Each year the Delaware legislature passes several amendments to the Delaware General Corporation Law (DGCL) which impact not only public and private companies incorporated in Delaware, but elsewhere, as many states follow the DGCL. This year the most significant changes relate to reduced stockholder approval provisions. Effective August 1, 2023, the DGCL has been amended to: (i) eliminating the need for stockholder approval for forward stock splits in certain cases; (ii) reducing the voting threshold for certain reverse stock splits or changes to authorized shares; (iii) allowing for the disposition of treasury stock for less than par value; (iv) simplifying the process for ratifying defective corporate actions; (v) simplify notices to stockholders following action taken by consent; (vi) expanding certain appraisal rights; and (vii) establishing “safe harbor” provisions from the stockholder approval requirement for certain dispositions of pledged assets.
Shareholder Voting Requirements for Certain Amendments to the Certificate of Incorporation – DGCL Section 242
One of the reasons Delaware remains the gold standard for corporate formation, despite being expensive, is the speed and precision in which the Delaware Chancery Court and Delaware legislature address concerns and provide clarity in an astute workable manner. In December 2022 the Delaware case of Garfield v. Boxed, Inc. sent the SPAC world in a spiral by declaring that Class A and Class B common shares were different classes, as opposed to series of the same class, thereby entitling each class to vote separately on charter amendments pursuant to DGCL Section 242 (see HERE).
Following the Garfield decision, there was a run on the Chancery Court by post-business-combination SPACs seeking to ratify shareholder approvals obtained during the de-SPAC process. Although the wording varied, in essence each of the companies asked the Chancery court to (i) validate and declare effective the company’s current amended certificate of incorporation, including the filing and effectiveness thereof and (ii) validate and declare effective the shares of the company’s Class A common stock, and other securities issued in reliance on the validity of its current certificate of incorporation (see HERE).
The court responded favorably, generally granting the petitions across the board. In at least one such case, the court noted that adding class approval requirements under these circumstances, where no legislation or precedence required same, would cause upheaval for practitioners and the marketplace. The SPAC world, and all Delaware corporations, gave a collective sigh of relief. Now just months later, the Delaware legislature has provided legislative clarity to avoid further ambiguity.
The Delaware legislature also seems to be responding to a depressed market, requiring more reverse splits to maintain minimum national exchange listing requirements together with an increased difficulty in obtaining votes from a majority of the outstanding shares. Although there could be many reasons for the difficulty in obtaining votes, for sure it is partially due to the increased number of retail investors participating in the stock market who are much less likely to vote than their institutional counterparts. Additionally, some brokers have instituted policies requiring them to decline to exercise their discretionary authority to vote shares held in “street name,” resulting in additional shares not voted.
DGCL Section 242 governs amendments to certificates of incorporation. DGCL 242(a) sets forth the general right to amend a certificate of incorporation, and includes a list of allowable amendments, including increases and decreases to capital stock, splits, recapitalizations, creations of Classes of preferred stock, etc. Section 242(b) sets forth the manner in which such amendments may be effectuated. Section 242(b) generally requires approval by (i) the board of directors and (ii) holders of a majority in voting power of the outstanding stock entitled to vote thereon and by the holders of a majority in voting power of each class entitled to vote thereon as a class, subject to limited exceptions.
Prior to the current amendments Section 242(b)(2) specifically provided for a Class vote on five types of charter amendments affecting that Class. In particular, Section 242(b)(2) stated that “holders of the outstanding shares of a Class shall be entitled to vote as a Class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would increase or decrease the aggregate number of authorized shares of such Class, increase or decrease the par value of the shares of such Class, or alter or change the powers, preferences, or special rights of the shares of such Class so as to affect them adversely.”
The Section also requires a series vote if any three of the listed certificate amendments uniquely affect that series. That is, “[I]f any proposed amendment would alter or change the powers, preferences, or special rights of 1 or more series of any Class so as to affect them adversely, but shall not so affect the entire Class, then only the shares of the series so affected by the amendment shall be considered a separate Class for the purposes of this paragraph.”
Section 242 has now been amended to:
- Forward Split – Eliminate the shareholder approval requirement to effectuate a forward stock split, including where the total number of authorized shares will be increased by the same ratio as the split provided the corporation has only one class of stock outstanding and such class is not divided into series;
- Increase or Decrease in Authorized – A charter amendment to increase or decrease the number of authorized shares of a class (in a manner not involving a forward stock split) previously required the affirmative vote of a majority of the outstanding shares entitled to vote thereon and, as applicable, a majority of each class or series of stock entitled to a separate class vote. The amendments allow for approval by a majority of votes cast (instead of majority of outstanding) and eliminate the class or series shareholder approval requirement if (a) the shares of such class are listed on a national securities exchange immediately before such amendment becomes effective and meet the listing requirements of such national securities exchange relating to the minimum number of holders immediately after such amendment becomes effective, (b) at an annual or special meeting, a vote of the stockholders entitled to vote thereon, voting as a single class, is taken for and against the proposed amendment, and the votes cast for the amendment exceed the votes cast against the amendment, and (c) if the amendment increases or decreases the authorized number of shares of a class of capital stock where the articles do not provide for such increase or decrease, the votes cast for the amendment by the holders of such class exceed the votes cast against the amendment by the holders of such class.
- Reverse Split – A charter amendment to effectuate a reverse stock split previously required the affirmative vote of a majority of the outstanding shares entitled to vote thereon and, as applicable, a majority of each class or series of stock entitled to a separate class vote. The amendments allow for approval by a majority of votes cast (instead of majority of outstanding) and eliminate the class or series shareholder approval requirement if (a) the shares of such class are listed on a national securities exchange immediately before such amendment becomes effective and meet the listing requirements of such national securities exchange relating to the minimum number of holders immediately after such amendment becomes effective, and (b) at an annual or special meeting, a vote of the stockholders entitled to vote thereon, voting as a single class, is taken for and against the proposed amendment, and the votes cast for the amendment exceed the votes cast against the amendment.
Like most DGCL provisions, the Section 242 amendment procedures and voting thresholds only govern unless otherwise expressly provided in the company’s charter documents. As such, attention should be given to a company’s articles and by-laws to be sure to take full advantage of the new provisions.
Equity Issuances
The issuance of stock, sale of treasury shares and issuances and the creation and issuance of rights and options are generally governed by Sections 152, 153 and 157 of the DGCL. The 2022 amendments allowed for a board to delegate the authority to for all issuances to a person or entity. The 2023 amendments add that the consideration received for treasury shares may have a value greater or less than, or equal to, the par value (if any) of such shares and may consist of cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof.
The 2022 amendments to Section 257 required guardrails when delegating authority, including board resolutions setting forth the maximum number of shares, rights or options that may be issued, the time frame for issuances and minimum amount of acceptable consideration. The 2023 amendments remove the requirement that the board resolution set forth the maximum number of rights or options that can be issued. The maximum number of shares must still be included.
Ratifying Defective Corporate Actions
Sections 204 and 205 of the DGCL, respectively, provide mechanisms for a corporation to unilaterally ratify defective corporate acts or seek relief from the Court of Chancery to validate any corporate act under certain circumstances. Section 204 is a self-help statute allowing a board of directors to remedy what would otherwise be void or voidable corporate acts and stock issuances and provides that “no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in Section 204 or validated by the Court of Chancery in a proceeding brought under Section 205.”
Pursuant to Section 204, a corporation’s board of directors may ratify one or more defective corporate acts by adopting resolutions setting forth the defective corporate act to be ratified, the date on which that act occurred, the reason why it is defective and that the board has approved the ratification of the defective corporate act or acts. A stockholder vote also is required to ratify the defective act if such a vote was required either at the time of the defective corporate act or at the time the board adopts the resolutions ratifying such act. Where the DGCL would have required the filing with the secretary of state related to the corporate act, ratification requires the filing of a certificate of validation.
The 2023 amendments amend Section 204 to streamline the requirements for filing, and the contents of, a certificate of validation upon the ratification of a defective corporate act. Pursuant to the amended Section 204, a certificate of validation is only required to be filed in circumstances where a certificate in connection with the original corporate act was required and was either (i) filed but is required to be changed to give effect to the ratification or (ii) never filed. The amendments also simplify the information required to be included in the certificate of validation, which will decrease the administrative burdens associated with such filings.
As an aside, the post Garfield run on the Chancery Court referred to above, was in reliance on Section 205 of the DGCL.
Notices to Stockholders of Actions Taken by Consent
Section 228 of the DGCL governs the requirements for providing stockholders with notice of actions taken by consent in lieu of a meeting. The amendments (i) clarify the date for determining the stockholders of a corporation entitled to notice of a stockholder action by written consent and (ii) permit such notice to be given electronically online, as long as certain requirements are met.
Prior to the amendments, a corporation was required to notify those stockholders who had not executed the written consent and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of the meeting had been the date that consents signed by a sufficient number of holders to take the action were delivered to the corporation as provided in Section 228. This provision conflicted with requirements related to setting a record date under Section 213, and also created some ambiguities in implementation.
The 2023 amendments provide that the stockholders entitled to notice of a corporate action are those who would have been entitled to notice of the meeting if the action had been taken at a meeting and the record date for the notice of the meeting was the record date for the action by consent. The record date for an action by consent may be one of the following: (i) a date set by the board, which date may not precede the date of the board action or be longer than 10 days after the board action; (ii) if no record date is set by the board, the first date on which a signed consent is delivered to the corporation; or (iii) if no record date is fixed by the board but the DGCL requires board action, the date on which the board adopts the resolutions required by the DGCL.
The 2023 amendments allow for notices under Section 228 to be provided by way of a notice “which constitutes a notice of internet availability of proxy materials under rules promulgated under the Securities Exchange Act of 1934.”
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.
For a more in-depth discussion of Delaware appraisal rights, see HERE.
The 2023 amendments expand the appraisal rights to include not only mergers, conversions and consolidations but also transfers, domestications and continuances to foreign jurisdictions. The 2023 amendments also amend Section 390 to reduce the voting requirements for a domestication, transfer or continuance from all of the outstanding shares to a majority of voting power.
Safe Harbor for Dispositions of Mortgaged or Pledged Assets
Section 271 of the DGCL generally requires shareholder approval to sell, lease or exchange all or substantially all of a corporation’s property and assets. Section 272, in turn, sets forth certain specific requirements for the disposition of mortgaged or pledged assets.
The amendments to Section 272 add a safe harbor for selling, leasing, or exchanging collateral assets that secure a mortgage or pledge without requiring stockholder approval under Section 271. In particular, insolvent corporations may sell or dispose of mortgaged or pledged assets without stockholder approval: (i) if the transaction is pursuant to which the secured party is exercising its rights with respect to the collateral under applicable law; (ii) whereby the board of the corporation and the secured party have agreed to an alternative transaction (e.g., a foreclosure sale to a third party) provided that the value of the assets is less than or equal to the amount of the liability or obligation being reduced as a result of the transaction. The amendment does not proscribe a methodology for valuing the assets.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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