Delaware enacts annual update to its corporate statutes
With the legislative session drawing to a close, Delaware Governor Jack Markell has signed into law the annual amendments to the General Corporation Law and the Alternative Entity Statutes.
In addition to more technical changes, the General Corporation Law was amended to ease the burden on corporations in connection with appraisal rights. The new amendments also clarify the “intermediate-form” merger process.
The amendments to the LLC Act and the LP Act, which largely track one another, include the elimination of the default rule that consent must be in writing, as well as provisions relating to the operation of “series” LLCs and LPs. A new subsection of the LLC Act provides that assignees of single-member LLCs are now automatically admitted as members.
HB 371 contains both substantive and technical amendments to the General Corporation Law of the State of Delaware (the “DGCL”). Chief amongst these are amendments relating to (1) “intermediate-form” mergers under Section 251(h) and (2) appraisal rights under Section 262.
Section 262 – Appraisal Rights
De Minimis Exception
Section 262(g) was amended to eliminate certain de minimis appraisal claims in public corporation mergers. The amendment was designed to prevent stockholders from demanding appraisal where the value of the stockholders’ interests in the corporation is nominal, but the corporation is inclined to settle such matters to avoid an appraisal proceeding.
Where a corporation is listed on a national securities exchange immediately prior to a merger, appraisal rights are essentially precluded unless the (1) total number of shares entitled to appraisal exceeds 1 percent of the outstanding shares of the class or series eligible for appraisal, (2) value of the consideration provided in the merger or consolidation for such total number of shares exceeds $1 million or (3) merger was approved pursuant to a “short-form” merger. Such limits will apply even where the certificate of incorporation confers appraisal rights where those rights would otherwise not exist.
Payment of Appraisal Prior to Entry of Judgment
Section 262(h) was amended to provide corporations with the option to limit the accrual of statutory interest on appraisal awards by permitting a corporation to pay the appraisal claimants a sum of money at any time before the entry of judgment in the appraisal proceedings. In such a case, following payment, the statutory interest will only accrue upon the difference between the amount paid and the sum of the fair value of the shares – as determined by the Delaware Court of Chancery – and unpaid interest accrued prior to such voluntary payment (unless paid in connection with the voluntary sum previously paid). Further, where one or more stockholders’ entitlement to appraisal is contested in good faith, the corporation may elect to pay only those stockholders whose entitlement is uncontested.
Section 251(h) – Intermediate-Form Mergers
The amendments to Section 251(h) are predominately designed to provide clarity as to the procedures for “intermediate-form” mergers, which are now commonly used in public M&A transactions.
Eligibility to Use Section 251(h)
As currently drafted, Section 251(h) implies that a corporation must have all of its shares listed on a national securities exchange or held by more than 2,000 record holders. This amendment makes it clear that Section 251(h) is available to those corporations that have any class or series of stock listed on a national securities exchange or held by more than 2,000 record holders.
Section 251(h) was further amended to allow a corporation to condition a tender offer on the receipt of a minimum number or percentage of shares (or of any class or series thereof), and such offer may be effected through separate offers for separate classes or series of the stock.
Rollover Stock; Receipt of Stock
Section 251(h) was also amended to include, when calculating whether sufficient shares have been tendered in connection with a tender offer, shares of stock of the target corporation (1) held by certain affiliated persons and entities of the acquiring corporation or (2) subject to a written agreement requiring such shares to be transferred to the acquiring corporation. The amendment further clarifies the means by which shares of a target corporation are “received” for purposes of determining whether this minimum tender condition has been met.
Section 111 – Jurisdiction
The amendment to Section 111 confers upon the Court of Chancery subject matter jurisdiction over civil actions involving instruments, documents or agreements (1) to which a corporation and one or more holders of its stock are parties and pursuant to which any such holder or holders sell or offer to sell any such stock and (2) by which a corporation agrees to sell, lease or exchange any of its property or assets and (3) which its terms provides that one or more holders of its stock approve of or consent to such sale, lease or exchange.
Section 141 – Default Quorum and Voting Requirements
Section 141(c) was amended to specify default quorum and voting requirements for committees of a board of directors and subcommittees of committees of a board and also to clarify that references in the DGCL to “committees” also encompasses “subcommittees.” The amendment sets the default quorum for a committee or subcommittee at a majority of the directors then serving on the applicable committee or subcommittee, unless the corporation takes action lowering the requirement.
Section 158 – Stock Certificates
Section 158, as amended, responds to a growing trend amongst corporations, namely the shift away from the titles “President” and “Treasurer” toward “C” level executive titles. Now, any two officers of the corporation who are authorized by the corporation to sign stock certificates may do so on behalf of the corporation.
Section 311 – Restoration
Section 311 was amended to include a procedure to restore a certificate of incorporation after it has expired by limitation, provided that the corporation initiates the restoration process within three (3) years of such expiration. The amendment also clarifies that a corporation desiring to revoke its dissolution or restore its certificate of incorporation must file all annual franchise tax reports and pay all franchise taxes that the corporation would have had to file if it had not dissolved or expired.
Section 312 – Revival
The amendment to Section 312 distinguishes the procedure to extend the term of a certificate of incorporation or to restore a certificate of incorporation if it has expired by limitation from the procedure to revive a certificate of incorporation whose certificate has become forfeited or void. Additionally, of particular significance is the provision allowing a majority of the directors then in office, even if less than a quorum, or the sole director in office, to authorize the revival of the certificate of incorporation. The statute now details with clarity the process for elections of directors if no directors are in office.
Alternative Entity Statutes Amendments
HB 372 and HB 368 contain largely technical amendments to the Delaware Limited Liability Company Act (the “LLC Act”) and the Delaware Limited Partnership Act (the “LP Act”), respectively. Generally speaking, they are intended to clarify how series of LLCs and LPs operate and to eliminate certain requirements that consent must be given in writing.
Service of Process on Series
These amendments provide a method for effecting service of process on a specific series of an LLC or LP, whereby service of process is made upon the registered agent of the LLC or LP, and such process shall include the name of the LLC or LP and the relevant series.
No Statutory Restriction on Ability to be Liable
These amendments clarify that a series of an LLC or LP, or such LLC or LP, is not restricted from agreeing to be liable for any or all of the debts, liabilities, obligations or expenses incurred by the LLC or LP generally, or another series of such LLC or LP specifically.
No Need for Written Consent
These amendments, among other things, eliminate the requirement for written consent, allowing members or limited partners to consent to specified action by means other than a writing.
Voluntary Assignments of Single-Member LLCs
A new subsection (3) to Section 18-704 of the LLC Act provides that, where the sole member of an LLC voluntarily assigns its limited liability interest to a single assignee, such assignee shall automatically become a member of the LLC.
For more information about Delaware’s corporate laws, please contact the authors or the attorneys at the firm with whom you are regularly in contact.