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2024 Amendments to Delaware General Corporation Law Signed into Law by Governor
Delaware Governor John Carney signed Senate Bill No. 313 (“SB313”) into law on Wednesday, July 17, 2024, thereby ushering in some strongly debated amendments to the Delaware General Corporation Law (“DGCL”). These amendments, introduced in late May after Delaware’s Court of Chancery released three decisions which many people thought upended established market practice, are set to take effect on August 1, 2024, and will apply retroactively to all contracts made by and agreements of merger and consolidation entered into by a corporation, as well as all agreements, instruments or documents approved by a corporation’s board of directors. The amendments will not apply to or affect any completed or pending civil actions or proceedings as of August 1, 2024.
SB313 touches on stockholder agreements, board approvals of merger agreements, the availability of damages following a failed merger, and disclosures delivered in connection with a merger agreement. The new provisions include the following:
1. New Section 122(18) allows a corporation to have the power, notwithstanding DGCL §141(a) (regarding the powers and duties given to the board of directors) and whether or not stated in the certificate of incorporation, to make contracts with current or prospective stockholders or beneficial owners of stock, in their capacity as such, in exchange for such minimal consideration as determined by the board of directors, which could include inducing stockholders or beneficial owners of stock to take, or not take, action, as long as the contract does not violate the certificate of incorporation or Delaware law (excluding §115 – forum selection). The new provision includes a non-exclusive list of examples and further states that the corporation may be subject to the remedies available under applicable contract law, including in connection with any breach or attempted breach of the contract.
2. New Section 147 permits boards to approve an agreement or other document that may be in final form or in substantially final form, so long as material terms are known by, or have been presented to, the board. If there is uncertainty as to whether the form of agreement presented to the board was substantially final, the board can ratify the final agreement before the applicable filing effective date.
3. Section 232 is amended by introducing a new paragraph (g), which provides that documents enclosed with, or appended or annexed to, notices to shareholders (for example, a proxy statement provided along with a notice of a stockholder meeting to approve a merger agreement) are deemed part of the notice for purposes of determining whether the notice has been duly given. However, a document is incorporated in a notice solely for purposes of satisfying the requirements of giving notice under the DGCL, the certificate of incorporation or the bylaws; the enclosed, appended or annexed information is therefore not deemed to be “per se” material to stockholders. This amendment does not affect the equitable disclosure obligations of directors or officers (or, as applicable, stockholders) with respect to any corporate action as to which notice is given.
4. New Section 261(a)(1) clarifies that parties to a merger or consolidation agreement may, through express provision in the agreement, specify the penalties or consequences of a party’s failure to perform its obligations under, or comply with the terms and conditions of, such agreement before the effective time of the merger, or to consummate the merger or consolidation contemplated by the agreement. Such a provision may include an obligation to make payments to the other party if the merger or consolidation is not consummated, including damages based on the lost premium that stockholders of a constituent corporation would be entitled to receive if the merger became effective in accordance with the terms of the agreement and reverse termination fees. In the event a corporation is entitled to receive the payment, the corporation may enforce the other party’s payment obligation, and, upon receipt of the payment, the corporation is entitled to retain the amount of the payment. The amendment is not intended to, and does not, exclude any remedies otherwise available to any party at law or in equity, nor does it remove or change the fiduciary duties of directors in connection with determining whether to approve, perform or enforce such a provision.
5. New Section 261(a)(2) confirms that parties to a merger or consolidation agreement may, through express provision in the agreement, appoint one or more persons to serve as the representative of stockholders of any constituent corporation, including stockholders whose shares will be cancelled, converted or exchanged in the merger or consolidation, and to delegate to such person(s) the exclusive authority to enforce the rights of such stockholders, such as rights to receive payments and enforce stockholders’ rights under an escrow or indemnification arrangement, and to enter into settlements with respect thereto. Any such appointment of a representative of stockholders of a constituent corporation may be made effective as of, or at any time following, the time at which the merger or consolidation agreement is adopted by stockholders in accordance with the requirements of this subchapter, and thereafter shall be binding on all stockholders of such constituent corporation.
6. New Section 268(a) allows that if a merger agreement (other than a holding company reorganization under § 251(g)) entered into by a corporation pursuant to subchapter IX of the DGCL provides that all of the shares of capital stock of the corporation issued and outstanding immediately before the effective time of the merger will be converted into or exchanged for cash, property, rights or securities (other than stock of the surviving corporation), then the merger agreement approved by the board need not include any provision relating to the certificate of incorporation of the surviving corporation, the board of directors or any person acting at its direction may approve any amendment or amendment and restatement of the certificate of the surviving corporation, and no alteration or change to the certificate of incorporation of the surviving corporation will be deemed to constitute an amendment to the merger agreement.
7. New Section 268(b) provides that a disclosure letter, disclosure schedules or any similar documents or instruments delivered in connection with a merger or consolidation agreement that modify, supplement, qualify, or make exceptions to representations, warranties, covenants or conditions in the agreement will not, unless otherwise expressly provided by the agreement of merger or consolidation, be deemed part of the agreement for purposes of the DGCL.
The changes wrought by SB313, although seemingly intended to address concerns with the recent decisions of the Court of Chancery, have already come under fire, and future judicial and/or legislative actions may emerge.
______________________________________________
1. Retrieved July 18, 2024 from https://legis.delaware.gov/BillDetail?LegislationId=141480.
2. Synopsis to SB 313. Retrieved July 23, 2024 from https://legis.delaware.gov/BillDetail?LegislationId=141480
3. Ibid
4. Ibid
5. Ibid
6. Ibid
7. Ibid
8. Ibid
SB313 touches on stockholder agreements, board approvals of merger agreements, the availability of damages following a failed merger, and disclosures delivered in connection with a merger agreement. The new provisions include the following:
1. New Section 122(18) allows a corporation to have the power, notwithstanding DGCL §141(a) (regarding the powers and duties given to the board of directors) and whether or not stated in the certificate of incorporation, to make contracts with current or prospective stockholders or beneficial owners of stock, in their capacity as such, in exchange for such minimal consideration as determined by the board of directors, which could include inducing stockholders or beneficial owners of stock to take, or not take, action, as long as the contract does not violate the certificate of incorporation or Delaware law (excluding §115 – forum selection). The new provision includes a non-exclusive list of examples and further states that the corporation may be subject to the remedies available under applicable contract law, including in connection with any breach or attempted breach of the contract.
2. New Section 147 permits boards to approve an agreement or other document that may be in final form or in substantially final form, so long as material terms are known by, or have been presented to, the board. If there is uncertainty as to whether the form of agreement presented to the board was substantially final, the board can ratify the final agreement before the applicable filing effective date.
3. Section 232 is amended by introducing a new paragraph (g), which provides that documents enclosed with, or appended or annexed to, notices to shareholders (for example, a proxy statement provided along with a notice of a stockholder meeting to approve a merger agreement) are deemed part of the notice for purposes of determining whether the notice has been duly given. However, a document is incorporated in a notice solely for purposes of satisfying the requirements of giving notice under the DGCL, the certificate of incorporation or the bylaws; the enclosed, appended or annexed information is therefore not deemed to be “per se” material to stockholders. This amendment does not affect the equitable disclosure obligations of directors or officers (or, as applicable, stockholders) with respect to any corporate action as to which notice is given.
4. New Section 261(a)(1) clarifies that parties to a merger or consolidation agreement may, through express provision in the agreement, specify the penalties or consequences of a party’s failure to perform its obligations under, or comply with the terms and conditions of, such agreement before the effective time of the merger, or to consummate the merger or consolidation contemplated by the agreement. Such a provision may include an obligation to make payments to the other party if the merger or consolidation is not consummated, including damages based on the lost premium that stockholders of a constituent corporation would be entitled to receive if the merger became effective in accordance with the terms of the agreement and reverse termination fees. In the event a corporation is entitled to receive the payment, the corporation may enforce the other party’s payment obligation, and, upon receipt of the payment, the corporation is entitled to retain the amount of the payment. The amendment is not intended to, and does not, exclude any remedies otherwise available to any party at law or in equity, nor does it remove or change the fiduciary duties of directors in connection with determining whether to approve, perform or enforce such a provision.
5. New Section 261(a)(2) confirms that parties to a merger or consolidation agreement may, through express provision in the agreement, appoint one or more persons to serve as the representative of stockholders of any constituent corporation, including stockholders whose shares will be cancelled, converted or exchanged in the merger or consolidation, and to delegate to such person(s) the exclusive authority to enforce the rights of such stockholders, such as rights to receive payments and enforce stockholders’ rights under an escrow or indemnification arrangement, and to enter into settlements with respect thereto. Any such appointment of a representative of stockholders of a constituent corporation may be made effective as of, or at any time following, the time at which the merger or consolidation agreement is adopted by stockholders in accordance with the requirements of this subchapter, and thereafter shall be binding on all stockholders of such constituent corporation.
6. New Section 268(a) allows that if a merger agreement (other than a holding company reorganization under § 251(g)) entered into by a corporation pursuant to subchapter IX of the DGCL provides that all of the shares of capital stock of the corporation issued and outstanding immediately before the effective time of the merger will be converted into or exchanged for cash, property, rights or securities (other than stock of the surviving corporation), then the merger agreement approved by the board need not include any provision relating to the certificate of incorporation of the surviving corporation, the board of directors or any person acting at its direction may approve any amendment or amendment and restatement of the certificate of the surviving corporation, and no alteration or change to the certificate of incorporation of the surviving corporation will be deemed to constitute an amendment to the merger agreement.
7. New Section 268(b) provides that a disclosure letter, disclosure schedules or any similar documents or instruments delivered in connection with a merger or consolidation agreement that modify, supplement, qualify, or make exceptions to representations, warranties, covenants or conditions in the agreement will not, unless otherwise expressly provided by the agreement of merger or consolidation, be deemed part of the agreement for purposes of the DGCL.
The changes wrought by SB313, although seemingly intended to address concerns with the recent decisions of the Court of Chancery, have already come under fire, and future judicial and/or legislative actions may emerge.
______________________________________________
1. Retrieved July 18, 2024 from https://legis.delaware.gov/BillDetail?LegislationId=141480.
2. Synopsis to SB 313. Retrieved July 23, 2024 from https://legis.delaware.gov/BillDetail?LegislationId=141480
3. Ibid
4. Ibid
5. Ibid
6. Ibid
7. Ibid
8. Ibid
