The Delaware State Bar Association has proposed amendments to the Delaware General Corporation Law (DGCL) and certain other provisions of the Delaware Code, which address a number of different topics, including the streamlined back-end merger process under Section 251(h) of the DGCL, springing director and stockholder consents, certain charter amendments without stockholder approval, and the statute of limitations for breach of contract claims. If approved by the Delaware General Assembly and signed into law by the governor, the proposed amendments are expected to become effective on August 1, 2014.
Amendments to Section 251(h)
In 2013, the DGCL was amended to add Section 251(h), which eliminates the need for a stockholder vote on a back-end merger in a two-step transaction involving a front-end tender or exchange offer when certain conditions are met. Since Section 251(h) became effective, more than 25 Section 251(h) deals have been announced. The statute’s use in practice and the manner in which practitioners have been structuring Section 251(h) deals in certain circumstances have raised questions with respect to the statute’s application and utility. The 2014 proposed amendments seek to address certain interpretation issues and other questions with respect to Section 251(h) by clarifying or eliminating certain requirements in the statute.
First, the proposed amendments clarify that Section 251(h) applies to merger agreements that permit or require the merger to be effectuated under Section 251(h), thereby permitting merger agreements to provide that a merger under Section 251(h), may be abandoned and consummated under a different statutory provision without running afoul of Section 251(h). In that regard, the proposed amendments also clarify that the requirement to consummate the merger as soon as practicable after the completion of the offer only applies when the merger is effected under Section 251(h).
Second, the proposed amendments eliminate the prohibition against using Section 251(h) if a party to the merger agreement is an interested stockholder (as defined in Section 203 of the DGCL – i.e., the owner of 15 percent or more of the corporation’s voting stock). The proposed amendments, therefore, would allow a stockholder who owns 15 percent or more of the voting stock of a corporation to effect a merger with the corporation pursuant to Section 251(h), which currently is impermissible. The proposed amendments also abate the uncertainty surrounding the permissibility of Section 251(h) deals where the offeror enters into tender or support agreements with stockholders that own 15 percent or more of the target’s voting stock. Accordingly, the proposed amendments diminish the need to provide for backstops in the merger agreement (e.g., a top-up option or a covenant to hold a stockholders meeting) because there will be much less risk, if any at all, that it will be determined post-signing that the requirements to consummate the merger under Section 251(h) cannot be met.
Finally, the proposed amendments to Section 251(h) address certain questions regarding the front-end offer, timing, and ownership requirements that have arisen in connection with Section 251(h) deals. In particular, the requirement that the front-end offer be for any and all of the outstanding stock of the target corporation would, if the amendments are adopted, exclude target stock owned at the commencement of the offer by (1) the target corporation, (2) the offeror, (3) any person that owns, directly or indirectly, all of the outstanding stock of the offeror, and (4) any direct or indirect wholly owned subsidiary of any of the foregoing, and such shares would not need to be tendered into the offer or converted into the same consideration as shares accepted in the offer in the back-end merger. Also, the shares of stock that would count when determining if an acquiror has sufficient shares to effect the back-end merger under Section 251(h) would include (a) all target corporation stock irrevocably accepted for purchase or exchange and “received” by the depository before the offer’s expiration, and (b) all stock otherwise owned by the acquiror. Stock would be deemed “received” by the depository when stock certificates have been physically received or, for uncertificated stock, when such stock is transferred into the depository’s account, or an agent’s message has been received by the depository. Stock would not be deemed “received” by the depository if it is tendered by guaranteed delivery without being actually delivered to the depository.
The proposed amendments, however, do not alter directors’ fiduciary duties in mergers effected pursuant to Section 251(h) or the level of judicial scrutiny applicable to the decision to enter into a merger agreement under Section 251(h).
If adopted, the proposed amendments to Section 251(h) will apply to merger agreements signed on or after August 1, 2014.
Written Consent Amendments
In AGR Halifax Fund, Inc. v. Fiscina, the Delaware Court of Chancery raised concerns over the effectiveness and validity of written consents executed by individuals who had not yet become directors. In particular, the court in AGR Halifax found that individuals who were not yet directors could not execute consents prior to the time they became directors, even though the consents would be held in escrow and would not be delivered until after the individuals joined the board. That decision created practical issues for practitioners in certain transactions where it was deemed expedient to collect signatures from individuals at a time when they were not yet directors.
The proposed amendments to Sections 141(f) of the DGCL seek to address this issue by allowing for springing director consents. In particular, the proposed amendments would clarify that any person, whether or not a director at the time, may provide, whether through instruction to an agent or otherwise, that a written consent be effective at a future time, including a time dependent upon the occurrence of an event. This springing consent is, of course, predicated upon the consenting person being a director at such future effective time. Notably, the future effective time can be no later than 60 days after such instruction is given or such provision is made, and such consent is revocable prior to becoming effective.
Similar amendments have also been proposed to Section 228(c) of the DGCL with respect to stockholder action by written consent that substantively mirror the proposed amendments to Section 141(f) discussed above. The proposed amendments to Section 228(c), however, would not affect the requirement that the consent must bear the actual date of signature, and to the extent the consent provides for a later effective time, such later effective time would serve as the date of signature.
If adopted, the proposed amendments to Section 141(f) and Section 228(c) would become effective on August 1, 2014.
Charter Amendments Without Stockholder Approval
The proposed amendments, if adopted, would grant boards of directors of Delaware corporations flexibility with respect to certain ministerial amendments to the corporation’s certificate of incorporation without having to expend the time and expense of obtaining stockholder approval. The proposed amendments provide that, if a corporation has not opted-out in its certificate of incorporation, boards of directors may, without obtaining stockholder approval, amend the certificate of incorporation to change the corporation’s name and delete historical references to the initial incorporator, initial directors, and initial subscribers for stock, and provisions relating to previously effected changes to stock.
Additionally, the proposed amendments would eliminate the requirement in Section 242 of the DGCL that the notice of a stockholders meeting at which an amendment is to be voted on contain a copy of the amendment or brief summary thereof if, but only if, the notice constitutes a notice of internet availability of proxy materials under the Securities Exchange Act of 1934.
Extending the Statute of Limitations for Breach of Contract Claims
Under Delaware law, the statute of limitations for a breach of contract claim cannot be extended beyond the statute of limitations period, which is typically three or four years. There is a statute in Delaware, however, that permits “specialty contracts” to be placed under seal and, for such contracts, the statute of limitations period would extend to 20 years. It has become relatively common for contracts to be placed under seal in an attempt to take advantage of that statutory provision, but it remains unclear whether the “under seal” statute is intended to extend to all types of agreements, thus raising enforceability concerns in practice.
In light of this issue, legislation has been proposed to amend Title 10 of the Delaware Code through the addition of new Section 8106(c) to permit contracting parties to agree to an extension of the statute of limitations for up to 20 years without having to use a sealed instrument as long as the written contract involves at least $100,000.
If adopted, new Section 8106(c) would become effective on August 1, 2014.
Other Proposed Amendments
Section 218 of the DGCL currently requires that a voting trust agreement, or any related amendment, be filed with the corporation’s registered office in the State of Delaware. The proposed amendments to Section 218 would permit voting trust agreements and related amendments to be delivered to the corporation’s principal place of business rather than its registered office.
The proposed amendments also address incorporator unavailability issues. Section 103(a)(1) of the DGCL currently provides that if an incorporator is unavailable due to death, incapacity, unknown address, or refusal or neglect to act, a person for whom the incorporator was acting may, subject to certain conditions, execute any certificate with the same effect as if it was executed by the incorporator. The proposed amendments would eliminate any limitations arising from the reason for the incorporator’s unavailability in Section 103(a)(1) and add a new Section 108(d), which would allow any person for whom or on whose behalf an unavailable incorporator was acting to, subject to certain conditions, take any action that the unavailable incorporator would be entitled to take under Sections 107 and 108 of the DGCL.
If adopted, the proposed amendments to Section 218 and Section 103(a)(1) would become effective on August 1, 2014.
Recently Effective Amendments to the DGCL
As a final note, on April 1, 2014, new Sections 204 and 205 of the DGCL went into effect authorizing the ratification of certain defective corporate acts and stock issuances and bestowing jurisdiction upon the Delaware Court of Chancery to hear matters related to such ratifications, as well as other matters relating to curing defective or potentially defective corporate acts.
