Several amendments to the Delaware General Corporation Law (DGCL), articulated in Delaware Senate Bill 313 (SB 313), have been adopted by the Delaware General Assembly and signed into law by Governor John Carney. These amendments will take effect on August 1, 2024, and will apply retroactively to all contracts and agreements (including merger and consolidation agreements) made by a Delaware corporation and all contracts, agreements and documents approved by the board of directors of a Delaware corporation. We explore these amendments further below.
Section 122 – Specific Powers
In West Palm Beach Firefighters' Pension Fund v. Moelis & Co., the Delaware Court of Chancery held that a number of approval provisions, requiring stockholder pre-approval of corporate actions and the composition of the board of directors and its committees, contained in a stockholders' agreement were facially invalid as an impermissible constraint on the board of directors' authority.1 DGCL Section 141(a) mandates that "[t]he business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in [the DGCL] or in its certificate of incorporation." The court found that contractual provisions that restrict a board of directors' authority must be specified in the corporation's certificate of incorporation.2 Given that the restrictive approval provisions in the stockholders' agreement were not authorized in the corporation's certificate of incorporation, these restrictive approval provisions violated DGCL Section 141(a). The court noted in its opinion that the "expansive use of stockholder agreements suggests that greater statutory guidance may be beneficial."3 The Council of Corporation Law Section of the Delaware State Bar Association and Delaware General Assembly quickly responded with amendments to Section 122 of the DGCL.
Most notably, new Subsection 122(18) creates a default rule that explicitly authorizes a corporation, regardless of whether such actions are listed in the corporation's certificate of incorporation, to enter in contractual arrangements with its stockholders and beneficial owners that may, among other things: (a) restrict or prohibit future specified corporate actions; (b) require approval of specified corporate actions; and (c) covenant specified future actions of the corporation or certain persons or bodies (i.e., the board of directors, current or future directors, stockholders, etc.). Such contractual arrangements under this subsection require consideration in a minimum amount determined and approved by the corporation's board of directors. This default rule does not apply to any contractual provision that conflicts with the corporation's certificate of incorporation, the DGCL or the laws of Delaware. Further, a corporation may limit or restrict the default application of Subsection 122(18) by expressly stating in its certificate of incorporation that the corporation lacks authority to enter into the contractual arrangements authorized by Subsection 122(18). Of note, Subsection 122(18) only provides statutory authorization of these types of restrictive agreements between a corporation and its stockholders or beneficial owners. Subsection 122(18) does not, however, alter or relieve directors, officers or stockholders of any fiduciary duties owed to the corporation or its stockholders when deciding whether to enter into, perform, or breach an agreement addressed by Subsection 122(18).
Additionally, to serve as a backstop to the concern of board of director over-delegation, Subsection 122(5) was amended to clarify that management agreements or other contracts appointing or delegating authority to an officer remain, unlike the contractual agreements authorized in Subsection 122(18), subject to Section 141(a) of the DGCL.
Further, while the language of Subsection 122(18) only addresses contractual arrangements with a corporation's stockholders or beneficial owners, Section 1 of the Synopsis to SB 313 clarifies that agreements entered into by the corporation pursuant to Subsection 122(13) (contracts of guaranty or suretyship) with parties who are not stockholders or beneficial owners of the corporation may still include the types of provisions addressed in Subsection 122(18).
Sections 147, 232 and 268 – Transaction Approval Requirements
SB 313 also sets forth a number of amendments in response to a court holding that valid board of directors approval of a transaction document requires the approval of an essentially complete version of the agreement. These amendments include:
- The addition of new Section 147, which provides that whenever
board of directors' approval of an agreement, instrument or
document is expressly required by the DGCL, such agreement,
instrument or document may be approved in its final or
substantially final form. Section 2 of the Synopsis of SB 313
clarifies that this new Section 147 is intended to enable a board
of directors to approve a transaction document at a time when all
material terms are set forth in the agreement or determinable
through other information provided to the board of directors.
- New Section 147 also allows a board of directors to ratify a previously approved agreement, instrument or document prior to any filing with the Delaware Secretary of State that may be required by the DGCL. This ratification option is intended to provide greater certainty when the final form status of the approved agreement, instrument or document is in question. The ratification option under Section 147 is intended as an alternative ratification option from those available under DGCL Sections 204 and 205. However, consistent with Sections 204 and 205, ratification under new Section 147 relates back to the time of the original board of directors approval.
- New Subsection (g) was added to Section 232, which expressly incorporates any document that is annexed, appended or enclosed with a stockholder notice regarding a merger or transaction approval as part of such stockholder notice. The purpose of this new provision is to clarify compliance with DGCL Section 251's requirement that a corporation include a copy (or a summary) of a transaction document when notice for approval is sent to the stockholders.
- Lastly, new Section 268 codifies two additional approval clarifications aimed at providing flexibility in the merger/transaction context. Subsection (a) of this new section provides that, in the context of a merger where all stock of a constituent corporation is converted or exchanged into cash (or anything other than stock in the surviving corporation), the board of directors approval of the constituent corporation does not need to include the certificate of incorporation of the surviving corporation if all shares of its stock would be converted or exchanged in the merger (to anything other than shares in the surviving corporation). Further, Subsection (b) of this new section excludes a disclosure schedule or disclosure letter as part of a merger agreement or similar document unless expressly stated in the agreement. This exclusion is an express recognition of the fluid nature of disclosure instruments and that they are often prepared and negotiated by officers and other agents of a board of directors without the statutory need of formal approval.
Section 261 – Target Corporation Lost-Premium Damages
In Crispo v. Musk, the Delaware Court of Chancery drew a grey cloud around the validity of contracted for target company lost-premium damages when it denied a Twitter Inc. stockholder's petition for a mootness fee for his role in the closing of Elon Musk's acquisition of Twitter.4 The court rejected Crispo's mootness fee application as a matter of standing, holding that "[b]ecause only the target stockholders expect to receive a premium in the event a merger closes, a damages-definition defining a buyer's damages to include lost-premium is only enforceable if it grants stockholders third-party beneficiary status."5 Given that the merger agreement at issue did not grant any such status to the Twitter stockholders, Crispo did not have standing to bring the underlying claim he was seeking the mootness fee for.6 Further, in dicta, the court noted that a contracted for lost-premium provision that allows the recovery of such damages by the target company (as opposed to its stockholders) is likely unenforceable as "there is no legal basis for allowing one contracting party to unilaterally and irrevocably appoint itself as an agent for a non-party for the purpose of controlling that party's rights."7
In response, SB 313 sets forth a new Subsection (a) to Section 261. New Subsection 261(a)(1) covers pre-closing issues, providing statutory authorization of the inclusion of penalties or other consequences in a merger agreement for a breach of its provisions prior to the effective time listed in the agreement, including failure to perform or comply with obligations thereunder or consummate the merger contemplated by the agreement. Section 4 of the Synopsis to SB 313 clarifies that such damages may include lost premiums and other monetary entitlements the stockholders of the nonbreaching party would have received if the merger was consummated.
New Subsection 261(a)(2) covers post-closing issues, allowing the appointment of a constituent corporation stockholder representative to be included as a contractual provision in a merger agreement. This express authorization of stockholder representative provisions is intended to conform with the growing market presence of these types of provisions in merger agreements and confirm the ability to delegate sole authority to a stockholder representative to enforce the rights of the stockholders in a merger. However, such delegation of authority in a merger agreement may not empower a stockholder representative to exercise powers beyond those required to enforce the rights of the stockholders contained in the agreement.
Effective Date of DGCL Amendments
SB 313 was signed into law July 17, 2024, by Governor John Carney. As noted above, these amendments will take effect on August 1, 2024, and will apply retroactively to all contracts and agreements (including merger and consolidation agreements) made by a Delaware corporation and all contracts, agreements and documents approved by the board of directors of a Delaware corporation. Notably, the amendments will not apply to or affect civil actions or proceedings completed or pending on or prior to August 1, 2024.
For More Information
If you have any questions about this Alert, please contact Rebecca A. Guzman, Christopher M. Winter, Richard L. Renck, Sahba Saravi, Michael Gonen, any of the attorneys in our Corporate Practice Group, or the attorney in the firm with whom you are regularly in contact.
Footnotes
1. 311 A.3d 809, 823 (Del. Ch. 2024).
2. Id. at 879.
3. Id. at 862, n. 272.
4. 304 A.3d 567, 570 (Del. Ch. 2023).
5. Id. at 584.
6. Id.
7. Id. at 581.
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