Each year the Delaware legislature passes several amendments to the Delaware General Corporation Law (DGCL) which impact public and private companies incorporated in Delaware, and elsewhere, as many states follow the DGCL. Effective August 1, 2022, the DGCL has been amended to: (i) add certain exculpation provisions in favor of senior officers; (ii) reduce the voting rights necessary to convert a corporation to another type of business entity; (iii) require a dissolution filing upon expiration of a corporate existence; (iv) update signature affirmations; (v) eliminate the requirement to make a stockholder list available during a stockholder meeting; (vi) clarify the method of notice for a stockholder meeting; (vii) increase insurance protections; (viii) update three important provisions related to stockholder appraisal rights; (ix) provide technical updates to the requirements for equity issuances; (x) broaden the ability to complete advance stockholder consents; (xi) improve the method of effectuating a domestication; and (xii) clarify annual franchise tax reports.
Stockholder Appraisal Rights
Appraisal rights are statutory rights whereby a company must offer certain dissenting or minority shareholders the right to receive the fair value of their shareholdings under certain circumstances, including merger transactions. That is, a shareholder can elect to be cashed out at the fair value of their equity instead of participating in a particular transaction. To elect their appraisal rights, a shareholder must follow very specific statutory formalities.
Section 262 of the DGCL governs appraisal rights for Delaware corporations. If a corporation is required to seek shareholder approval of a merger or consolidation, it must notify the shareholders that are entitled to vote on such merger or consolidation, of the availability of appraisal rights. Notice of the meeting and appraisal rights must be provided at least 20 days prior to the shareholder meeting. Moreover, the notice must include a copy of Section 262 of the DGCL itself for the shareholders to review.
In order to exercise their appraisal rights, a dissenting shareholder must (a) deliver a written demand to the company exercising their appraisal rights prior to the shareholder vote; (b) not vote in favor of the merger or consolidation; and (c) continuously hold their shares from the date of making the appraisal right demand through the date of the closing of the merger or consolidation. Thereafter, within 10 days of the closing of the merger or consolidation, the company must provide notice to all shareholders who properly delivered notification of appraisal rights that the transaction has closed.
Within 120 days of the effective date of the merger or consolidation, either the surviving corporation or any shareholder that has properly demanded appraisal rights and otherwise complied with Section 262, can commence an action in the Delaware Court of Chancery for the determination of the fair value of the shares held by such shareholder(s). Fair value is determined without including any added value from the merger or consolidation. That is, the dissenting shareholder is not entitled to vote against a transaction and request appraisal rights and get the increased (or decreased) value associated with the transaction.
Appraisal rights provisions are often tweaked and were so again in 2022 with four amendments. Section 262 has been amended to allow beneficial owners to exercise appraisal rights directly in their own names instead of through the record owner (such as their brokerage firm).
Significantly, Section 262 has been amended to establish appraisal rights for stockholders in connection with the conversion of a Delaware corporation to a foreign corporation (i.e., redomicile to another state) and in connection with the conversion to another type of entity (but note the decreased voting requirement discussed below). Appraisal rights are not required if the “market out” exception is available. The “market out” exception (Section 251) eliminates the need for shareholder approval to complete a merger, where such merger is completed following a tender or exchange offer, and the acquirer owns at least the percentage amount of the target that is needed to approve the merger.
That is, Section 251(h) eliminates unnecessary time and expense related to a vote on a merger when certain preconditions have been satisfied. These preconditions include:
- The merger must be consummated as soon as practicable following the tender offer or exchange offer;
- The underlying tender or exchange offer must be for all of the outstanding stock of the target, except for the stock owned by the acquirer or any person that directly or indirectly owns all outstanding stock of the acquirer, and any direct or indirect wholly owned subsidiary of any of the foregoing;
- The use of Section 251(h) can be a contractual election by the parties to the merger.
Moreover, the 2022 amendments eliminate appraisal rights in a merger, consolidation or conversion authorized by a plan of domestication under Section 388 (i.e., moving to Delaware from another country). Finally, the amendments allow a company to provide notices related to appraisal rights by electronic link to a publicly available source instead of having to print and mail the notices.
Plan of Domestication
In addition to eliminating appraisal rights in a merger, consolidation or conversion authorized by a plan of domestication, Section 388 has been amended to broaden the allowable provisions in a plan of domestication including post-domestication corporate actions. As long as such corporate actions are approved in accordance with the law of the country of incorporation at the time of the adoption of the plan, such actions will be deemed approved in accordance with Delaware law. This provision may be especially helpful for non-U.S. SPACs that determine to domesticate to Delaware as part of a de-SPAC transaction.
Senior Officer Exculpation
Section 102(b)(7) of the DGCL has always allowed a corporation to include provisions in its certificate of incorporation eliminating or limiting directors’ personal liability for monetary damages arising from a breach of fiduciary duty. The 2022 amendments now permit a degree of exculpation for senior officers as well. The new provision includes some exceptions including liability arising from a breach of the duty of loyalty, acts or omissions not in good faith or acts of intentional misconduct or knowing violations of law. They provision also excepts circumstances in which the officer derives an improper personal benefit. Furthermore, the new provision is limited to direct claims or class actions by stockholders whereas a director is also protected from derivative claims. Covered senior officers include the president, chief executive officer, chief financial officer, chief operating officer, chief legal officer, controller, treasurer, chief accounting officer, any named executive officer in SEC filings and other executive officers who agree to consent to service of process in Delaware.
Since an amendment to the certificate of incorporation requires both board and shareholder consent, and for Exchange Act reporting companies, compliance with the Section 14 proxy rules, public companies should consider incorporating these amendments in a regular annual meeting or other necessary changes to the certificate of incorporation. I suspect that adding officer exculpation will also increase D&O insurance premiums but will also decrease the number of officers named as defendants in stockholder litigation actions.
Proxy advisors are also taking note of the amendment. ISS has indicated it will take a case-by-case approach to proposals on director and officer indemnification and liability protection whereas Glass Lewis has been silent on the subject so far.
Historically, Section 266 of the DGCL required the approval of a majority of all outstanding equity, whether voting or non-voting. The DGCL lowered this requirement to a majority of equity entitled to vote on the conversion, provided however, whether the entity is being converted into a partnership, the general partner must also approve. This change aligns approval requirements with the majority of corporate actions. Of course, a company can choose to require greater voting requirements or other provisions in its certificate of incorporation or in voting agreements.
Expiration of Corporate Existence
Corporations have always had the ability to limit its duration in its certificate of incorporation. The 2022 amendments have added a provision requiring an entity to file a certificate of dissolution within 90 days of the expiration date.
Amended Section 103 provides that upon signing a document that is filed with the Delaware Secretary of State, such person is affirming, under the penalty of perjury, that the document will be true at the time of becoming effective, regardless of the date of filing.
Notice of Stockholders Meetings
As I’ve discussed many times, the regulation of corporate law rests primarily within the power and authority of the states. However, for public companies, the federal government imposes various corporate law mandates including those related to matters of corporate governance. While state law may dictate that shareholders have the right to elect directors, the minimum and maximum time allowed for notice of shareholder meetings, and what matters may be properly considered by shareholders at an annual meeting, Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules promulgated thereunder govern the proxy process itself for publicly reporting companies. Federal proxy regulations give effect to existing state law rights to receive notice of meetings and for shareholders to submit proposals to be voted on by fellow shareholders.
All companies with securities registered under the Exchange Act are subject to the Exchange Act proxy regulations found in Section 14 and its underlying rules. Section 14 of the Exchange Act and its rules govern the timing and content of information provided to shareholders in connection with annual and special meetings with a goal of providing shareholders meaningful information to make informed decisions, and a valuable method to allow them to participate in the shareholder voting process without the necessity of being physically present.
The 2022 amendments amended Section 222 to provide that when a virtual meeting is adjourned, including due to technical issues, notice need not be given of the continuation date, time or place if same are announced at the meeting and displayed during the time scheduled for the meeting. Despite the Delaware provisions, Section 14 of the Exchange Act requires a new SEC filing and mailing to stockholders under certain circumstances involving an adjournment (including one to gather further votes on a matter).
Advance Stockholder Consents
Section 228 permits stockholders to act by written consent. Such consents may be executed in advance and held in escrow for up to 60 days in advance. The 2022 amendments confirm that a person need not be a stockholder on the date of execution of the consent as long as they are so by the record date of the action for which the consent applies.
Stockholder lists at Meetings
Catching up with changing times and increased virtual meetings, Section 219 has been amended to eliminate the requirement that a stockholder list must be made available at any stockholder meeting. The rules maintain the requirement that a list must be made available during the 10 days prior to a meeting. Generally, provisions related to stockholder meetings are contained in company bylaws (not the certificate of incorporation) so an amendment to align with this new provision can be completed by the board of directors. Public companies should keep in mind that an amendment to the bylaws is an 8-K triggering event.
The 2022 amendments expressly allow a corporation to use a captive insurer, including for D&O insurance. A captive insurance company is one that is wholly owned and controlled by its insureds and its primary purpose is to insure its owners. In other words, a Delaware corporation can create a fund for self-insurance.
The issuance of stock, sale of treasury shares and issuances and the creation and issuance of rights and options are governed by three separate sections of the DGCL. The 2022 amendments harmonize the three sections and allow for a board to delegate the authority to for all issuances to a person or entity. Any such grant of authority must include guardrails including the maximum number of shares, rights or options that may be issued, the time frame for issuances and minimum amount of acceptable consideration. Under the amendments, the delegated party may not issue stock, options or rights to themselves.
Annual Franchise Tax Reports
The 2022 amendments tighten up some of the annual franchise tax report requirements. First, amended Section 5602(a)(3) prohibits using a company’s registered agent’s address as the principal place of business address unless it is, in fact, the principal place of business and the company is acting as its own registered agent. Second, large corporate filers must now notify Delaware of a change of status, or continue to pay the higher tax rate.
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