On July 17, 2024, Delaware Governor John Carney signed into law the 2024 amendments to the General Corporation Law of the State of Delaware (the “DGCL”), the Delaware Limited Liability Company Act (the “LLC Act”), the Delaware Revised Uniform Limited Partnership Act (the “LP Act”), the Delaware Revised Uniform Partnership Act (the “Partnership Act”), and the Delaware Statutory Trust Act (the “Statutory Trust Act”). The LLC Act, the LP Act, the Partnership Act and the Statutory Trust Act are sometimes referred to as the “Alternative Entity Statutes.”
Each of the amendments will become effective on August 1, 2024. Set forth below is a brief summary of the most significant changes contemplated by these amendments.
What You Need to Know:
Amongst other changes, these amendments:
- Codify a board of directors’ ability to enter into stockholder agreements for minimum consideration;
- Clarify the approval process and notice requirements for certain corporate agreements;
- Authorizes the use of penalty provisions in merger agreements;
- Authorize inclusion of amendments in merger documents; and
- Confirm and clarify mechanisms for revoking termination or dissolution.
Delaware General Corporation Law
Authorization of Stockholder Agreements (DGCL § 122(18))
Newly-added Section 122(18) of the 2024 DGCL Amendments codifies the ability of a Delaware corporation’s board of directors to provide contractual rights to stockholders, including the right to participate in certain decision-making on behalf of the corporation, in the form of a stockholder agreement. This new subsection is in direct response to a recent Delaware Court of Chancery Opinion, West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024). In Moelis, the Chancery Court considered the validity of a stockholder agreement which delegated certain approval rights to the corporation’s founder. The Court held the stockholder agreement was unenforceable because it constituted impermissible delegation of the board’s managerial authority in violation of Section 141(a) of the DGCL. The Moelis decision prompted significant concern from Delaware corporate law practitioners regarding the implication of the decision more broadly on the common practice of entering into stockholder agreements, and the Court noted that “greater statutory guidance may be beneficial” in light of the “expansive” use of such agreements between corporations and their stockholders.
Section 122(18) now provides such guidance, expressly codifying a corporate board’s authority to enter into stockholder agreements for minimum consideration and provides a non-exhaustive list of provisions which may be lawfully included in a stockholder agreement, including:
- Requiring the approval or consent of one or more persons or bodies (including the board of directors, or any current or future directors, stockholders or beneficial owners of stock) before the corporation may take a specific action;
- Restricting or prohibiting a corporation from taking an action specified in the agreement; and
- Agreeing that the corporation or one or more persons or bodies (including the board of directors or any current or future directors, stockholders or beneficial owners of stock) will take, or refrain from taking, a specific action.
Importantly, however, Section 122(18) does not allow for stockholder agreements that would bind the board or individual directors in their official capacities as parties to the agreement. Section 122(18) also provides that the corporation, and not any individual person (such as a director), may be subject to remedies for breach of the stockholder agreement. Moreover, the synopsis to Section 122(18) confirms that no agreement under that Section will be enforceable if it contravenes the certificate of incorporation of the corporation or Delaware law. That said, Section 122(18) provides an exception whereby a stockholder agreement which places a prohibition on a board will not be deemed unenforceable simply because the board is explicitly authorized to take the prohibited action in the certificate of incorporation.
Additionally, Section 122(18) provides that the board must receive consideration for entering into a stockholder agreement. The new subsection charges the board with determining the minimum consideration necessary for entering into such an agreement and provides examples of what may constitute such minimum consideration, including requiring stockholders to take or refrain from taking certain actions.
The amendments also make clear that nothing in the revised Section 122 disturbs directors’ existing fiduciary duty obligations or impacts existing case law. Additionally, the amendments affirm that directors reserve all of the powers granted to them under Section 122 unless otherwise noted in the certificate of incorporation.
Board Approval of “Substantially Final” Agreements (DGCL §§ 147, 262 and 268)
New Sections 147, 262, and 268 of the 2024 amendments address issues surrounding board approval and notice of mergers and acquisitions following a recent Court of Chancery decision in Sjunde AP-Fonden v. Activision Blizzard, Inc., C.A. No. 2022-1001-KSJM (Del. Ch. Feb. 9, 2024). The Activision case concerned the acquisition of Activision by Microsoft which, the plaintiff-stockholder argued, failed to comply with certain requirements of the DGCL. In particular, the plaintiff argued the Activision board failed to properly approve the merger because the merger agreement that was approved was not “final” and also failed to provide sufficient notice of the merger to stockholders. The Court held that the board must approve a final or “essentially complete” form of the merger agreement and concluded that the inclusion of a summary of the merger in a proxy statement did not constitute proper notice. Likewise, the Court held that attaching the merger agreement to the proxy statement did not constitute proper notice because the agreement did not include the surviving corporation’s certificate of incorporation—an essential document appended to the merger agreement.
With regard to merger approval, the 2024 amendments enact new DGCL Section 147, which provides that whenever a board is required to approve or take some action with regard to an agreement, instrument, or document, it must be in its final or substantially final form when approved or acted upon. Pursuant to the synopsis to Section 147, “substantially final” means all material terms must be included in the agreement, instrument, or document or readily ascertainable to the board through other materials. If any question remains at to whether an approved agreement, instrument, or document was “substantially final” at the time of approval, Section 147 allows a board to adopt a resolution ratifying the approval of or action taken regarding any agreement, instrument, or document that must be filed with the Secretary of State or referenced in any certificate. The ratification must occur before filing and is effective as of the date of the original approval or action.
Additionally, new Section 268(a) now allows merger agreements to exclude provisions relating to the certificate of incorporation of a corporation whose shares of stock will not be converted or exchanged in the merger, other than for shares of the surviving corporation’s stock. Furthermore, new Section 268(b) clarifies that, unless explicitly provided for by the merger agreement, any disclosure letter and schedules regarding representations, warranties, covenants, or other conditions are not considered a part of the merger agreement under the DGCL. Accordingly, such documents may be negotiated without formal approval of the board and are not required to be included in the notice to stockholders, but still have any effects as provided in the merger agreement (such as qualifying representations and warranties).
Finally, new Section 232(g) clarifies the notice requirements to stockholders and provides any document enclosed with, annexed or appended to a notice is deemed a part of the notice. The synopsis to Section 232(g) further provides that the attached materials are considered a part of the notice for compliance purposes only and do not otherwise constitute “per se” materials to stockholders.
Penalty Provisions for Wrongful Termination of Merger Agreements (§ 261)
New Section 261 of the DGCL concerns the penalties and consequences for wrongfully terminating a merger agreement. Section 261 is in direct response to the Court of Chancery’s ruling in Crispo v. Musk, C.A. No. 2022-0666-KSJM (Del. Ch. Nov. 4, 2023), wherein the Court considered the validity of a merger agreement provision which required the buyer to pay a lost premium to target stockholders for wrongfully terminating the merger. The Court deemed the provision invalid because a “target company has no right or expectation to receive merger consideration, including the premium,” and, thus, “has no entitlement to lost-premium damages” if the merger falls through.
New Section 261(a)(1) explicitly provides that a merger agreement may include provisions which penalize a party who fails to comply with the agreement or execute the merger. Such penalties can include payment of lost premium or other economic advantages the stockholders of the non-breaching party would have been entitled to if the merger went forward. The synopsis to Section 261(a)(1) confirms that these provisions are enforceable notwithstanding any contract law to the contrary.
Section 261(a) also allows a corporation, if entitled to payment under the agreement, to enforce the obligations of the breaching party and collect penalties. Corporations are permitted to keep these payments and need not distribute them to stockholders, however, directors must still abide by their fiduciary duties in deciding whether to approve, perform or enforce a penalty provision. Lastly, Section 261(a)(2) allows for a stockholder representative to be appointed who can be authorized to enforce the rights of stockholders under applicable agreements.
Alternative Entity Statutes
Mergers & Consolidations
Several amendments were made to the Alternative Entity Acts with regard to filing requirements and documentation related to mergers and consolidations. These include:
- Domestic partnerships merging under Section 15-902(m) of the Partnership Act, which may not have previously filed a statement of partnership existence with the Delaware Secretary of State, are now required to file a statement of partnership existence prior to merging.
- The Partnership Act, the LP Act and the LLC Act have each been amended to provide that a certificate of merger or certificate of ownership and merger may include any amendments to the surviving entity’s certificate of formation, certificate of registered series, certificate of limited partnership or statement of qualification, as applicable (including amending the relevant document in its entirety).
- The LP Act now requires each new general partner that is admitted via amendment to the certificate of limited partnership of a limited partnership surviving a merger to sign the certificate of merger or certificate of ownership and merger before it is filed with the Delaware Secretary of State.
Revocation of Dissolution/Termination
The LP Act and the LLC Act have each been amended to confirm and clarify certain of the mechanisms for revoking termination or dissolution of a limited liability company, limited partnership, protected series or registered series, as applicable. The amendments confirm and clarify that references to the term “other persons” in the LP Act and LLC Act in reference to dissolution or termination are references to other persons whose approval is required for such dissolution or termination of the limited liability company, limited partnership, protected series or registered series pursuant to the partnership agreement or limited liability company agreement, as applicable.
Amendments Specific to the Statutory Trust Act
Mergers & Governing Instrument Amendments
Section 3815(f) of the Statutory Trust Act has been amended to confirm that in the event of a statutory trust undergoing a merger or consolidation, an amendment to a governing instrument or the adoption of a new governing instrument may be effected only with respect to the governing instrument of the surviving or resulting statutory trust and not with respect to the governing instrument of a constituent statutory trust that is not the surviving or resulting statutory trust.
Voting of Securities Held by Statutory Trust
In response to the fact that many registered investment companies have implemented, or are considering implementing, forms of pass-through voting, Section 3608(p) of the Statutory Trust Act has been amended to confirm that the trustees of a statutory trust may authorize the beneficial owners of the statutory trust to direct the voting of securities held by the statutory trust. A trustee shall have no duties or liabilities with respect to the voting of such securities if the trustees have exercised the standard of care required under the governing instrument or the Statutory Trust Act in connection with such direction given to the beneficial owners.
Conversion or Domestication to a Statutory Trust
The Statutory Trust Act was also amended to provide that in the event of a conversion or domestication of an entity into a Delaware statutory trust, approval of the conversion or domestication to a statutory trust, and the approval of the governing instrument of the statutory trust, are required to occur prior to the time a certificate of conversion or domestication to statutory trust becomes effective, rather than prior to filing of the certificate.
