CURRENT MONTH (August 2022)
2022 Amendments to the Delaware General Corporation Law
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.
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.
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.
See Business Law Today’s full-length article on this topic for information on other amendments.
2022 Amendments to the Delaware LLC and Partnership Statutes
By Michael P. Maxwell, Potter Anderson & Corroon LLP
The Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq. (the “LLC Act”), the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101 et seq. (the “LP Act”), and the Delaware Revised Uniform Partnership Act, 6 Del. C. § 15-101 et seq. (the “Partnership Act” and together with the LLC Act and the LP Act, each, an “Act,” and, collectively, the “Acts”), have been amended in 2022. Among the provisions of the Acts that have been amended are those concerning the definition of the applicable governing agreement (i.e., limited liability company agreement or partnership agreement), permitted methods of document execution, the timing of approvals for domestications and conversions, and the effect of filing a certificate of revival of a limited liability company or a limited partnership on a series of such limited liability company or limited partnership. The amendments became effective on August 1, 2022.
LLC and Partnership Agreements
The Acts have been amended to confirm that any protected or registered series of a limited liability company or a limited partnership is bound by its limited liability company agreement or partnership agreement, as applicable, regardless of whether such series has executed such agreement. The Acts have been further amended to confirm that a limited liability company agreement or partnership agreement, as the case may be, may include or incorporate multiple documents that may govern the business or affairs of the applicable entity or any of its series, as applicable.
Service of Process on Managers and Liquidating Trustees of LLCs
Section 18-109 of the LLC Act has been amended to modify where required copies or statements related to service of process must be served on liquidating trustees or managers. Specifically, when service of process is being effected on a manager or liquidating trustee of a limited liability company, the required copies and statements relating to such service of process should be addressed to such manager or liquidating trustee at the company’s principal place of business, if known, rather than its registered office.
Electronic Signing of Certificates
The amendments to the Acts have expanded upon the requirement for the form of a signature on a certificate of limited liability company interest or certificate of partnership. Specifically, such signatures “may be a manual, facsimile, or electronic signature.”
Timing of Statements in Certificates
The Acts have been amended to clarify that execution of a certificate by a person authorized to do so by the applicable Act constitutes an oath or affirmation that, to the best of such person’s knowledge and belief, the facts stated in such certificate shall be true at the time such certificate becomes effective, rather than at the time such certificate is executed.
Domestication of Non-US Entities
Prior to the effectiveness of the amendments, the Acts required that approval of a domestication of a non-US entity to a limited liability company or a partnership occur prior to the filing of a certificate of limited liability company or partnership domestication with the Delaware Secretary of State’s office. The Acts have been amended to provide that the approvals required under the Acts for a non-US entity to domesticate to a limited liability company or partnership (including approval of the limited liability company agreement or partnership agreement, as applicable) must take place prior to the time a certificate of limited liability company or partnership domestication becomes effective.
Conversion of Certain Entities to LLC or Partnership
Similar to the amendments related to the timing for obtaining approval for domestication of non-US entities to a limited liability company or partnership, the 2022 amendments also modified the time frame by which an “other entity” (as such term is used in the applicable Act) must receive approval for a conversion to a limited liability company or partnership. The Acts have been amended to provide that the approvals required under the Acts for another entity to convert to a limited liability company or partnership (including approval of the limited liability company agreement or partnership agreement, as applicable) must take place prior to the time a certificate of conversion to limited liability company or partnership becomes effective.
Revival of Limited Liability Company or Limited Partnership
The LLC Act and the LP Act have each been amended to clarify the effect of filing a certificate of revival of a limited liability company or certificate of revival of a limited partnership, as the case may be, on a limited liability company’s or limited partnership’s protected series that are not, at the time of such filing, otherwise terminated and wound up, and on its registered series whose certificates of registered series are not, at the time of such filing, otherwise canceled. Specifically, the amendments provide that the filing of a certificate of revival of a limited liability company or limited partnership also revives each registered series thereof whose certificate of registered series has been canceled as a result of the cancellation of the certificate of formation of the limited liability company or certificate of limited partnership, as applicable, pursuant to certain provisions of the applicable Act (e.g., Sections 18-104(d), 18-104(i)(4), or 18-1108 of the LLC Act, and Sections 17-104(d), 17-104(i)(4), or 17-1110(a) of the LP Act), and each protected series thereof that has not been otherwise terminated and wound up. Sections 18-1108(b) of the LLC Act and 17-1110(b) of the LP Act, regarding the cancellation of a certificate of formation or certificate of limited partnership, or a certificate of registered series of such entity for failure to pay taxes, have been amended to make conforming changes.