A Summary to the new amendments of the General Corporation Law of Delaware

August 31, 2022
10 min

Category : Law Updates

Before the amendments came in turn, let’s state the reasons behind ,,, Why Do So Many Companies Incorporate in Delaware? Almost 93% of all U.S.-based initial public offerings have one thing in common! … They’re all registered in Delaware!! In 2020, Delaware saw an additional 250,000 new businesses register in the state, pushing the total number of businesses to over 1.6 million. Delaware has become internationally recognized as a corporate paradise and is “home” to such famous firms as Amazon, Google, Tesla, Walmart, American Express, and Disney, to name just a few. Although it is the second smallest state (by size), and one of the least populous, it may seem odd that Delaware became the business mecca it is today, but since the early 1900s, the state has been incentivizing businesses to stay with lenient tax policies, reduced restrictions and simplified corporate laws. The key benefits to incorporating in Delaware are tax benefits, privacy, practicality, simplified structure, and the corporation court. Lately, some new law amendments to the General Corporation Law of the State of Delaware (the “DGCL”) proposed by the Delaware State Bar Association have been signed into by the Official Administration of Delaware and thence approved by the Delaware House. Consequently, some provisions of the DGCL are affected. The legislation addresses several important topics, including the personal liability of senior corporate officers under Section 102(b)(7) of the DGCL, the authority to issue stock and options, the expansion of appraisal rights to beneficial owners, and new provisions intended to streamline the process for non-U.S. entities to domesticate into Delaware. The 2022 amendments to the DGCL took effect on August 1, 2022, and apply to corporate actions taken on or after that date.

– PERSONAL LIABILITY OF SENIOR CORPORATE OFFICERS (SECTION 102(B)(7))

Section 102(b)(7) of the DGCL has been amended to extend exculpation rights for breaches of the fiduciary duty of care to senior officers of a Delaware corporation. The amendments state a high conflict between exculpation rights granted to directors but not to corporate officers, an issue magnified in cases where a corporate officer also serves as a director and could therefore be protected from liability in his or her capacity as a director, but not concerning any actions taken as an officer. The exculpatory clause has been adopted in the amendments to Section 102(b) (7) to limit the personal liability of directors and officers, including the president, CEO, COO, CFO, chief legal officer, controller, and chief accounting officers, as well as those who have consented in writing to accept service of process on the corporation’s behalf. By the safeguards previously provided to directors under Section 102(b)(7), the corporation’s certificate of incorporation must contain language exculpatory to directors and officers, and a corporation may only limit officer responsibility for violations of the fiduciary duty of care. The changes further state that executives are solely exempt from liability for claims brought directly by stockholders; they are not exempt from liability for claims of breach of fiduciary duty brought by the company or indirectly by stockholders. Finally, the revisions forbid the exoneration of officials for any transaction in which they gain an improper personal benefit, a breach of their fiduciary duty of loyalty, or a failure to act in good faith.

AUTHORITY TO ISSUE STOCKS AND OPTIONS (SECTIONS 152, 153, 157, 154, AND 141(C))

The capacity of a board to grant authorization to an individual or organization to issue stock or options in the corporation continues to be expanded and modernized with the passage of these changes. The modifications authorize a board to grant a person or organization the power to issue stock, sell treasury shares, or grant rights or options to purchase stock. The board must nonetheless ensure that each delegation of authority complies with Sections 152, 153, and 157 of the DGCL. The amendment also mandates that the board adopt a resolution before transferring these duties that specify the minimum amount of consideration for these transactions, provided that the consideration complies with the requirements outlined in Section 154 of the DGCL, as well as the maximum number of shares of stock, rights, or options that may be sold or issued. The amendment also mandates that the board adopt a resolution before transferring these duties that specify the minimum amount of consideration for these transactions, provided that the consideration complies with the requirements outlined in Section 154 of the DGCL, as well as the maximum number of shares of stock, rights, or options that may be sold or issued. While the amendments further expand the Board of Directors’ authority to delegate the issuance of stock and options, it is important to note that the amendment does not affect the board’s process for delegating authority to board committees under Section 141(c). Additionally, the amendments prohibit the individual or entity delegated authority by the board to issue or sell to themselves stock, options, or any related rights falling within his, her, or its delegated authority.

NO REQUIREMENT THAT THE STOCKHOLDER LIST BE AVAILABLE DURING A MEETING (SECTION 219)

The requirement that a corporation make a stockholder list available for examination during a stockholders’ meeting is removed by the amendments to Section 219 of the DGCL. The modifications further specify how the company shall calculate the ten-day duration for purposes of requesting a stockholder list before a stockholder meeting to determine when the stockholder list shall be made available for examination. The DGCL modifications to Section 219 are designed to address the growing trend of virtual electronic stockholder meetings as well as privacy issues about the dissemination of stockholder information during virtual meetings.

MEETING NOTICE AND THE ADJOURNMENT OF VIRTUAL MEETINGS (SECTION 222)

A notice of a stockholders’ meeting may be delivered in any method allowed by Section 232 of the DGCL, as stated specifically in the amendments to Section 222 of the DGCL. To address potential technical difficulties that could occur during a virtual meeting of stockholders, Section 222(c) was further amended. It now states that if a virtual meeting of stockholders is adjourned (unless the corporation’s bylaws specify otherwise), including because of a technical failure to convene or continue a virtual meeting, notice is not required if the time, date, and location of the new meeting are announced at the original gathering and are visible during the time allotted for it. As a practical matter, a corporation using a virtual meeting format may wish to include an advance adjournment notice in the meeting notice to address potential technical issues that may arise while convening or holding the stockholder meeting.

STOCKHOLDER CONSENTS (SECTION 228)

The wording of Section 228(c) of the DGCL has been changed to make it clear that a stockholder need not be a stockholder at the time the written consent is executed if they are a stockholder of record as of the record date established for determining stockholders entitled to consent to the action. This includes a time determined by the occurrence of a future event.

APPRAISAL RIGHTS (SECTION 262)

The DGCL modifications to Section 262 increase the rights of stockholders who are beneficial owners, notably by giving them access to statutory appraisal rights. Before the amendments, a stock’s beneficial owner may only exercise their appraisal rights if the stock’s record holder requested on their behalf. The revisions now allowed stock’s beneficial owners to submit assessment demands in their names. The adjustments include a new subsection 262(d)(3) that allows a beneficial owner to submit a written demand for appraisal if they meet all three of the following criteria: (1) they have maintained beneficial ownership of the corporation’s stock from the date of the demand until the date of the merger, consolidation, or conversion; (2) they meet the stockholder ownership threshold outlined in subsection 262(a); and (3) they have provided proof of their beneficial ownership in a document. In addition, the amendments specifically define who may be classified as a beneficial owner, including any “person (either an individual or entity) who is the beneficial owner of stock held either in a voting trust or by a nominee on behalf of the person.” The amendments also provide that stockholders may have appraisal rights in connection with a conversion of the corporation unless the 262(b) market-out exception applies. The amendments further extend the market-out exception to “transactions approved by a stockholder consent.” Finally, the amendments remove the requirement that a Section 262 stockholder notice of appraisal rights include a copy of Section 262 of the DGCL; rather, the notice may reference a publicly available electronic resource providing information regarding stockholder appraisal rights.

CONVERSIONS (SECTIONS 265, 266, AND 262(K))

The deadline for approving a conversion was amended in Section 265 of the DGCL, which governs the conversion of other entities to Delaware corporations. Previously, the law required that the converting entity and the certificate of incorporation be approved by the same authority that approved the conversion before the certificate of conversion could be filed; however, the amendments now state that the approvals must take place before the certificate of conversion filed with the Delaware Secretary of State takes effect. Additionally, Section 266 of the DGCL, which governs the conversion of a Delaware corporation to another entity, was altered to require the vote of holders of a majority of the voting power of the outstanding shares eligible to vote on the conversion, as opposed to the previous requirement that all outstanding shares of the entity, regardless of voting rights, must unanimously approve the conversion. Although the prior structure was designed to prevent stockholders from converting into a different kind of business with significantly different governance and ownership rights, the unanimity requirement made the Act practically unworkable in many situations. In recognition of the prior policy concerns, however, Section 266 contains two important protections for the stockholders of a Delaware corporation contemplating a conversion: (1) the amendments require the consent of any stockholder who would become a general partner due to a conversion, given potential personal liability for a general partner under Delaware law; and (2) the amendments state that any provision of a certificate of incorporation of a corporation incorporated before August 1, 2022, or a voting or other written agreement between the corporation and a stockholder entered into before that date, that restricts or prohibits the consummation of a merger or consolidation, shall be deemed to apply to a conversion unless the certificate of incorporation or agreement otherwise provides. Thus, for example, holders of preferred stock who are entitled to a separate class vote to approve a merger or consolidation transaction under the terms of a corporation’s certificate of incorporation effective before August 1, 2022, would be deemed to have the same class vote on a proposed conversion. Last but not least, the DGCL’s Section 262, which outlines stockholders’ statutory appraisal rights, has been changed to include the conversion of a Delaware corporation in addition to mergers or consolidations.

DISSOLUTION (SECTIONS 275 AND 276)

The DGCL’s Sections 275 and 276 modifications aim to make the dissolution process clearer for corporations whose certificate of incorporation specifies the length of the corporation’s existence. According to the amendments to Section 275, every corporation whose certificate of incorporation specifies the length of the company’s existence must submit dissolution paperwork to the Delaware Secretary of State within 90 days after the date specified in the company’s incorporation documents. The name of the corporation, the date specified in the certificate of incorporation on which the corporation would dissolve, the names and contact details of the corporation’s directors and officers, and the date the original certificate of incorporation was filed must also be included in the certificate of dissolution. Further, the amendments specify that the corporation will be dissolved as a legal matter on either the date listed in the certificate of incorporation or the date on which the certificate of dissolution goes into effect, whichever is earlier. In addition, the amendments modify Section 276 to contain conforming dissolution provisions for nonstock corporations.

DOMESTICATION OF NON-US ENTITIES (SECTION 388)

A non-U.S. entity domesticating into Delaware may now adopt a plan of domestication outlining the specifics of the domestication, including how the non-U.S. entity’s equity interests will be exchanged or converted as well as any other specifics or provisions deemed desirable. This was made possible by a substantive amendment to Section 388 of the DGCL. The revised statutory language allowing for a plan of domestication significantly simplifies the procedures and technical reviews necessary in connection with the creation of a new Delaware corporation upon domestication and gives transaction planners more freedom in structuring deals that call for one or more non-U.S. entities to domesticate into Delaware. Before the domestication into Delaware is effective, a plan of domestication may specify the corporate actions that the domesticated corporation will conduct in conjunction with the domestication. Each of these actions must be approved in line with the requirements of any applicable foreign laws. The domesticated corporation, its board of directors, and stockholders shall be deemed to have authorized, adopted, and approved, as appropriate, any such corporate action specified in the plan of domestication that is within the power of the Delaware corporation under the DGCL, and no further action of the board of directors or stockholders shall be necessary. Importantly, if any corporate action outlined in the plan requires the filing of a certificate with the Delaware Secretary of State, the certificate must state that no action by the board of directors or stockholders of the Delaware corporation otherwise required by any other provision of the DGCL is required by Section 388 of the DGCL. Additionally, the amendments stipulate that if the operation of such facts is expressly stated in the plan, the provisions of the domestication plan may be made dependent upon information that can be discovered independently of the plan. The modifications further stipulate that a certificate of domestication must attest that the domestication was authorized by the non-United States entity’s bylaws or by applicable non-United States legislation before the certificate of domestication becomes effective.

OTHER MODIFICATIONS

Other minor changes to the DGCL were also made, including (1) Section 103, which was amended to remove dated language and clarify that the execution of an instrument by a person constitutes an oath or affirmation, under penalties of perjury, that the facts stated in the document will be true at the time the document becomes effective; (2) Section 502, which was amended to make it clear that, unless a corporation maintains its principal place of business in the State of Delaware and serves as its registered agent there, and (3) amend Section 503 so that a company that is currently a large corporate filer with the Delaware Secretary of State will continue to keep that status unless it notifies the Secretary of State’s office that the corporation no longer satisfies the requirements for big corporate filers.

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