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Significant Amendments to the Delaware General Corporation Law: Key Changes and Implications

Every year, the Delaware General Corporation Law (DGCL) undergoes several changes brought about by the Delaware legislature, affecting both public and private corporations incorporated in the state. Such changes also often have a ripple effect on companies in other states, given that many follow the DGCL. On August 1, 2022, a number of significant updates were made to the DGCL, which included: (i) the introduction of certain immunity provisions for senior officers; (ii) a decrease in the voting requirements necessary for transforming a corporation into another type of business entity; (iii) a mandate for a dissolution filing when a corporate existence ends; (iv) modernized signature attestations; (v) a decision to no longer mandate the availability of a stockholder list during a stockholder meeting; (vi) the modification of the notification process for a stockholder meeting; (vii) heightened insurance protections; (viii) revisions to three crucial provisions related to stockholder appraisal rights; (ix) nuanced updates to equity issuance requirements; (x) the expansion of the capacity to complete early stockholder consents; (xi) better procedures for executing a domestication; and (xii) clarity added to yearly franchise tax reports.

Appraisal Rights of Stockholders

Appraisal rights are legal rights that require companies to offer dissenting or minority shareholders the opportunity to receive the fair value of their shares under specific circumstances, such as in merger situations. In other words, shareholders can opt to cash out at the fair value of their stake, rather than participating in a particular transaction. The process to exercise these rights, however, involves stringent statutory formalities.

Section 262 of the DGCL is responsible for guiding appraisal rights for Delaware corporations. If a corporation needs shareholder approval for a merger or consolidation, it has the obligation to inform shareholders who are eligible to vote on such matters about the availability of appraisal rights. This notification, which must also include a copy of Section 262 of the DGCL for shareholders to peruse, should be provided at least 20 days prior to the shareholder meeting.

For a shareholder to exercise their appraisal rights, they must (a) submit a written request to the company expressing their intention to use their appraisal rights before the shareholder vote; (b) abstain from voting in favor of the merger or consolidation; and (c) hold onto their shares from the date they request the appraisal right up until the date the merger or consolidation closes. Following this, the company is obligated to inform all shareholders who properly requested appraisal rights that the transaction has been completed within 10 days of the closing of the merger or consolidation.

Within 120 days from the effective date of the merger or consolidation, the surviving corporation or any shareholder who has correctly demanded appraisal rights and adhered to the guidelines outlined in Section 262, has the right to initiate an action in the Delaware Court of Chancery. This action is for determining the fair value of the shares owned by the respective shareholders. The fair value is calculated excluding any value added as a result of the merger or consolidation, which means that dissenting shareholders cannot vote against a transaction, request appraisal rights, and gain from the increased (or decreased) value stemming from the transaction.

The provisions for appraisal rights underwent a few alterations in 2022, including four amendments to Section 262. Now, beneficial owners are permitted to directly exercise their appraisal rights in their own names, rather than through the record owner (for example, their brokerage firm).

Moreover, Section 262 was updated to grant appraisal rights to shareholders when a Delaware corporation converts into a foreign corporation (re-domiciles to another state) or when it transforms into a different type of entity. It's important to note the reduced voting requirement in these instances. The need for appraisal rights is nullified if the company's charter provides for the payment of cash in exchange for shares to shareholders upon the completion of these changes, so long as the cash amount equals or exceeds the value that shareholders would have received under Section 262.

Furthermore, the 2022 changes clarified that, in the appraisal context, if the relevant corporation has authorized or issued shares of more than one class or series, the resolution of the board of directors prescribing the terms of such shares must be filed with the corporation's public records.

Immunity Provisions for Senior Officers

In 2022, the Delaware legislature introduced new immunity provisions for senior officers of corporations. These updates to Section 145 aim to provide greater clarity and protection to these individuals by delineating the extent of their potential liability.

Under the revised Section 145, the indemnification rights of senior officers are now on par with those of directors. Officers are now granted the same rights to mandatory indemnification, advancement of expenses, and protection under a corporation's certificate of incorporation against liability to the corporation and its stockholders. These changes underline Delaware's continued commitment to fostering a legal environment that protects individuals taking corporate risks in the interest of stockholder welfare.

Decreased Voting Requirement for Entity Transformation

The DGCL has long allowed corporations to convert into or merge with other types of business entities, such as limited liability companies. However, the 2022 updates reduced the voting threshold required for these transactions. The changes to Section 266 allow for such conversions and mergers to be approved by a majority of the outstanding shares entitled to vote, instead of the formerly required two-thirds vote. This lowered threshold simplifies the process for corporations seeking to transform their entity type.

Updated Signature Attestations

As technology evolves, so too does the manner in which business transactions are conducted. Acknowledging this, the 2022 changes modernized signature requirements under Section 103(a)(1). Under the revised statute, any person may sign a document electronically, which the Delaware Secretary of State is required to accept. This development removes obstacles related to physical documentation and simplifies the process of filing with the Secretary of State, a move that aligns with the trend towards greater digitalization in business practices.

Each of these changes were intended to modernize Delaware's corporate laws and maintain the state's position as a favorable jurisdiction for corporations. These updates affect numerous aspects of corporate governance, ranging from voting requirements to shareholder rights, and provide both companies and their stockholders with more streamlined procedures and greater protections. It is essential for Delaware corporations, and for those who model their governance on the DGCL, to understand and adjust to these changes to ensure they remain in compliance with the law.

Refinement of Notice Procedures for Shareholder Meetings

Changes to Section 222 of the DGCL streamline the procedure for notifying shareholders about meetings. Now, in the event of a virtual meeting adjournment, it's no longer required to issue a separate notice detailing the date, time, or place of the meeting's resumption, if such details are announced during the original meeting and displayed throughout the scheduled meeting time. While this facilitates the organization of virtual meetings, publicly traded companies need to bear in mind that they must still comply with federal laws regarding notifying shareholders in certain adjournment situations.

Expansion of Advance Shareholder Consents

Updates to Section 228 provide increased flexibility for shareholders to act by written consent. This provision now allows shareholders to execute consents in advance and have them held in escrow for up to 60 days. Importantly, it confirms that an individual does not have to be a shareholder at the time they sign the consent, so long as they become one by the record date of the action to which the consent relates.

Revamp of Stockholder Lists During Meetings

Section 219 has been updated to reflect the increasing prevalence of virtual meetings, removing the obligation to have a stockholder list available at every meeting. Despite this, there is still a requirement to make the list available during the ten days leading up to the meeting. It's worth noting that any amendments needed to accommodate this change can be made by the board of directors since provisions concerning shareholder meetings typically fall under the company's bylaws, rather than the certificate of incorporation.

Expansion of Insurance Protections

In a move that allows corporations to establish self-insurance funds, the 2022 amendments explicitly permit corporations to utilize captive insurance companies for D&O insurance. A captive insurance company is one that is wholly owned and controlled by its insureds, with its primary purpose being to insure the risks of its owners. This provides corporations with an alternative to traditional insurance, which may be particularly beneficial in periods of high insurance premiums.

Streamlining of Equity Issuances

The DGCL 2022 amendments consolidate and harmonize provisions governing the issuance of stock, sale of treasury shares, and creation and issuance of rights and options. This allows for a more streamlined process and provides the board with the authority to delegate these functions to a designated individual or entity. However, this power is not unrestricted; there must be predefined parameters regarding the maximum number of shares, rights or options that may be issued, the timeframe for issuances, and the minimum amount of consideration that must be received. This safeguard ensures that the individual or entity does not abuse this power, particularly with respect to self-dealing.

Revision of Annual Franchise Tax Reports

Lastly, the amendments offer clarification on the requirements for annual franchise tax reports. Now, under Section 502(a)(3), a company cannot use its registered agent's address as the principal place of business unless the agent is acting as its own registered agent and the address is indeed the company's primary business location. Moreover, large corporations are now required to inform Delaware of a change of status or continue paying the higher tax rate.

In conclusion, the 2022 amendments to the DGCL reflect the ongoing evolution of corporate law and governance, taking into account technological advances and changing business practices. For Delaware corporations, understanding and adapting to these changes is vital for ensuring continued legal compliance and effective corporate governance. Furthermore, corporations in other jurisdictions that look to the DGCL for guidance will also benefit from staying abreast of these updates.