On July 17, 2024, Delaware Governor John Carney signed into law amendments to the Delaware General Corporation Law (DGCL) from Senate Bill 313 that had sparked considerable controversy within the corporate law and governance community. These amendments were predominantly intended to reverse three recent decisions of the Delaware Court of Chancery and aim to provide more predictability to certain corporate practices and processes resulting from these decisions. The amendments are effective Aug. 1, 2024, and will apply retroactively to contracts and agreements made by a Delaware corporation. This alert outlines some of the key changes resulting from the amendments and the Chancery Court opinions triggering the amendments.
The Amendments
Stockholder Agreements and Moelis
In West Palm Beach Firefighters' Pension Fund v. Moelis & Co.,the Delaware Court of Chancery ruled that certain approval rights granted to a founding stockholder in a stockholders' agreement between the founder and the corporation, including consent rights over a broad range of corporate actions and the composition of the corporation's board of directors and board committees, were facially invalid as they impermissibly constrained the board of directors' authority. The court reasoned that the approval rights violated Section 141(a) of the DGCL because the restrictive approval rights in the stockholders' agreement effectively constrained “in a very substantial way” the directors' ability to manage the corporation, and Section 141(a) of the DGCL provides that the business and affairs of a corporation must be managed by or under the direction of the board of directors unless otherwise specified in the DGCL or the corporation's certificate of incorporation. The court suggested that “greater statutory guidance may be beneficial,” acknowledging the common use of such stockholder agreements to afford approval rights to founding and other large stockholders. In response, less than a month after the Chancery Court's decision, Senate Bill 313 was proposed to amend to Section 122 of the DGCL.
New Section 122(18) authorizes Delaware corporations to enter into agreements with stockholders and prospective stockholders, even if such agreements constrain the board's discretion, so long as such agreements do not violate the DGCL (other than Section 115 of the DGCL regarding forum selection) or the corporation's certificate of incorporation. These agreements may:
- Restrict corporate actions under specified circumstances,
- Require specific approvals before the board can take corporate action, and
- Provide that the corporation, and its directors and stockholders, will take, or refrain from taking, particular actions.
Section 122(18) does not, however, eliminate fiduciary duties owed by directors, officers or controlling stockholders to the corporation.
Finally, Section 122(5) of the DGCL was amended to reaffirm that a board cannot delegate fundamental board-level functions to officers or agents unless authorized under the corporation's certificate of incorporation, maintaining the board's central role in corporate governance.
The amendments to Section 122 of the DGCL attracted considerable controversy. Critics of the amendment had argued, among other things, that it was hastily enacted while Moelis was still pending appeal to the Delaware Supreme Court and runs counter to Delaware's long history of relying on its courts to shape corporate law. Ultimately, the amendments passed and have now been signed into law by the governor.
Merger Agreement Remedies and Crispo
In Crispo v. Musk, a former Twitter stockholder sued Elon Musk and his related affiliates for specific performance and damages after Musk attempted to terminate a merger agreement with Twitter. After Musk abandoned his attempt to terminate the merger agreement and closed the transaction, the plaintiff claimed he was entitled to a mootness fee because his previous suit contributed to Musk's decision to close the acquisition. The Chancery Court ruled that the plaintiff was not entitled to the fee since either he lacked standing as a third-party beneficiary to bring the suit or, even if he were a third-party beneficiary, his rights to bring the suit had not vested. The Chancery Court noted the Second Circuit's 2005 reasoning in Consolidated Edison, Inc. v. Northeast Utilities,which held that in a proposed merger, a target corporation cannot claim damages on behalf of its stockholders for the loss of any premium it would have received if the buyer had not breached the merger agreement; the corporation can only seek damages for its own incurred losses. In reaction to Consolidated Edison, prior to the Chancery Court's Musk decision, it was common practice for parties to transaction agreements to include language expressly allowing target corporations to sue for lost premium in the event of a buyer's breach.
In response to the Chancery Court's Musk decision, new Section 261(a)(1) of the DGCL explicitly permits parties to a merger agreement to provide in the agreement for liquidated damages or penalties in the event of a breach, including penalties based on the loss of any premium that a party's stockholders may have been entitled to absent the breach. Notably, new Section 261(a)(1) of the DGCL states that a party receiving such a payment may retain it, and the payments need not be distributed to stockholders. Additionally, new Section 261(a)(2), consistent with long-standing market practice, allows for the appointment of stockholder representatives to enforce stockholders' rights under a merger agreement, with the appointment being irrevocable post-adoption and where their specified consent is required for amendments to the merger agreement.
Transaction Approval Requirements and Activision
Under the DGCL, the following steps must be taken sequentially in order to obtain approval of a merger agreement: (i) the board must adopt a resolution approving the merger agreement, (ii) the agreement is executed and (iii) the agreement must be submitted to the stockholders with proper notice containing either the merger agreement or a brief summary thereof. In addition, the agreement must include any amendments to the certificate of incorporation of the surviving corporation or state that there will be no such amendments, and amendments to these provisions are not permitted after stockholder approval.
In Sjunde Ap-Fonden v. Activision Blizzard, the plaintiff argued that many of the above steps were not followed in Microsoft's acquisition of Activision Blizzard. The allegations included that the Activision board did not properly approve the merger because:
- The merger agreement that was approved by Activision's board was not in final form and did not include the disclosure schedules thereto,
- A board committee negotiated pre-closing dividends after the board had already approved the agreement, and
- The board gave inadequate notice to stockholders because (i) the notice did not include the surviving company charter and (ii) although the proxy statement delivered to the stockholders included a summary of the merger agreement, the notice to the stockholders did not.
The court ruled that a board-approved merger agreement must be “essentially complete,” and the stockholder notice was deficient since the enclosed merger agreement was incomplete. However, the court dismissed claims about the improper amendment of the merger agreement as the allegations were ruled speculative.
In response to the Chancery Court's Activision decision, the following amendments to the DGCL were proposed and signed into law by Governor Carney:
New Section 147 of the DGCL provides that when the DGCL requires board approval of any agreement (e.g., merger agreements), a board may approve it in final form or “substantially final form.” An agreement is in substantially final form if all of the material terms are set forth therein or determinable through other information or materials presented to or known by the board. A board can also ratify its prior approval of any document referenced in a certificate filed with the Secretary of State, including a merger agreement, at any time before the certificate of merger becomes effective. Therefore, if there is any uncertainty regarding whether a merger agreement was in substantially final form when approved by the board, the board can ratify the finalized merger agreement at any time prior to the effectiveness of the merger agreement.
New Section 232(g) clarifies that any document enclosed with, or annexed or appended to, a notice will be deemed part of the notice for purposes of complying with the DGCL's notice provisions. As a result, so long as a summary of a merger agreement is included in a proxy statement attached to a notice, the notice will not be deficient for failure to include a summary directly in the notice.
New Section 268(a) of the DGCL provides that in mergers where stockholders do not receive stock in the surviving corporation as part of the consideration (e.g., cash-out mergers), a merger agreement does not need to include a provision regarding the charter of the surviving corporation in order to be approved by the board of directors. New Section 268(b) provides that disclosure schedules with respect to representations, warranties, covenants or conditions contained in the agreement are not part of the agreement for purposes of the DGCL, unless otherwise expressly provided by the agreement. This amendment serves to avoid any implication by Activision that a board has to approve final or substantially final disclosure schedules for it to authorize a merger agreement. As a result, such schedules that are incorporated by reference into the merger agreement but are not themselves part of the agreements would not require board approval and a board could, consistent with current practice, delegate approval of these schedules to corporation officers or agents.
Key Takeaways
Delaware's signed Senate Bill 313 created new amendments to the DGCL in response to three recent Delaware Court of Chancery decisions. Following the decision in West Palm Beach Firefighters' Pension Fund v. Moelis & Co.,the amendments permit corporations to enter into stockholder agreements that may constrain the discretion of a board of directors under Delaware law, regardless of whether they are expressly permitted in the corporation's certificate of incorporation, as long as they do not violate the certificate of incorporation and the DGCL. In response to Crispo v. Musk, the amendments allow parties to a merger agreement to contract for financial remedies in the event of a breach and the appointment of stockholder representatives. In addition, in response to Sjunde Ap-Fonden v. Activision Blizzard,the amendments simplify the approval of a merger by a board of directors, thereby removing the potential for specific technical foot faults.
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