In accordance with its annual tradition of updating its business entity laws, the Delaware legislature passed Senate Bill 114, with Senate Amendment 1. On July 17, 2023, Governor Carney signed the bill. It generally takes effect on August 1, 2023. Let’s examine some of the key changes to the Delaware General Corporation Law (DGCL) the bill makes. (Note: Citations refer to Title 8, Sections 101-398 of the DGCL, unless otherwise indicated.)
Stock Consideration and Treasury Share Disposal
Section 153 relates to consideration for stock. The amendment adds consideration provisions for stock relating to disposal of treasury shares. It provides that the consideration for treasury shares may have a value, greater or less than or equal to the par value (if any) of such shares. The consideration received for treasury shares may consist of cash, any tangible or intangible property, or any benefit to the corporation or any combination thereof.
Defective Corporate Act
Senate Bill 114 provides clarification as to the filing requirements for a certificate of validation of a defective corporate act. The corporation must file the certificate if a ratification requires a Section 103 certificate of validation under another section, and either: The certificate requires a change to give effect to the defective corporate act under Section 204 or a certificate previously required to be filed under Section 103 was not filed.
The certificate of validation format for defective corporate acts is also changed. The required information is less detailed under Senate Bill 114. For example, the certificate only needs to include that the corporation has ratified 1 or more defective corporate acts that would have required the filing of the certificate under Section 103 without inclusion of details relating to putative stock and dates issued. A simple statement that each corporate act has been ratified in accordance with the section; and other required information is all that is needed.
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Members/Stockholders Consent in Lieu of Meeting
The bill adds to notification provisions for certain members or stockholders. Section 228 is amended to provide that if a stockholders or members action by consent (under subsections (a) or (b)) has been less than unanimous, prompt notice of the action must be given to those members or stockholders of the record date of the action by consent who have not consented. These must be members or stockholders who would have been entitled to notice of the meeting if the action had been taken at a meeting and the record date for the notice of the meeting were the record date for the action by consent. A notice may be provided which constitutes a notice of internet availability of proxy materials under rules set by the Securities and Exchange Act of 1934., 15 U.S.C. Section 78a et seq.
Amendment After Receipt for Stock Payment
New language is added to Section 242 which provides that no meeting or stockholder vote will be required to adopt an amendment that affects only certain changes listed in the section or reclassifies by subdividing the issued shares of a class of stock into a greater number of issued shares of the same stock. The amendment may increase the number of authorized shares of such class of stock up to an amount proportionate to the subdivision so long as the corporation has only 1 class of stock outstanding and such class is not divided into series. Provisions to amend to increase or decrease authorized shares or reclassify capital stock shares are also added so long as certain requirements are met.
Powers of Surviving or Resulting Corporation
Section 260 currently lists the powers of a corporation surviving or resulting from merger or consolidation. Senate Bill No. 114 adds powers resulting from conversion or domestication. When 2 or more corporations are merged or consolidated, or another entity is converted to or a non-United States entity becomes domesticated, as a Delaware corporation, the corporation surviving or resulting from the merger or consolidation or upon domestication or conversion may issue bonds or other obligations to provide for required payments and obligations to effect the change. Permitted actions to effect the merger, consolidation, conversion or domestication are also included.
Appraisal Rights
Section 262 is amended to add appraisal rights for stockholders who continuously hold shares of stock through the effective date of a transfer, domestication or continuance. The appraisal right previously only applied to mergers, consolidations and conversions. The rights for all these changes are subject to certain conditions. The stockholders must not have voted in favor of the merger, consolidation, merger, transfer or continuance, nor consented thereto in writing.
Conversions
Section 265 deals with conversion of other entities to a domestic corporation. Senate Bill 114 amends Section 265 to include references to the plan of conversion. Plans for conversion adoption are included for the converting other entity and converted corporation. Optional provisions for plans of conversion are included as well as approval requirements to be given by a converted corporation and a converting other entity. Section 266 deals with conversion of a domestic corporation to other entities. The changes to Section 266 are similar to those listed in Section 265. Plans for adoption of a conversion are also added with approval requirements.
Transfer, Domestication or Continuance
Section 390 relates to transfer, domestication or continuance of domestic corporations in a foreign jurisdiction. The amendment specifies information that may be included in connection with a plan of transfer, domestication or continuance. The plan will be approved together with a resolution adopting the transfer, domestication or continuance. The bill changes the voting requirements for adoption of the resolution from all the outstanding shares of the stock to a majority of the outstanding shares of stock entitled to vote. If the corporation is transferring, domesticating or continuing as a partnership having one or more general partners, additional approval is needed for authorization of the transfer, domestication or continuance from each stockholder of the corporation who will become a general partner of the partnership because of the transfer, domestication or continuance.
A provision is added to Section 390 which states that any provision of the certificate of incorporation of a corporation incorporated before August 1, 2023 or any provision in any voting trust agreement or other written agreement between or among the corporation and 1 or more of its stockholders in effect on or before August 1, 2023, that restricts, conditions or prohibits the consummation of a merger or consolidation will also apply to a transfer, domestication or continuance as if it were a merger or consolidation, unless the certificate of incorporation or such agreement expressly provides otherwise or if the certificate of incorporation does not so expressly provide, a conversion, in which case the express provision will be deemed to apply to a transfer, domestication or continuance as if it were a conversion.
Mortgage or Pledge of Assets
Senate Bill No. 114 adds a provision to Section 272 relating to mortgage or pledge of assets, The amendment first notes that it is not limiting the rights of a secured party under applicable law. The amendment then provides that no stockholders' resolution will be required by Section 271(a) for a sale, lease or exchange of a corporation’s property or assets if the property or assets are collateral that secures a mortgage or are pledged to a secured party. Either of 2 alternatives must be met. The secured party exercises its rights under the law governing such mortgage or pledge or other applicable law, whether under Article 9 of the Uniform Commercial Code, a real property law or other law, to effect such sale, lease or exchange without the corporation’s consent. Or in lieu of the second party exercising such rights, the corporation’s board of directors authorizes an alternative sale, lease or exchange of the property or assets. This alternative transaction, whether with the secured party or another person, must result in the reduction or elimination of the total liabilities or obligations secured by such property or assets. The value of such property or assets must be less than or equal to the total amount of the liabilities or obligations being eliminated or reduced. In addition, the sale, lease or exchange must not be prohibited by governing law.
A provision in the certificate of incorporation that requires stockholders' authorization or consent for a sale, lease or exchange of property of assets does not apply to transactions permitted by the new law (Section 272 (b) unless expressly provided. This new provision included in Section 272(d) only applies to certificate of incorporation provisions that first become effective on or after August 1, 2023.
For additional effective dates and other information, please refer to Senate Bill 114. As amended by Senate Amendment 1.
Delaware has also amended its LLC and Partnership statutes. Please see our companion article, Delaware Business Law Changes Part 2: Amendments to the LLC (Limited Liability Company) and Partnership Acts, for highlights of these changes.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
