The Governor of Delaware has signed into law amendments to the General Corporation Law of the State of Delaware (the “DGCL”) proposed by the Delaware State Bar Association and subsequently approved by the Delaware legislature. A number of provisions of the DGCL are affected, and the legislation addresses several significant topics, including the personal liability of senior corporate officers under Section 102(b)(7) of the DGCL, the authority to issue stock and options, the expansion of appraisal rights to beneficial owners, and new provisions intended to streamline the process for non-U.S. entities to domesticate into Delaware. The 2022 amendments to the DGCL took effect on August 1, 2022, and apply to corporate actions taken on or after that date.
Personal Liability of Senior Corporate Officers (Section 102(b)(7))
Section 102(b)(7) of the DGCL has been amended to extend exculpation rights for breaches of the fiduciary duty of care to senior officers of a Delaware corporation. The amendments address a long-standing discrepancy between exculpation rights granted to directors but not to corporate officers, an issue magnified in cases where a corporate officer also serves as a director and could therefore be protected from liability in his or her capacity as a director, but not with respect to any actions taken as an officer. The dichotomy has been troublesome since the Delaware Supreme Court held in Gantler v. Stephens, 2009 WL 188828 (Del. 2009) that both officers and directors owe fiduciary duties of care and loyalty to a corporation and its stockholders but that personal liability for breaches of the fiduciary duty of care differ for officers and directors given the statutory language contained in Section 102(b)(7).
The amendments to Section 102(b)(7) permit a corporation to adopt exculpatory language in its certificate of incorporation limiting the personal liability of both directors and officers, including the president, CEO, COO, CFO, chief legal officer, controller, treasurer, chief accounting officers, and others “identified in the corporation’s public filings with the SEC” or who have consented through a written agreement to accept service of process on the corporation’s behalf.
Consistent with the protections previously afforded to directors under Section 102(b)(7), to be valid, language exculpating directors and officers must be included in the corporation’s certificate of incorporation, and a corporation may only limit officer liability for breaches of the fiduciary duty of care. The amendments further provide that officers may only be exculpated for claims brought directly by stockholders and not for fiduciary duty claims brought by the corporation or derivatively by stockholders. Finally, the amendments prohibit the exculpation of officers for (1) breaches of the fiduciary duty of loyalty; (2) a failure to act in good faith; and (3) any transaction where an officer derives an improper personal benefit.
Authority to Issue Stocks and Options (Sections 152, 153, 157, 154, and 141(c))
These amendments continue the ongoing expansion and modernization of a board’s ability to delegate authority to an individual or entity for purposes of issuing stock or options in the corporation. Pursuant to the amendments, a board is permitted to delegate authority to an individual or entity to issue stock, sell treasury shares, or issue rights or options to acquire stock. Each delegation of authority made by the board must still satisfy the requirements of Sections 152, 153, and 157 of the DGCL, respectively. Further, the amendment requires that before delegating these responsibilities, the board must adopt a resolution establishing: (1) the maximum number of shares of stock, rights, or options that may be sold or issued; (2) a time period for selling shares or issuing stock; and (3) the minimum amount of consideration for these transactions, so long as the consideration aligns with the requirements laid out in Section 154 of the DGCL. The resolutions adopted by the board may be dependent upon facts ascertainable outside of the resolution, such as by reference to a formula such as the stock’s trading price on a particular date or a trading price average over a specified period of time, so long as the resolution clarifies how such facts operate on the resolution.
While the amendments further expand the authority of a board of directors to delegate the issuance of stock and options, it is important to note that the amendment does not affect the board’s process for delegating authority to board committees under Section 141(c). Additionally, the amendments prohibit the individual or entity delegated authority by the board to issue or sell to themselves stock, options, or any related rights falling within his, her, or its delegated authority.
No Requirement that Stockholder List be Available During a Meeting (Section 219)
The amendments to Section 219 of the DGCL eliminate the requirement that a corporation make a stockholder list available for inspection during a meeting of stockholders. The amendments also clarify how the ten-day period for purposes of requesting a stockholder list in advance of a stockholder meeting is calculated in order to determine when the corporation is required to make the stockholder list available for inspection. The amendments to Section 219 of the DGCL are intended to address the increasing frequency with which stockholder meetings are held virtually on an electronic platform, as well as privacy concerns relating to the broadcast of stockholder information via the virtual meeting format.
Meeting Notice and the Adjournment of Virtual Meetings (Section 222)
The amendments to Section 222 of the DGCL explicitly provide that a notice of meeting of stockholders may be given in any manner permitted by Section 232 of the DGCL. Section 222(c) was further amended to address potential technical issues that may arise during a virtual meeting of stockholders, providing that (unless the corporation’s bylaws state otherwise) if a virtual meeting of stockholders is adjourned, including due to a technical failure to convene or continue a virtual meeting, notice need not be given if the time, date, and place of the adjourned meeting are announced at the meeting, displayed during the time scheduled for the meeting on the virtual platform utilized for the meeting, or set forth in the notice of meeting. As a practical matter, a corporation using a virtual meeting format may wish to include an advance adjournment notice in the meeting notice to address potential technical issues that may arise while convening or holding the stockholder meeting.
Stockholder Consents (Section 228)
Section 228(c) of the DGCL has been amended to clarify that a stockholder executing a written consent that is effective at a future time, including a time determined by the happening of a future event, need not be a stockholder at the time such consent is executed if the person is a stockholder of record as of the record date set for determining stockholders entitled to consent to the action.
Appraisal Rights (Section 262)
The amendments to Section 262 of the DGCL expand the rights of beneficial owners of stock, specifically by extending statutory appraisal rights to beneficial owners. Prior to the amendments, a beneficial owner of stock could only seek appraisal rights if the record holder of such stock demanded appraisal on the beneficial owner’s behalf. As a result of the amendments, beneficial owners of stock are now permitted to make appraisal demands in their own name.
The amendments include a new subsection 262(d)(3) providing that a beneficial owner may submit a written demand for appraisal if the owner satisfies the following three requirements: (1) maintaining beneficial ownership of the stock of the corporation from the date of the demand through the date of the merger, consolidation, or conversion; (2) satisfying the stockholder ownership threshold established under 262(a); and (3) submitting evidence of beneficial ownership in addition to other identifying information such as the beneficial owner’s address and the identity of the record holder.
In addition, the amendments specifically define who may be classified as a beneficial owner, including any “person (either an individual or entity) who is the beneficial owner of stock held either in voting trust or by a nominee on behalf of the person.” The amendments also provide that stockholders may have appraisal rights in connection with a conversion of the corporation unless the 262(b) market-out exception applies. The amendments further extend the market-out exception to “transactions approved by a stockholder consent.”
Finally, the amendments remove the requirement that a Section 262 stockholder notice of appraisal rights include a copy of Section 262 of the DGCL; rather, the notice may reference a publicly available electronic resource providing information regarding stockholder appraisal rights.
Conversions (Sections 265, 266, and 262(k))
Section 265 of the DGCL, governing the conversion of other entities to a Delaware corporation, was amended to modify the time frame by which a conversion must be approved. While the statute previously required the approval of the converting entity and the approval of the certificate of incorporation by the same authorization required to approve the conversion to occur prior to the filing of the certificate of conversion, the amendments provide that the approvals must occur by the time the certificate of conversion filed with the Delaware Secretary of State becomes effective.
Section 266 of the DGCL, governing the conversion of a Delaware corporation to another entity, was also amended to require the vote of holders of a majority in voting power of the outstanding shares entitled to vote on the conversion, versus the prior requirement for unanimous approval of the conversion by all of the outstanding stock of the entity regardless of voting rights. While the prior formulation was intended to protect stockholders from converting into a different form of entity with substantially different governance and ownership rights, as a practical matter the unanimity requirement made the statute unworkable in many instances.
In recognition of the prior policy concerns, however, Section 266 contains two important protections for the stockholders of a Delaware corporation contemplating a conversion: (1) the amendments require the consent of any stockholder who would become a general partner due to a conversion, given potential personal liability for a general partner under Delaware law; and (2) the amendments state that any provision of a certificate of incorporation of a corporation incorporated before August 1, 2022, or a voting or other written agreement between the corporation and a stockholder entered into prior to that date, that restricts or prohibits the consummation of a merger or consolidation, shall be deemed to apply to a conversion unless the certificate of incorporation or agreement otherwise provides. Thus, for example, holders of preferred stock who are entitled to a separate class vote to approve a merger or consolidation transaction under the terms of a corporation’s certificate of incorporation effective prior to August 1, 2022, would be deemed to have the same class vote on a proposed conversion.
Finally, Section 262 of the DGCL, which sets forth statutory appraisal rights for stockholders, has been amended to apply to the conversion of a Delaware corporation in addition to a merger or consolidation.
Dissolution (Sections 275 and 276)
The amendments to Sections 275 and 276 of the DGCL are intended to clarify dissolution procedures for corporations specifying the duration of the corporation’s existence in their certificate of incorporation. The revisions to Section 275 provide that any corporation whose certificate of incorporation specifies the duration of the company’s existence must file dissolution documents with the Delaware Secretary of State within ninety days of the date set in the company’s incorporation documents. The certificate of dissolution must also contain the name of the corporation, the date listed in the certificate of incorporation on which the corporation would dissolve, the names and contact information for the corporation’s directors and officers, and the date on which the original certificate of incorporation was filed. Further, the amendments specify that the corporation will be dissolved as a legal matter on either the date listed in the certificate of incorporation or the date on which the certificate of dissolution goes into effect, whichever is earlier. In addition, the amendments modify Section 276 to contain conforming dissolution provisions for nonstock corporations.
Domestication of Non-US Entities (Section 388)
Section 388 of the DGCL was substantively amended to permit a non-United States entity domesticating into Delaware to adopt a plan of domestication setting forth the terms and conditions of the domestication, including the manner of exchanging or converting the equity interests of the non-United States entity to be domesticated and any details or provisions deemed desirable. The revised statutory language providing for a plan of domestication significantly streamlines the mechanics and technical approvals required in connection with the formation of a new Delaware corporation upon domestication and offers greater flexibility to transaction planners in structuring deals that contemplate one or more non-United States entities domesticating into Delaware.
A plan of domestication may set forth corporate action to be taken by the domesticated corporation in connection with the domestication, each of which must be approved in accordance with the requirements of applicable foreign laws prior to the effectiveness of the domestication into Delaware. Once approved, any such corporate action that is within the power of the Delaware corporation under the DGCL that is set forth in the plan of domestication will be deemed to be authorized, adopted, and approved, as applicable, by the domesticated corporation and its board of directors and stockholders, and no further action of the board of directors or stockholders is required. Importantly, if any corporate action set forth in the plan requires the filing of a certificate with the Delaware Secretary of State, the certificate must state that no action by the board of directors or stockholders of the Delaware corporation otherwise required by any other provision of the DGCL is required in accordance with Section 388 of the DGCL.
In addition, the amendments provide that the terms of the plan of domestication may be made dependent upon facts ascertainable outside of the plan if the way such facts operate is clearly set forth in the plan. The amendments further require that a certificate of domestication certify that, prior to the time the certificate of domestication becomes effective, the domestication was approved in accordance with the governing documents of the non-United States entity or by applicable non-United States law.
Other minor amendments to the DGCL were also enacted, including amending: (1) Section 103 to clarify that the execution of an instrument by a person constitutes an oath or affirmation, under penalties of perjury, that the facts stated in the instrument will be true at the time such instrument is effective, and to remove outdated language; (2) Section 502 to clarify that, unless a corporation maintains its principal place of business in the State of Delaware and serves as its own registered agent, the principal place of business of the corporation shall not be the address of its registered office in Delaware; and (3) Section 503 to provide that a corporation holding the status of a large corporate filer with the Delaware Secretary of State will maintain that status unless it notifies the Secretary of State’s office that the corporation no longer meets the criteria applicable to large corporate filers.