding shares entitled to vote. Section 363(c), which provides the voting standards applicable to public benefit corporations in connection with analogous amendments to the certificate of incorporation as well as mergers or consolidations, would be similarly amended.

Section 363(b) currently provides that stockholders of a corporation that is not a public benefit corporation are entitled to statutory appraisal rights in cases where the corporation amends its certificate of incorporation to become a public benefit corporation or effects a merger or consolidation that results in the shares of its stock becoming, or being converted into the right to receive, shares of a public benefit corporation. The proposed amendments to Section 363(b) would provide a “market out” exception to these rights. Under the proposed amendments, no such appraisal rights would be available for shares of stock (or depository receipts in respect thereof) that, at the record date fixed to determine stockholders entitled to receive notice of the meeting of stockholders to act upon any such agreement of merger or consolidation, or to adopt any such amendment, were either listed on a national securities exchange or held of record by more than 2,000 holders, unless, in the case of a merger or consolidation, the holders are required by the terms of the merger to accept anything other than shares of stock (or depository receipts in respect thereof) that will be listed on a national securities exchange or held of record by more than 2,000 holders, cash in lieu of fractional shares (or fractional depository receipts), or any combination of the foregoing.