July 26, 2023
Delaware General Corporation Updates Enacted Into Law
Each year the Delaware legislature, guided by drafting committees of the Delaware State Bar Association, improves and updates the various entity law codes to ensure that the laws governing Delaware's business organizations remain state of the art and that issues that have arisen during the year are addressed by appropriate legislative action. The 2023 amendments to the Delaware General Corporation Law (the “DGCL”), Senate Bill 114, as amended by Senate Amendment 1 (as so amended, “SB 114”), provide guidance for Delaware corporations in dealing with treasury stock, the issuance of stock options or other rights, the validation of defective corporate acts, notice of action taken by written consent under Section 228, the availability of appraisal rights for certain transactions, and procedures (including appraisal rights) applicable to certain extraordinary transactions. SB 114 was passed by both houses of the Delaware legislature and was signed into law on July 17, 2023. An additional piece of legislation, Senate Bill 110, approves an increase of $20 to the courthouse municipality fee collected at the time of every corporate and limited liability company filing, making this fee $40 for each document filed.
A summary of the significant changes to the DGCL follows:
Treasury Shares. The 2023 DGCL Amendments add language to Section 153 clarifying that the consideration received by a corporation in a disposition of treasury shares may be less than the aggregate par value of the shares and may consist of the same types of consideration that may be paid on an initial issuance.
Treasury shares are shares of corporate stock that, following their issuance, have been redeemed, repurchased or otherwise reacquired by the corporation, but have not been retired. Because shares held in a corporation’s treasury are issued but not outstanding, they are not subject to the same consideration requirements that apply to an initial issuance. Initially, issued stock must be issued for consideration that equals or exceeds the aggregate par value (if the shares have par value) and consists of some combination of cash, tangible or intangible property and/or any other benefit to the corporation, having a value determined by or pursuant to a resolution of the board authorizing the issuance. In 2022, Section 152 was amended to confirm that the board could delegate the authority to issue stock, and to determine the consideration therefore, to a person or another body, subject to certain parameters. In conjunction, the 2022 amendments modified DGCL Section 153 to replace language indicating that treasury stock could be disposed of by the corporation for such consideration as the board of directors may determine with new language stating that treasury stock may be disposed of “in the same manner that shares of stock are issued pursuant to § 152.” The 2023 amendment is intended to negate any implication that the 2022 amendment required a purchaser of treasury shares to pay consideration that equals or exceeds their par value.
SB 114 also amends DGCL Section 160 to clarify that nothing in that section is intended to limit the right of a corporation to resell treasury shares following a repurchase or redemption unless the shares are, or are required under the terms of the certificate of incorporation to be, retired.
Rights and Options Respecting Stock. Just as a corporation’s board of directors (or a committee) may delegate to agents or other bodies the authority to issue capital stock (subject to certain established parameters), DGCL Section 157 permits the board or a committee to delegate the authority to issue rights and options with respect to stock. The 2023 DGCL amendments modify Section 157(b) to clarify certain matters relating to the authorization by board of directors (or a committee) of stock options or other rights to shares of a corporation’s stock and the parameters of the board’s delegation of such authority. As amended, Section 157(b) and (c) make clear that a board resolution may authorize the issuance of rights and options in one or more transactions or may delegate that authority. Amended Section 157(c) elaborates and confirms that the persons to whom the authority to grant rights or options is delegated may determine the terms of the rights or options and the conditions of exercise, within the established parameters. Moreover, the amendments clarify that the board resolution need not specify a maximum number of rights or options; rather, the board must merely specify a maximum number of shares issuable pursuant to such rights or options. Furthermore, revised Section 157(c) requires that the board resolution establish both (a) the time period during which the rights or options may be granted and (b) the time period within which the underlying shares issuable upon exercise must be issued. Finally, the amendments clarify Section 157(e) to confirm that any consideration payable for the shares issuable upon the option exercise must comply with the applicable requirements of Section 153.
Ratification Under Section 204. DGCL Sections 204 and 205, adopted in 2013 and effective April 1, 2014, enable parties to ratify and cure defects in transactions that were previously void or voidable as a result of a “failure of authorization” under the DGCL. Section 204 is a “self-help” provision that permits the parties to ratify certain potentially fatal defects without court intervention, including the filing of a certificate of validation to correct a flawed public record, while Section 205 allows the parties to seek court validation of a defective corporate act or to resolve challenges to a Section 204 ratification. In the years following the original adoption of Section 204, the marketplace has become more comfortable with the ratification concept and the statute has been amended several times to reduce the information that must be included in a certificate of validation and to simplify the process. Even so, prior to the 2023 amendments, because of the level of detail required in a certificate of validation and the uniqueness of the circumstances of each failure of authorization, certificates of validation required special review at the Division of Corporations and processing times were lengthy. Moreover, no preclearance of certificates of validation was permitted.
The 2023 DGCL amendments clarify and further streamline the requirements of Section 204 in connection with a ratification of a defective corporate act as follows:
Thus, prior to the amendments, there could be a mismatch between the stockholders entitled to take the action and the stockholders entitled to receive notice of the action taken.
The 2023 DGCL amendments align the record date for determining stockholders (or members, in the case of a nonstock corporation) who are entitled to notice of the action taken with the consent record date. As amended, Section 228(e) requires that notice be given to nonconsenting stockholders who (1) were stockholders or members of record as of the consent record date, and (2) would have been entitled to notice of a meeting, if the action had been taken at a meeting and if the consent record date had been the record date to determine entitlement to notice of the meeting.
The 2023 amendments also establish that notice to nonconsenting stockholders may be given pursuant to a notice of internet availability of proxy materials, to the extent permitted by the federal Securities Exchange Act of 1934 and the regulations thereunder, if applicable.
Stock Splits; Charter Amendments Without Stockholder Consent. The 2023 DGCL amendments modify Section 242 of the DGCL in several respects. First, Section 242(a) has been amended to provide that a stock split, whether forward or reverse, must apply to all issued shares. Issued shares include both outstanding shares (meaning shares that are held by stockholders) and treasury shares (meaning shares that were issued but have been repurchased, redeemed or otherwise reacquired by the corporation and have not been retired). A forward stock split involves a proportional increase in the number of issued shares, such that each share of issued stock is divided into multiple shares of stock and may also involve a proportionate increase in the number of authorized shares. A reverse split involves the combination or consolidation of a larger number of shares into a single share, which may result in the cashing out or the rounding up of fractional shares remaining in the hands of a holder after the reverse split is implemented. Even if the number of authorized shares remains unchanged following a stock split, any stock split requires an amendment to the certificate of incorporation.
In order to adopt an amendment to the certificate of incorporation, Section 242 of the DGCL generally requires that the amendment be adopted by the board of directors and approved by the holders of a majority of the corporation’s outstanding stock entitled to vote on the matter, as well as the holders of a majority of each class of stock entitled to vote as a separate class on the matter. Prior to the 2023 amendments, a handful of matters were exempted from these stockholder vote requirements, unless the certificate of incorporation otherwise provides. The 2023 amendments add a new Section 242(d), to which the existing exceptions from the stockholder vote requirement have been relocated from Section 242(b), and pursuant to which certain stock splits and changes to the authorized capital stock of a corporation are exempt from the requirements of Section 242(b) provided that certain conditions are met, so long as the certificate of incorporation does not expressly override Section 242(d).
The key changes implemented by Section 242(d) are as follows:
Issuance of Secured or Unsecured Bonds in a Conversion or Domestication. Section 260 of the DGCL presently permits a corporation surviving a merger or resulting from a consolidation to issue stock, bonds or other debt as merger consideration or to satisfy other obligations it incurs or assumes pursuant to or in connection with the merger or consolidation transaction. Section 260 also permits a surviving corporation to mortgage or grant a security interest in its rights and assets to secure such obligations. SB 114 amends Section 260 to afford these same rights to a Delaware corporation resulting from the conversion of another entity or the domestication of a non-U.S. entity. In addition, pursuant to revised Section 260, a converted or domesticated corporation may, to the extent provided in a plan of conversion or domestication approved by converting entity under its applicable governing law, issue shares of its stock or other securities, bonds or other obligations, secured or unsecured in exchange for the shares, rights, or securities of, or interests, in a constituent corporation or predecessor entity or cancel any shares, rights, securities or interests to the same extent as a corporation surviving a merger or resulting from a consolidation.
Plans of Conversion, Domestication, Transfer or Continuance. Currently, although Section 390 makes no mention of a plan, many practitioners documenting conversions, domestications, transfers or continuances prepare a plan of conversion domestication, transfer or continuance setting forth the terms of the transaction. The 2022 legislative package amended Section 388, which addresses the domestication to a Delaware corporation by a non-U.S. entity, to permit the non-U.S. entity to adopt a plan of domestication setting forth the terms of the domestication, including how the interests in the non-U.S. entity are converted to or exchanged for securities in the Delaware corporation and, if applicable, authorizing the post-domestication Delaware corporation to engage in certain other corporate actions. SB 114 extends this concept to Section 265, which addresses conversion of another Delaware domestic entity or an entity organized under the laws of another U.S. state or territory (each of which is referred to as a “foreign” entity) to a Delaware corporation, Section 266, which governs the conversion of a Delaware corporation to another entity form, domestic or foreign (including a foreign corporation), and Section 390, which addresses the transfer, continuance or domestication of a Delaware corporation to a non-U.S. entity.
New Sections 265(k), 266(l) and 390(j) set forth the subject matter that may be addressed in a plan of conversion or a plan of domestication, transfer or continuance under Section 390, as applicable, all of which are permissive. Any of the terms of a plan may be dependent upon facts ascertainable outside the plan (including a determination or the happening of an event), so long as the plan clearly and expressly sets forth the manner in which such facts operate on the plan.
If a plan of conversion is adopted in connection with the conversion to a Delaware corporation, Section 265(c) requires that the certificate of conversion state that all provisions of the plan will have been approved under the laws applicable to the converting entity prior to the time the conversion becomes effective. New Section 265(k) provides that the plan may specify corporate actions to be taken by the Delaware corporation in connection with or immediately following the inbound conversion, each of which must be approved in accordance with the laws applicable to the converting entity prior to the effective date of the certificate of conversion. Pursuant to new subsection 265(l) a properly approved plan of conversion to be taken by the Delaware corporation may authorize the taking of corporate action by the converted Delaware corporation following the conversion. Provided that such action is within the power of a Delaware corporation, it is deemed to be authorized, adopted and approved by or on behalf of the converted corporation without any further authorization by its board of directors or stockholders (or members of a nonstock corporation). If any such corporate action requires the filing of a certificate under another section of the DGCL, that certificate must reference DGCL Section 265 and must state that no action by the corporation’s board of directors, stockholders (or members, if applicable) is required thereunder.
Under Section 266, as amended by SB 114, if a Delaware corporation adopts a plan of conversion in connection with its conversion to an “other entity,” the plan must be approved contemporaneously with the approval of the conversion in the manner required by Section 266 and the certificate of conversion filed in Delaware must certify that all provisions of the plan will be approved in accordance with Section 266.
Similarly, pursuant to revised section 390, a plan of transfer adopted in connection with the transfer, domestication or continuance of a Delaware corporation to a non-U.S. jurisdiction must be approved contemporaneously with the resolution approving the transfer.
Change in Approval Threshold for Transfer, Domestication or Continuance. Historically, the transfer, continuance or domestication of a Delaware corporation to a jurisdiction outside the United States pursuant to DGCL Section 390 has required unanimous approval by all holders of the corporation’s outstanding stock, whether voting or nonvoting stock. The 2023 DGCL amendments pare back the required stockholder approval threshold for a Section 390 from unanimity to the affirmative vote of holders of a majority of the voting power held by the stockholders entitled to vote on such matter. These changes are consistent with the 2022 amendments to Section 266, which reduced the required vote for a conversion to another entity type, domestic or foreign.
Because general partners undertake general liability for the debts and obligations of the partnership for which they serve as general partner, if pursuant to such transaction, the corporation will become a partnership with at least one general partner, each stockholder that will become a general partner must approve the transfer, continuance or domestication.
Moreover, since stockholders of existing corporations acquired their shares with the expectation that the corporation would be unable to consummate a domestication, transfer or continuance without their consent, amended Section 390 includes some protection for stockholders. First, with respect to existing corporations formed prior to the effective date of the 2023 DGCL amendments, if the certificate of incorporation, or an agreement between the corporation and one or more stockholders effective on or prior to the effective date of the 2023 amendments, restricts, conditions or prohibits a merger or consolidation, such restriction, condition or prohibition will be deemed to apply to a transfer, domestication or continuance, unless the certificate of incorporation or such agreement expressly provides that such restriction, condition or prohibition does not apply to a transfer, domestication or continuance. Second, SB 114 also amends DGCL Section 262 to extend appraisal rights to stockholders of a Delaware corporation engaging in a Section 390 transaction, as more particularly discussed below. With respect to corporations incorporated on or after August 1, 2023, investors will need to bargain for an approval right with respect to a transfer, domestication or continuance, which must be documented either in the certificate of incorporation or in a separate written agreement.
Changes Affecting Appraisal Rights. At present, Section 262 grants appraisal rights to stockholders of Delaware corporations in connection with mergers, consolidations and conversions. The 2023 DGCL amendments extend the rights to obtain an appraisal to stockholders of a Delaware corporation who do not vote in favor of the corporation’s transfer, domestication or continuance to a non-U.S. jurisdiction under Section 390. As noted above, the appraisal remedy is intended to offset the impact to a stockholder of the corporation’s ability to fundamentally change its governance structure over that stockholder’s objection.
The so-called “market out” exception to appraisal rights will apply to a stockholder of a public company engaging in a transaction under Section 390. Thus, stockholders of a Delaware corporation holding shares that are listed on a national securities exchange or are held by more than 2,000 holders who receive only shares of stock or other interests (or depository receipts relative thereto) that are listed on a national exchange, and/or cash in lieu of fractional shares, are not entitled to appraisal.
In addition, in conjunction with the amendments to Section 265 (discussed above) permitting an entity that is converting to a Delaware corporation to approve certain corporate acts pursuant to a plan of conversion, no appraisal is available with respect to a merger, consolidation, conversion, transfer, domestication or continuance by a converted corporation that was approved in the plan of conversion adopted by the converting entity, as contemplated by amended Section 265. This parallels the approach taken in conjunction with the 2022 amendments to Section 388, which permit a plan of domestication adopted a foreign entity domesticating as a Delaware corporation to authorize certain corporate action by the newly domesticated Delaware corporation. At that time, Section 262 was similarly amended to deny appraisal rights in connection with a merger, consolidation or conversion by a newly-domesticated corporation authorized pursuant to a plan of domestication approved under the applicable non-U.S. law.
SB 114 also amends Section 260(k) to provide that an appraisal demand may be withdrawn, with the consent of the corporation, more than 60 days after the transaction has become effective. Finally, a clarifying sentence has been added to Section 262(k) to confirm that that if no petition for appraisal is timely filed under Section 260(e), the right to an appraisal with respect to all shares will lapse.
Mortgage or Pledge of Assets. The 2023 DGCL amendments also address an existing tension between DGCL Sections 271 and 272. Section 271 requires the consent of the holders of a majority of the outstanding stock of the corporation (or, in the case of a nonstock corporation, a majority of the members) in order to approve a proposed sale, lease or exchange all or substantially all of a corporation’s property and assets. Section 272 (prior to the amendment) stated that no such authorization or consent of stockholders is required in connection with a corporation’s mortgage or pledge of its property and assets, unless otherwise provided in the certificate of incorporation. Reading these sections together, it was unclear whether, where a corporation had granted a security interest in all or substantially all of its assets, as permitted by Section 272, stockholder approval was required under Section 271 in order for the corporation to subsequently deliver a deed or other instrument of conveyance in lieu of foreclosure or to otherwise cooperate in the exercise of remedies with respect to such collateral.
In 2022, the Delaware Supreme Court, in Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A.3d 323 (Del. 2022), reversed a decision of the Court of Chancery finding that a transfer of assets to a secured creditor in lieu of a foreclosure was not a transfer that required a shareholder vote, either under Section 271 or under a charter provision requiring the approval of a majority of a class of stockholders in order for the corporation to dispose of all or substantially all of its assets. TV Networks, Inc. v. SeeCubic, Inc., 250 A.3d 1016 (Del. Ch. 2020), The Court of Chancery decision, relying on common law principles predating the enactment of Section 271, providing that a transfer by an insolvent corporation was exempt from the general rule that, unless otherwise provided in the certificate of incorporation, a corporation lacked authority to sell all or substantially all of its assets without unanimous stockholder approval. Without addressing the Court of Chancery’s contention that requiring stockholder consent to a foreclosure proceeding would be “contrary to the plain language of Section 272,” the Delaware Supreme Court first held that the clear and unambiguous language of the certificate of incorporation requiring stockholder consent to a “disposition” of assets was controlling regardless of Section 271 principles, and then held that the enactment of Section 271 supplanted the preexisting common law principles, including any insolvency exception to the stockholder approval requirement.
The modifications to Section 272 add new subsections (b) – (d), which dispense with stockholder approval under Section 271(a) in connection with a corporation’s sale, lease or exchange of assets that are collateral securing a mortgage or a pledge, so long as either:
(1) the secured party forecloses or otherwise exercises its rights the documents governing the mortgage or pledge and under applicable law (whether pursuant to Article 9 of the Uniform Commercial Code (the “UCC”), real property law or otherwise, without the consent of the corporation; or
(2) the board of directors authorizes a transaction, in lieu of foreclosure or other exercise of remedies, to sell, lease or exchange assets or property that are collateral in consideration of the reduction or satisfaction of the secured obligations or liabilities, provided that the value of the property or assets being conveyed pursuant to such transactions does not exceed the aggregate amount of the liabilities and obligations being reduced or eliminated and the transaction is not otherwise prohibited under the applicable law governing the mortgage of pledge.
Revised Section 272 does not legislate a general insolvency exception to Section 271. Rather, it establishes a limited safe harbor pursuant to which collateral may be transferred to or for the benefit of a secured creditor in consideration of an equivalent amount of debt.
Pursuant to new Section 272(c), the fact that the corporation or its stockholders may receive other consideration in the transaction does not create a presumption that the value of the collateral exceeds the total liabilities or obligations being reduced or eliminated. Such “other consideration” might include (but is not limited to) amounts paid to the corporation or its stockholders in settlement of claims. Under Section 272, as amended, a conveyance of collateral to a transferee who provided value (including the reduction or elimination of liabilities or obligations secured thereby) is not void or voidable so long as the transferee acted in good faith (as defined in Section 1-201 of the Delaware UCC). However, a party may still seek to enjoin the proposed transaction prior to its consummation. Moreover, amended Section 272 does not purport to eliminate any person’s liability for monetary damages for breach of fiduciary duty (whether in a direct or derivative action) in connection with a transaction consummated in reliance on Section 272.
Finally, under new Section 272(d), any certificate of incorporation provision that becomes effective after August 1, 2023, and requires the approval of any stockholder or stockholders in connection with a sale, lease or exchange of property or assets will not override Section 272(b) unless it expressly states that it applies to a transaction otherwise permitted by Section 272(b).
While the term “pledge” technically refers to a possessory security interest, neither the text of SB 114 nor the synopsis evinces an intent to limit the Section 272 amendments to collateral that is perfected by possession rather than any other means.
Effective Date of Amendments. Sections 14 – 16 of SB 114 provide that the DGCL amendments will take effect on August 1, 2023, with certain exceptions. First, the changes to appraisal rights will apply only to (a) a merger under Section 253, a conversion under Section 266 or a domestication under Section 390 that is authorized or provided for pursuant to resolutions of a corporation’s board of directors adopted on or after August 1, 2023, (b) a merger effective under Section 267 of the DGCL that is authorized on or after August 1, 2023 under the laws of the jurisdiction under which a constituent entity is formed or organized and in accordance with its governing documents, or (c) any other merger or consolidation consummated pursuant to an agreement of merger or consolidation entered into on or after August 1, 2023. Second, the changes to Section 265 will apply only to corporations for which a plan of conversion is entered into on or after August 1, 2023, or, if no plan of conversion is entered into, a corporation as to which the approvals required by DGCL Section 265(h) are obtained on or after August 1, 2023. Finally, the changes to Section 390 will apply only to domestications, transfers or continuances effected thereunder that are authorized pursuant to resolutions adopted on or after August 1, 2023.
For any questions about the new legislation, please contact Marla H. Norton at 302-429-4214 or mnorton@bayardlaw.com
A summary of the significant changes to the DGCL follows:
Treasury Shares. The 2023 DGCL Amendments add language to Section 153 clarifying that the consideration received by a corporation in a disposition of treasury shares may be less than the aggregate par value of the shares and may consist of the same types of consideration that may be paid on an initial issuance.
Treasury shares are shares of corporate stock that, following their issuance, have been redeemed, repurchased or otherwise reacquired by the corporation, but have not been retired. Because shares held in a corporation’s treasury are issued but not outstanding, they are not subject to the same consideration requirements that apply to an initial issuance. Initially, issued stock must be issued for consideration that equals or exceeds the aggregate par value (if the shares have par value) and consists of some combination of cash, tangible or intangible property and/or any other benefit to the corporation, having a value determined by or pursuant to a resolution of the board authorizing the issuance. In 2022, Section 152 was amended to confirm that the board could delegate the authority to issue stock, and to determine the consideration therefore, to a person or another body, subject to certain parameters. In conjunction, the 2022 amendments modified DGCL Section 153 to replace language indicating that treasury stock could be disposed of by the corporation for such consideration as the board of directors may determine with new language stating that treasury stock may be disposed of “in the same manner that shares of stock are issued pursuant to § 152.” The 2023 amendment is intended to negate any implication that the 2022 amendment required a purchaser of treasury shares to pay consideration that equals or exceeds their par value.
SB 114 also amends DGCL Section 160 to clarify that nothing in that section is intended to limit the right of a corporation to resell treasury shares following a repurchase or redemption unless the shares are, or are required under the terms of the certificate of incorporation to be, retired.
Rights and Options Respecting Stock. Just as a corporation’s board of directors (or a committee) may delegate to agents or other bodies the authority to issue capital stock (subject to certain established parameters), DGCL Section 157 permits the board or a committee to delegate the authority to issue rights and options with respect to stock. The 2023 DGCL amendments modify Section 157(b) to clarify certain matters relating to the authorization by board of directors (or a committee) of stock options or other rights to shares of a corporation’s stock and the parameters of the board’s delegation of such authority. As amended, Section 157(b) and (c) make clear that a board resolution may authorize the issuance of rights and options in one or more transactions or may delegate that authority. Amended Section 157(c) elaborates and confirms that the persons to whom the authority to grant rights or options is delegated may determine the terms of the rights or options and the conditions of exercise, within the established parameters. Moreover, the amendments clarify that the board resolution need not specify a maximum number of rights or options; rather, the board must merely specify a maximum number of shares issuable pursuant to such rights or options. Furthermore, revised Section 157(c) requires that the board resolution establish both (a) the time period during which the rights or options may be granted and (b) the time period within which the underlying shares issuable upon exercise must be issued. Finally, the amendments clarify Section 157(e) to confirm that any consideration payable for the shares issuable upon the option exercise must comply with the applicable requirements of Section 153.
Ratification Under Section 204. DGCL Sections 204 and 205, adopted in 2013 and effective April 1, 2014, enable parties to ratify and cure defects in transactions that were previously void or voidable as a result of a “failure of authorization” under the DGCL. Section 204 is a “self-help” provision that permits the parties to ratify certain potentially fatal defects without court intervention, including the filing of a certificate of validation to correct a flawed public record, while Section 205 allows the parties to seek court validation of a defective corporate act or to resolve challenges to a Section 204 ratification. In the years following the original adoption of Section 204, the marketplace has become more comfortable with the ratification concept and the statute has been amended several times to reduce the information that must be included in a certificate of validation and to simplify the process. Even so, prior to the 2023 amendments, because of the level of detail required in a certificate of validation and the uniqueness of the circumstances of each failure of authorization, certificates of validation required special review at the Division of Corporations and processing times were lengthy. Moreover, no preclearance of certificates of validation was permitted.
The 2023 DGCL amendments clarify and further streamline the requirements of Section 204 in connection with a ratification of a defective corporate act as follows:
- The date upon which the board of directors adopts a resolution ratifying the defective corporate act will serve as the record date or other relevant date for determining: (1) whether there are any holders of validly issued and outstanding shares of stock entitled to vote on a ratification, (2) whether shares of the corporation’s stock are validly issued or are putative stock, and (3) the stockholders entitled to prompt notice of stockholder action by written consent approving the defective corporate act (unless the board adopts a different record date for such notice as permitted by Section 204(g)).
- The 2023 DGCL amendments eliminate the need to file a certificate of validation if a filing was previously made under the section of the DGCL applicable to the defective corporate act and the certificate or certificates so filed (including any certificate of correction that may have been filed) do not require any change (including with respect to the effective date or time) to give effect to the defective corporate act being ratified. A certificate of validation must still be filed if either the certificate or certificates filed in connection with the defective corporate act are not adequate to satisfy the statutory requirements without change or if a required certificate was not filed.
- A certificate of validation no longer must specify the details of the defective corporate act(s) being ratified or the nature of the related failure(s) of authorization, the dates upon which the board and, if applicable, the stockholders ratified the defective corporate acts or the details of the certificates previously filed, if no changes to such certificates are required. Instead, the certificate of validation need only state that the corporation has ratified one or more defective corporate acts that would have required the filing of a certificate under the DGCL and that each of the defective corporate acts has been ratified in accordance with Section 204.
Consent in Lieu of Meeting Under Section 228. Section 228 governs stockholder consent in lieu of a meeting and requires that prompt notice of action taken by consent in lieu of a meeting be given to stockholders who did not participate in the consent process but would have been entitled to vote. Prior to the amendment, the record date for determining stockholders entitled to notice of the taking of action by consent was tied to the date sufficient consents to take the action were delivered to the corporation. But the record date for determining the stockholders entitled to participate in the consent process is governed by Section 213(b), which provides that the record date for determining stockholders entitled to consent to corporate action (the “consent record date”) is either:
- the date determined by the board of directors (which cannot precede the date of the board resolution nor can it more than 10 days following such resolution); or
- if no prior action by the board of directors is required under the DGCL and the board has not otherwise established a record date for stockholders entitled to consent to such action, the first date on which a signed consent relative to the action is delivered to the corporation; or
- if prior action by the board of directors is required by the DGCL in connection with the action being taken and the board did not establish a record date for stockholders entitled to consent to such action, the close of business on the day upon which the board resolution approving the action was taken.
Thus, prior to the amendments, there could be a mismatch between the stockholders entitled to take the action and the stockholders entitled to receive notice of the action taken.
The 2023 DGCL amendments align the record date for determining stockholders (or members, in the case of a nonstock corporation) who are entitled to notice of the action taken with the consent record date. As amended, Section 228(e) requires that notice be given to nonconsenting stockholders who (1) were stockholders or members of record as of the consent record date, and (2) would have been entitled to notice of a meeting, if the action had been taken at a meeting and if the consent record date had been the record date to determine entitlement to notice of the meeting.
The 2023 amendments also establish that notice to nonconsenting stockholders may be given pursuant to a notice of internet availability of proxy materials, to the extent permitted by the federal Securities Exchange Act of 1934 and the regulations thereunder, if applicable.
Stock Splits; Charter Amendments Without Stockholder Consent. The 2023 DGCL amendments modify Section 242 of the DGCL in several respects. First, Section 242(a) has been amended to provide that a stock split, whether forward or reverse, must apply to all issued shares. Issued shares include both outstanding shares (meaning shares that are held by stockholders) and treasury shares (meaning shares that were issued but have been repurchased, redeemed or otherwise reacquired by the corporation and have not been retired). A forward stock split involves a proportional increase in the number of issued shares, such that each share of issued stock is divided into multiple shares of stock and may also involve a proportionate increase in the number of authorized shares. A reverse split involves the combination or consolidation of a larger number of shares into a single share, which may result in the cashing out or the rounding up of fractional shares remaining in the hands of a holder after the reverse split is implemented. Even if the number of authorized shares remains unchanged following a stock split, any stock split requires an amendment to the certificate of incorporation.
In order to adopt an amendment to the certificate of incorporation, Section 242 of the DGCL generally requires that the amendment be adopted by the board of directors and approved by the holders of a majority of the corporation’s outstanding stock entitled to vote on the matter, as well as the holders of a majority of each class of stock entitled to vote as a separate class on the matter. Prior to the 2023 amendments, a handful of matters were exempted from these stockholder vote requirements, unless the certificate of incorporation otherwise provides. The 2023 amendments add a new Section 242(d), to which the existing exceptions from the stockholder vote requirement have been relocated from Section 242(b), and pursuant to which certain stock splits and changes to the authorized capital stock of a corporation are exempt from the requirements of Section 242(b) provided that certain conditions are met, so long as the certificate of incorporation does not expressly override Section 242(d).
The key changes implemented by Section 242(d) are as follows:
- Forward Stock Splits. Because a stock split proportionately adjusts the holdings of all shareholders, no dilution or other alteration of the relative rights and interests of the stockholders occurs solely by virtue of a stock split. Accordingly, unless the certificate of incorporation provides otherwise, new Section 242(d)(1) eliminates the stockholder vote requirement in connection with a forward stock split applicable to the issued shares or the total authorized shares, so long as the increase in authorized shares is proportionate to the ratio applicable to the split of the issued shares, so long as the corporation has only one class of outstanding shares that is not divided into series. In this case, the authorized but unissued shares in that class represent the same percentage of the total authorized number of shares as they did prior to the amendment and the stock split.
- Reverse Stock Splits and Other Authorized Share Adjustments. The 2023 DGCL amendments also relax but do not eliminate the required stockholder vote in connection with respect to a reverse stock split or an increase (not in conjunction with a forward stock split) or decrease in the number of authorized shares of a class of stock listed on a national securities exchange, provided certain conditions are met. Pursuant to Section 242(d)(2), a reverse stock split or other adjustment of the number of authorized shares in a listed class will require stockholder approval at a meeting duly convened, of all stockholders entitled to vote, voting as a single class, at which the vote tally reflects that the number of votes in favor of the amendment exceed the number of votes against it and, if the amendment increases or decreases the number of authorized shares of a class of stock and the corporation’s certificate of incorporation does not eliminate a class vote on the amendment as permitted by Section 242(b)(2), the holders of that class of stock must also approve the amendment, with the number of votes in favor of the amendment exceeding the number of votes against. In order to qualify for this reduced voting threshold (1) the reverse split or other transaction must not reduce the number of holders below the minimum number required to be eligible to remain listed on the exchange, and (2) the certificate of incorporation must not contain language, expressly requiring a vote pursuant to Section 242(b) in order to approve a reverse stock split or change in authorized shares that would otherwise qualify for the reduced voting threshold permitted under Section 242(d). The synopsis to SB 114 makes clear that abstentions are not considered in determining whether the requisite approval has been obtained. The synopsis also confirms that the DGCL amendments are not intended to permit a change in the par value of a class of stock without a stockholder vote, whether or not in connection with a stock split (forward or reverse).
- Opting Out of Section 242(d). In order to override Section 242(d), a certificate of incorporation must contain express language stating either (a) that, notwithstanding Section 242(d) of the DGCL, the stockholder vote specified in Section 242(b) is required to adopt an amendment described in Section 242(d) or (b) that Section 242(d) will not apply to the corporation (or, presumably, a class of its stock). The synopsis to SB 114 cautions that a general recitation of the voting standard set forth in Section 242(b) without specific reference to Section 242(d) will not be sufficient to “opt out” of Section 242(d).
Issuance of Secured or Unsecured Bonds in a Conversion or Domestication. Section 260 of the DGCL presently permits a corporation surviving a merger or resulting from a consolidation to issue stock, bonds or other debt as merger consideration or to satisfy other obligations it incurs or assumes pursuant to or in connection with the merger or consolidation transaction. Section 260 also permits a surviving corporation to mortgage or grant a security interest in its rights and assets to secure such obligations. SB 114 amends Section 260 to afford these same rights to a Delaware corporation resulting from the conversion of another entity or the domestication of a non-U.S. entity. In addition, pursuant to revised Section 260, a converted or domesticated corporation may, to the extent provided in a plan of conversion or domestication approved by converting entity under its applicable governing law, issue shares of its stock or other securities, bonds or other obligations, secured or unsecured in exchange for the shares, rights, or securities of, or interests, in a constituent corporation or predecessor entity or cancel any shares, rights, securities or interests to the same extent as a corporation surviving a merger or resulting from a consolidation.
Plans of Conversion, Domestication, Transfer or Continuance. Currently, although Section 390 makes no mention of a plan, many practitioners documenting conversions, domestications, transfers or continuances prepare a plan of conversion domestication, transfer or continuance setting forth the terms of the transaction. The 2022 legislative package amended Section 388, which addresses the domestication to a Delaware corporation by a non-U.S. entity, to permit the non-U.S. entity to adopt a plan of domestication setting forth the terms of the domestication, including how the interests in the non-U.S. entity are converted to or exchanged for securities in the Delaware corporation and, if applicable, authorizing the post-domestication Delaware corporation to engage in certain other corporate actions. SB 114 extends this concept to Section 265, which addresses conversion of another Delaware domestic entity or an entity organized under the laws of another U.S. state or territory (each of which is referred to as a “foreign” entity) to a Delaware corporation, Section 266, which governs the conversion of a Delaware corporation to another entity form, domestic or foreign (including a foreign corporation), and Section 390, which addresses the transfer, continuance or domestication of a Delaware corporation to a non-U.S. entity.
New Sections 265(k), 266(l) and 390(j) set forth the subject matter that may be addressed in a plan of conversion or a plan of domestication, transfer or continuance under Section 390, as applicable, all of which are permissive. Any of the terms of a plan may be dependent upon facts ascertainable outside the plan (including a determination or the happening of an event), so long as the plan clearly and expressly sets forth the manner in which such facts operate on the plan.
If a plan of conversion is adopted in connection with the conversion to a Delaware corporation, Section 265(c) requires that the certificate of conversion state that all provisions of the plan will have been approved under the laws applicable to the converting entity prior to the time the conversion becomes effective. New Section 265(k) provides that the plan may specify corporate actions to be taken by the Delaware corporation in connection with or immediately following the inbound conversion, each of which must be approved in accordance with the laws applicable to the converting entity prior to the effective date of the certificate of conversion. Pursuant to new subsection 265(l) a properly approved plan of conversion to be taken by the Delaware corporation may authorize the taking of corporate action by the converted Delaware corporation following the conversion. Provided that such action is within the power of a Delaware corporation, it is deemed to be authorized, adopted and approved by or on behalf of the converted corporation without any further authorization by its board of directors or stockholders (or members of a nonstock corporation). If any such corporate action requires the filing of a certificate under another section of the DGCL, that certificate must reference DGCL Section 265 and must state that no action by the corporation’s board of directors, stockholders (or members, if applicable) is required thereunder.
Under Section 266, as amended by SB 114, if a Delaware corporation adopts a plan of conversion in connection with its conversion to an “other entity,” the plan must be approved contemporaneously with the approval of the conversion in the manner required by Section 266 and the certificate of conversion filed in Delaware must certify that all provisions of the plan will be approved in accordance with Section 266.
Similarly, pursuant to revised section 390, a plan of transfer adopted in connection with the transfer, domestication or continuance of a Delaware corporation to a non-U.S. jurisdiction must be approved contemporaneously with the resolution approving the transfer.
Change in Approval Threshold for Transfer, Domestication or Continuance. Historically, the transfer, continuance or domestication of a Delaware corporation to a jurisdiction outside the United States pursuant to DGCL Section 390 has required unanimous approval by all holders of the corporation’s outstanding stock, whether voting or nonvoting stock. The 2023 DGCL amendments pare back the required stockholder approval threshold for a Section 390 from unanimity to the affirmative vote of holders of a majority of the voting power held by the stockholders entitled to vote on such matter. These changes are consistent with the 2022 amendments to Section 266, which reduced the required vote for a conversion to another entity type, domestic or foreign.
Because general partners undertake general liability for the debts and obligations of the partnership for which they serve as general partner, if pursuant to such transaction, the corporation will become a partnership with at least one general partner, each stockholder that will become a general partner must approve the transfer, continuance or domestication.
Moreover, since stockholders of existing corporations acquired their shares with the expectation that the corporation would be unable to consummate a domestication, transfer or continuance without their consent, amended Section 390 includes some protection for stockholders. First, with respect to existing corporations formed prior to the effective date of the 2023 DGCL amendments, if the certificate of incorporation, or an agreement between the corporation and one or more stockholders effective on or prior to the effective date of the 2023 amendments, restricts, conditions or prohibits a merger or consolidation, such restriction, condition or prohibition will be deemed to apply to a transfer, domestication or continuance, unless the certificate of incorporation or such agreement expressly provides that such restriction, condition or prohibition does not apply to a transfer, domestication or continuance. Second, SB 114 also amends DGCL Section 262 to extend appraisal rights to stockholders of a Delaware corporation engaging in a Section 390 transaction, as more particularly discussed below. With respect to corporations incorporated on or after August 1, 2023, investors will need to bargain for an approval right with respect to a transfer, domestication or continuance, which must be documented either in the certificate of incorporation or in a separate written agreement.
Changes Affecting Appraisal Rights. At present, Section 262 grants appraisal rights to stockholders of Delaware corporations in connection with mergers, consolidations and conversions. The 2023 DGCL amendments extend the rights to obtain an appraisal to stockholders of a Delaware corporation who do not vote in favor of the corporation’s transfer, domestication or continuance to a non-U.S. jurisdiction under Section 390. As noted above, the appraisal remedy is intended to offset the impact to a stockholder of the corporation’s ability to fundamentally change its governance structure over that stockholder’s objection.
The so-called “market out” exception to appraisal rights will apply to a stockholder of a public company engaging in a transaction under Section 390. Thus, stockholders of a Delaware corporation holding shares that are listed on a national securities exchange or are held by more than 2,000 holders who receive only shares of stock or other interests (or depository receipts relative thereto) that are listed on a national exchange, and/or cash in lieu of fractional shares, are not entitled to appraisal.
In addition, in conjunction with the amendments to Section 265 (discussed above) permitting an entity that is converting to a Delaware corporation to approve certain corporate acts pursuant to a plan of conversion, no appraisal is available with respect to a merger, consolidation, conversion, transfer, domestication or continuance by a converted corporation that was approved in the plan of conversion adopted by the converting entity, as contemplated by amended Section 265. This parallels the approach taken in conjunction with the 2022 amendments to Section 388, which permit a plan of domestication adopted a foreign entity domesticating as a Delaware corporation to authorize certain corporate action by the newly domesticated Delaware corporation. At that time, Section 262 was similarly amended to deny appraisal rights in connection with a merger, consolidation or conversion by a newly-domesticated corporation authorized pursuant to a plan of domestication approved under the applicable non-U.S. law.
SB 114 also amends Section 260(k) to provide that an appraisal demand may be withdrawn, with the consent of the corporation, more than 60 days after the transaction has become effective. Finally, a clarifying sentence has been added to Section 262(k) to confirm that that if no petition for appraisal is timely filed under Section 260(e), the right to an appraisal with respect to all shares will lapse.
Mortgage or Pledge of Assets. The 2023 DGCL amendments also address an existing tension between DGCL Sections 271 and 272. Section 271 requires the consent of the holders of a majority of the outstanding stock of the corporation (or, in the case of a nonstock corporation, a majority of the members) in order to approve a proposed sale, lease or exchange all or substantially all of a corporation’s property and assets. Section 272 (prior to the amendment) stated that no such authorization or consent of stockholders is required in connection with a corporation’s mortgage or pledge of its property and assets, unless otherwise provided in the certificate of incorporation. Reading these sections together, it was unclear whether, where a corporation had granted a security interest in all or substantially all of its assets, as permitted by Section 272, stockholder approval was required under Section 271 in order for the corporation to subsequently deliver a deed or other instrument of conveyance in lieu of foreclosure or to otherwise cooperate in the exercise of remedies with respect to such collateral.
In 2022, the Delaware Supreme Court, in Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A.3d 323 (Del. 2022), reversed a decision of the Court of Chancery finding that a transfer of assets to a secured creditor in lieu of a foreclosure was not a transfer that required a shareholder vote, either under Section 271 or under a charter provision requiring the approval of a majority of a class of stockholders in order for the corporation to dispose of all or substantially all of its assets. TV Networks, Inc. v. SeeCubic, Inc., 250 A.3d 1016 (Del. Ch. 2020), The Court of Chancery decision, relying on common law principles predating the enactment of Section 271, providing that a transfer by an insolvent corporation was exempt from the general rule that, unless otherwise provided in the certificate of incorporation, a corporation lacked authority to sell all or substantially all of its assets without unanimous stockholder approval. Without addressing the Court of Chancery’s contention that requiring stockholder consent to a foreclosure proceeding would be “contrary to the plain language of Section 272,” the Delaware Supreme Court first held that the clear and unambiguous language of the certificate of incorporation requiring stockholder consent to a “disposition” of assets was controlling regardless of Section 271 principles, and then held that the enactment of Section 271 supplanted the preexisting common law principles, including any insolvency exception to the stockholder approval requirement.
The modifications to Section 272 add new subsections (b) – (d), which dispense with stockholder approval under Section 271(a) in connection with a corporation’s sale, lease or exchange of assets that are collateral securing a mortgage or a pledge, so long as either:
(1) the secured party forecloses or otherwise exercises its rights the documents governing the mortgage or pledge and under applicable law (whether pursuant to Article 9 of the Uniform Commercial Code (the “UCC”), real property law or otherwise, without the consent of the corporation; or
(2) the board of directors authorizes a transaction, in lieu of foreclosure or other exercise of remedies, to sell, lease or exchange assets or property that are collateral in consideration of the reduction or satisfaction of the secured obligations or liabilities, provided that the value of the property or assets being conveyed pursuant to such transactions does not exceed the aggregate amount of the liabilities and obligations being reduced or eliminated and the transaction is not otherwise prohibited under the applicable law governing the mortgage of pledge.
Revised Section 272 does not legislate a general insolvency exception to Section 271. Rather, it establishes a limited safe harbor pursuant to which collateral may be transferred to or for the benefit of a secured creditor in consideration of an equivalent amount of debt.
Pursuant to new Section 272(c), the fact that the corporation or its stockholders may receive other consideration in the transaction does not create a presumption that the value of the collateral exceeds the total liabilities or obligations being reduced or eliminated. Such “other consideration” might include (but is not limited to) amounts paid to the corporation or its stockholders in settlement of claims. Under Section 272, as amended, a conveyance of collateral to a transferee who provided value (including the reduction or elimination of liabilities or obligations secured thereby) is not void or voidable so long as the transferee acted in good faith (as defined in Section 1-201 of the Delaware UCC). However, a party may still seek to enjoin the proposed transaction prior to its consummation. Moreover, amended Section 272 does not purport to eliminate any person’s liability for monetary damages for breach of fiduciary duty (whether in a direct or derivative action) in connection with a transaction consummated in reliance on Section 272.
Finally, under new Section 272(d), any certificate of incorporation provision that becomes effective after August 1, 2023, and requires the approval of any stockholder or stockholders in connection with a sale, lease or exchange of property or assets will not override Section 272(b) unless it expressly states that it applies to a transaction otherwise permitted by Section 272(b).
While the term “pledge” technically refers to a possessory security interest, neither the text of SB 114 nor the synopsis evinces an intent to limit the Section 272 amendments to collateral that is perfected by possession rather than any other means.
Effective Date of Amendments. Sections 14 – 16 of SB 114 provide that the DGCL amendments will take effect on August 1, 2023, with certain exceptions. First, the changes to appraisal rights will apply only to (a) a merger under Section 253, a conversion under Section 266 or a domestication under Section 390 that is authorized or provided for pursuant to resolutions of a corporation’s board of directors adopted on or after August 1, 2023, (b) a merger effective under Section 267 of the DGCL that is authorized on or after August 1, 2023 under the laws of the jurisdiction under which a constituent entity is formed or organized and in accordance with its governing documents, or (c) any other merger or consolidation consummated pursuant to an agreement of merger or consolidation entered into on or after August 1, 2023. Second, the changes to Section 265 will apply only to corporations for which a plan of conversion is entered into on or after August 1, 2023, or, if no plan of conversion is entered into, a corporation as to which the approvals required by DGCL Section 265(h) are obtained on or after August 1, 2023. Finally, the changes to Section 390 will apply only to domestications, transfers or continuances effected thereunder that are authorized pursuant to resolutions adopted on or after August 1, 2023.
For any questions about the new legislation, please contact Marla H. Norton at 302-429-4214 or mnorton@bayardlaw.com