Delaware’s governor signed into law a series of amendments to the Delaware General Corporation Law. Among other changes, the amendments simplify the process for ratifying defective corporate acts, expand stockholder appraisal rights to more types of transactions, and allow an insolvent company to sell all its assets without stockholder approval. The amendments go into effect on August 1.
The amendments to Title 8 of the Delaware Code (the “DGCL”) affect the following sections:
- Section 152. Issuance of stock; lawful consideration; fully paid stock
- Section 153. Consideration for stock
- Section 157. Rights and options respecting stock
- Section 160. Corporation’s powers respecting ownership, voting, etc., of its own stock; rights of stock called for redemption
- Section 204. Ratification of defective corporate acts and stock
- Section 228. Consent of stockholders or members in lieu of meeting
- Section 242. Amendment of certificate of incorporation after receipt of payment for stock; nonstock corporations
- Section 260. Powers of corporation surviving or resulting from merger or consolidation or upon conversion or domestication; issuance of stock, bonds or other indebtedness
- Section 262. Appraisal rights
- Section 265. Conversion of other entities to a domestic corporation
- Section 266. Conversion of a domestic corporation to other entities
- Section 272. Mortgage or pledge of assets
- Section 390. Transfer, domestication or continuance of domestic corporations
- Section 245. Restated certificate of incorporation
Lawmakers also revised the provisions for converting from a domestic corporation to another type of entity, or vice versa. Section 265 (converting to a domestic corporation) now requires that the plan of conversion be approved in accordance with the other entity’s law and describes the information the plan may contain. Any of the terms of a plan of conversion may be dependent on facts ascertainable outside of the plan, as long as the plan makes clear how those facts will operate on the conversion. If the plan is approved, corporate actions set out in the plan will not require any further action by the board, stockholders, or members of the corporation.
Section 266 (converting from a domestic corporation) newly provides that a plan of conversion be approved together with the resolution approving the corporation. Similar to the Section 265 amendments, the statute describes the information that may be contained in the plan and authorizes the use of facts ascertainable outside the plan.
Defective corporate acts. In 2013, Delaware amended the DGCL to provide for the ratification of defective corporate acts. The latest amendments now look to the date of the board resolutions, not the record date, for purposes of determining if the corporation can skip stockholder approval because there are no shares entitled to vote. Shares of putative stock as of the board’s adoption of the resolutions are not entitled to vote on the ratification nor counted for quorum purposes.
The new changes also facilitate ratification by narrowing the circumstances under which the corporation must file a certificate of validation. A certificate of validation must only be filed if the defective act would have required the filing of a certificate under any other section of the DGCL. Either that other certificate requires a change to give effect to the defective corporate act (including a change to the date and time of the effectiveness of the certificate) or the other certificate was not previously filed in respect of the defective act. The certificate of validation takes the place of the certificate that would otherwise have been required.
Consent in lieu of meeting. Under Section 228, where an action has been taken by less than unanimous consent of stockholders or members, prompt notice must be given to the nonconsenting stockholders or members who would have been entitled to notice of the meeting. The amendments clean up this provision and newly allow that a notice of internet availability of proxy materials under Exchange Act rules satisfies the notice requirement.
Terms, rights and options for stock. The amendments specify that the consideration received for treasury shares need not equal the par value of such shares. This consideration may consist of cash, tangible or intangible property, or any benefit to the corporation.
Rights and options respecting stock may be issued in one or multiple transactions under terms specified in a board resolution.
Under amendments to Section 242, a stockholder vote is not required to adopt an amendment that effects a stock split into a greater number of shares (i.e., a forward stock split) as long as the corporation has only one class of stock which is not divided into series.
An amendment to increase or decrease the authorized number of shares of a class of capital stock or an amendment to reclassify may be made and effected by a simple majority of votes cast under certain conditions. The shares must be listed on a national securities exchange immediately before the amendment becomes effective, and the listing must meet the requirements of the exchange relating to the minimum number of holders.
Sale of all assets. Under Section 271(a) of the DGCL, a corporation usually needs majority stockholder approval to sell, lease, or exchange substantially all of its property and assets. However, the latest amendments establish an insolvency exception. No stockholder resolution is required for the sale of property or assets that secure a mortgage or are otherwise pledged to a secured party and the secured party exercises its rights under the UCC or other law to effect the sale without the corporation’s consent or, in lieu of that exercise of rights, the board authorizes an alternative (legal) disposition.
If the board authorizes an alternative disposition, the value of the property or assets must not exceed the total liabilities or obligations; however, this would not invalidate the sale if the transferee provided value and acted in good faith.