United States: Delaware General Corporation Law Amendments

On June 24, 2015, Delaware Governor Jack Markell approved several important amendments to the Delaware General Corporation Law (the "DGCL"),1 with such amendments generally becoming effective on August 1, 2015. These amendments clarified Delaware's view on fee shifting provisions and forum selection provisions in corporate charters and bylaws—two issues that have been heavily litigated over the past two years—in addition to addressing the procedures necessary to ratify defective corporate acts, adding flexibility in issuing stock and options and revising certain provisions relating to public benefit corporations among other items.  We address amendment highlights below.

Fee Shifting Prohibited

Stock corporations are now prohibited from including fee-shifting provisions in their charters or bylaws. Last year, the Delaware Supreme Court issued a decision upholding as valid a bylaw that forced the losing party (the plaintiffs, in that case) in a stakeholder lawsuit to pay the corporation' s legal fees. Sections 102, 109(b), and 114(b) of the DGCL were amended to prohibit stock corporations (as opposed to non-stock corporations, like the corporation at issue in the Delaware Supreme Court decision) from including fee shifting provisions in their charters or bylaws. These amendments do not invalidate any fee-shifting provision in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.

Forum Selection Provisions Authorized

New Section 115 authorizes a corporation, through its charter or bylaws, to require that all "internal corporate claims" arising under the DGCL be brought solely and exclusively in the Delaware courts—state or federal. This section codifies the holding from a Delaware case that upheld the validity of a forum selection bylaw. However, Section 115 expressly rejects the holding in another Delaware Court of Chancery decision, which upheld the validity of a Delaware corporation's forum selection bylaw that designated North Carolina as the exclusive forum for litigating internal corporate claims. This amendment presumably leaves room for Delaware corporations to have a non-Delaware forum selection provision for non-internal corporate claims.

Some examples of "internal corporate claims" that are now within the exclusive jurisdiction of the Delaware courts include all derivative actions and claims of breach of fiduciary duty by current or former directors or officers or controlling stockholders of the corporation, or persons who aid and abet such a breach.

This new section, like the amendments relating to fee-shifting, does not invalidate non-Delaware forum selection provisions contained in a stockholders agreement or other writing signed by the stockholder against whom the provision is to be enforced.

Ratifying Defective Corporate Acts and Stock

Amended Section 204 clarifies the procedures necessary to ratify defective corporate acts that would otherwise be void or voidable. In sum, to ratify a defective corporate act or stock, the board must first take action to effect the ratification; then, the board's action must be submitted to the stockholders for adoption if the underlying act is one that requires a stockholder vote, or is one that would have required a stockholder vote, either at the time the ratification is submitted for adoption or at the time the original act was taken.  In addition to establishing requirements for a board to adopt and ratify defective acts, the amendments to Section 204 also:  address the problems that occur when the initial board of directors was not identified in the original charter; clarify stockholder approval necessary to adopt and ratify defective acts; establish the approvals necessary to ratify the election of a director where the original vote was defective; clarify and explain the information necessary to obtain a certificate of validation; clarify the notice requirements for ratification of defective actions; explain which acts of the board or corporate executives are curable by ratification; confirm that certain voidable acts may be ratified under common law; clarify the notice requirements when the ratification of a defective corporate act is approved by consent of stockholders in lieu of a meeting; and clarify when the ratification of a defective corporate act is validated and becomes effective.

Amended Section 204 clarifies that a board may ratify (or initiate the process to ratify) multiple defective corporate acts in a single set of resolutions; however, each defective corporate act that requires or required a vote of stockholders must be submitted to stockholders for their approval.

Conforming amendments were made to Section 205 of the DGCL, which confers jurisdiction on the Court of Chancery to hear and determine, inter alia, the validity of any ratification effected pursuant to Section 204 and the validity of any corporate act or transaction.

Added Flexibility for Issuing Stock and Options

Amended Sections 152 and 157 provide Delaware corporations more flexibility to authorize the issuance of stock. The amendments clarify that the board (or a duly empowered committee) may authorize stock to be issued pursuant to "at the market" programs without the need to separately authorize each individual stock issuance pursuant to the program.  Further, under amended Section 152, so long as the board (or a committee of the board) authorizes that a fixed maximum number of shares may be issued during a defined period of time for no less than a specific minimum amount of consideration, those shares may be issued in one or more transactions in such numbers and at such times as determined by a person or body other than the board. Section 152 clarifies that the minimum amount of consideration cannot be less than the consideration required pursuant to Section 153 of the DGCL, so shares with par value cannot be issued for consideration having a value less than the par value of the shares. Section 152 explains that any formula used to determine the consideration for stock may include reference to or be made dependent on the operation of extrinsic facts, thereby confirming that the consideration may be based on market price or an averaged market price.

Similarly, Section 157 of the DGCL, which deals with the creation and issuance of rights and options to purchase stock, has been amended to clarify that any formula used to determine the consideration for stock issued on the exercise of rights and options may be based on market price or an averaged market price.

In sum, these changes allow the board to delegate to officers the ability to issue restricted stock on the same basis that the board may delegate to officers the ability to issue rights or options under Section 157(c) of the DGCL, an issue on which the DGCL was previously silent.

Public Benefit Corporations

Section 362 of the DGCL, as amended, makes several changes to the law affecting public benefit corporations. To begin, it is no longer necessary for a public benefit corporation to include a specific "public benefit corporation" identifier in its name; however, if an identifier is not used, the corporation must provide notice of its public benefit status before any stock is issued. Additionally, amended Section 363 relaxes the restrictions for an existing corporation to become a "public benefit corporation" and for an already established public benefit corporation to cease being a public benefit corporation.  The amendments reduce the necessary approval to change the status of a corporation (to or from a public benefit corporation) from 90% of the outstanding shares of each class of stock, whether voting or nonvoting, to 66 2/3% of the outstanding shares entitled to vote. Additionally, Section 363 now provides a "market out" exception to the appraisal rights provided in Section 363(b) for public benefit corporations—similar to the "market out" exception for appraisal rights under Section 262.

Considerations; Contact

Delaware companies should carefully review these recent amendments to determine what, if any, charter or bylaw amendments may be appropriate.  Further, Delaware companies may also want to assess their option and restricted stock grant practices in light of the clarification that officers may be delegated the authority to issue both types of awards within certain parameters.

Footnote

1. A copy of the amendments, as stated in Delaware State Senate Bill No. 75, may be found here: http://www.legis.delaware.gov/LIS/lis148.nsf/2bede841c6272c888025698400433a04/87e715e89a8c4ee785257e2f00641f25?OpenDocument&Highlight=0,DGCL.

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