Delaware Amends General Corporations Act of 2020
On July 16, 2020, the Delaware General Corporations Law (the DGCL) was amended (the 2020 Amendments) to help Delaware corporations respond to challenges arising from the novel coronavirus pandemic (COVID- 19). The 2020 Amendments also make a number of significant changes to the DGCL that are unrelated to the challenges presented by COVID-19, including facilitating a corporation’s ability to convert to a utility corporation and perform a holding company merger. Finally, the 2020 Amendments limit the persons who constitute “officers” of a company for the purposes of determining which officers are entitled to mandatory indemnification from the company in cases where the officer is successful or otherwise in his defense against proceedings brought because of such social status of the director. A summary of the 2020 changes is provided below.
RESPONDING TO AN EMERGENCY LIKE COVID-19
Section 110 of the DGCL previously authorized the board of directors of a company to pass emergency by-laws to be operative in the event of an emergency, such as an attack, nuclear or atomic disaster, catastrophe or any other another similar emergency, following which a quorum of the board of directors or of a committee thereof could not easily be called to act.
However, COVID-19 presented new challenges that Article 110 of the DGCL did not expressly cover. Some of these challenges were urgently addressed on April 6, 2020 when the Governor of the State of Delaware issued an order (the Order) allowing public companies subject to the reporting requirements of Section 13(a) or of section 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) to change the format of a meeting previously notified for a physical location to a virtual meeting only by filing a document with the Securities and Exchange Commission (the SEC) pursuant to Sections 13, 14 or 15(d) of the Exchange Act and issue a press release.
While the ordinance granted many Delaware corporations interim authority to change the format of a shareholder meeting, the 2020 amendments to Section 110, which come into effect retroactively to January 1, 2020, offer a solution. more permanent. The 2020 amendments expand the definition of an emergency to include an epidemic, a pandemic, and a declaration of a national emergency by the United States government and include additional flexibility for a board of directors with respect to board meetings. shareholders, dividends or other matters, which are discussed below.
If a quorum of the board cannot be readily achieved during an emergency, the board may pass emergency by-laws or take other practical and necessary action by a majority of the directors present at a meeting.
During any emergency, the Board of Directors may take any action it deems practical and necessary to deal with such emergency with respect to a meeting of shareholders, including: (i) postponing a meeting shareholders, while maintaining the original record date of such meeting, regardless of the number of days such meeting is postponed, and (ii) whether a company is subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act, notify shareholders of an adjournment or change in the place or format of a meeting only by filing a document with the SEC in accordance with the Exchange Act. In addition, if it is not possible to allow inspection of a list of shareholders entitled to vote before or during a meeting of shareholders, the failure of a company to make the list of shareholders available n ‘will result in no personal liability for directors or a meeting of shareholders being postponed or cancelled.
The 2020 amendments allow the record date and payment date of a dividend declared by a Delaware corporation to be changed in an emergency if the record date has not yet occurred until the new date payment is within 60 days of the new registration date. . A Delaware corporation that is subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act may give notice of such change to shareholders only by filing with the SEC pursuant to the Exchange Act. In all cases, notice must be given as soon as possible after the change of record date and payment date.
The 2020 amendments make it easier for a Delaware corporation to become a public benefit corporation and vice versa by lowering the shareholder voting threshold from two-thirds to a majority of outstanding votes for a conventional corporation in order to ( (i) amend a certificate of incorporation which converts a conventional corporation into a public benefit corporation or vice versa, and (ii) enact an amalgamation whereby the shares of a conventional corporation are converted into shares of a benefit corporation audience, or vice versa. The 2020 Amendments also eliminate valuation rights in connection with the conversion or amalgamation of a conventional corporation into a benefit corporation effective July 16, 2020. In addition, the 2020 Amendments reduce the risks for persons acting as directors of a public benefit corporation. in several key ways.
Article 365 of the DGCL provides that the directors, in managing the activities and affairs of a public benefit company, must balance the pecuniary interests of the shareholders, the interests of those who are materially affected by the conduct of the company and the public benefits identified in the company certificate. of constitution. The 2020 Amendments provide that a director of a public benefit company will not be considered to be interested in such balancing decisions because of his or her ownership interest in the public benefit company, unless such ownership is considered a conflict of interest for a traditional society.
Further, provided that a director does not have a conflict of interest, a director’s failure to balance the interests of all stakeholders when making decisions on behalf of the company will not constitute a act or omission in bad faith for the purposes of exculpation or compensation, unless the certificate of incorporation of the company provides otherwise. Finally, the 2020 Amendments provide a higher standard for shareholders to bring an action to enforce balancing requirements for directors of public benefit corporations. In order to bring an action or breach of duty of loyalty to enforce the statutory requirement that directors of public benefit corporations balance the pecuniary interests of shareholders with the public interest identified in the certificate of incorporation of the corporation, the shareholder must hold at least two percent of the outstanding shares of the corporation or, in the case of certain public corporations, the lesser of two percent of the outstanding shares of the corporation or shares of a of at least $2,000,000.
MERGERS OF HOLDING COMPANIES
Prior to the 2020 Amendments, Section 251(g) of the DGCL permitted corporations to effect holding company reorganization mergers, without a shareholder vote, only if the surviving entity and the existing operating company generally had identical organizational documents. This requirement will be removed with respect to holding company mergers completed pursuant to an agreement entered into after July 16, 2020. The amendments do not change the requirement that shareholders of the holding company must approve any action at the level of the operating company which would have required their approval if they were still shareholders of the operating company. Additionally, the 2020 amendments require that a non-Delaware holding company be managed by persons who have the same fiduciary duties as directors of a Delaware corporation.
INDEMNIFICATION AND EXCULPATION
The 2020 Amendments modify certain provisions of the DGCL governing indemnification, advancement and exculpation. First, with respect to any act or omission occurring after December 31, 2020, Section 145(c) of the DGCL will only require mandatory compensation for a current or former officer of a successful company. on the merits or otherwise in a proceeding brought by reason of his corporate status if the officer at the time of such act or omission (i) is the President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, the company’s general counsel, controller, treasurer, or chief accounting officer, (ii) is or has been identified in the company’s public filings with the SEC as one of the company’s highest-paid executives, and (iii) has consented to service of process in Delaware by written agreement.
Second, the 2020 Amendments specifically provide that a company may elect to indemnify any other person who is successful in a covered proceeding who is not a current or former director or officer of the company. Next, the 2020 amendments protect the rights to compensation and advancement contained in a corporation’s certificate of incorporation or articles of association by providing that these rights cannot be removed and retroactively alter the rights to compensation or advancement of a Covered Person with respect to acts or omissions that occurred prior to the elimination of this provision unless permitted by such provision in effect at the time of withdrawal or modification. Similarly, the removal or modification by a company of an exculpatory provision from its certificate of incorporation will not affect acts that occurred prior to such removal or modification.
ELECTRONIC TRANSMISSION AND COMMUNICATION
The 2020 Amendments further streamline how corporations and their shareholders can electronically sign or deliver directors’, founders’ and shareholders’ consents and clarify that while a corporation may restrict the ability of its shareholders to sign or deliver documents electronically, a Delaware corporation may not limit any other means of signature or authorized delivery. In addition, shareholder consents or proxy documents that are delivered electronically must be accompanied by the information necessary to determine the delivery date and identify the person delivering the document.
The 2020 amendments clarify how a corporation can notify its shareholders. A corporation may provide notice to shareholders by mail, courier or electronic mail without shareholder consent. However, notice sent to shareholders by other means of electronic transmission, such as telecommunication by facsimile, posting on an electrical network or any other form of electronic transmission, requires the prior consent of the shareholder to whom the notice is sent.
The 2020 Amendments provide that if a record date has not been set for a share by written shareholder consent, the default record date will be the date the consents are received by the company.