Delaware General Corporations Act 2020 Changes | Smith Anderson
[co-author: Caitlan Carberry]
On June 23, 2020, the Delaware General Assembly adopted a number of Delaware General Corporation Law (DGCL) amendments which were promulgated by the Governor on July 16, 2020. In particular, these amendments (1) clarify and increase the powers of the boards of directors of Delaware corporations in the event of an emergency (including, in particular, a pandemic such as novel coronavirus (COVID-19)), (2) strengthen exculpatory provisions for directors and review executive compensation provisions, (3) confirm and clarify the ability of corporations to perform and deliver documents and opinions by electronically and (4) facilitate mergers of holding companies without shareholder approval.
Emergency powers of the board of directors
As stated in our previous alert, Annual meetings in a world without meetings: the impact of COVID-19 on public enterprises, on March 13, 2020, staff in the Division of Corporation Finance of the Securities and Exchange Commission (SEC) issued guidance in response to the COVID-19 pandemic allowing public companies to change the date, time and location of their shareholders’ meetings without mailing additional solicitation documents to shareholders.
However, those guidelines did not anticipate the requirements of state law, and on April 6, 2020, the Governor of Delaware also made compliance obligations more lenient for publicly traded Delaware companies. For more information on the Governor’s Order of April 6, 2020, see our previous alert titled Delaware provides emergency exemption from shareholder meeting requirements.
Several of the changes to the DGCL build on, clarify, and protect companies and their boards of directors that relied on previous governor orders, particularly with respect to the board’s emergency powers. These changes come into force retroactively to January 1, 2020. In particular, these changes:
- Clarify the application and the scope of the DGCL § 110. DGCL § 110 provides the boards of directors of Delaware corporations with emergency powers in response to disasters. As amended, DGCL § 110 now lists epidemics, pandemics and declarations of national emergencies by the United States government as specific examples of the types of disasters that trigger the emergency powers granted to boards of directors in the DGCL § 110.
- Facilitate the adoption of emergency regulations by boards of directors. As amended, DGCL § 110 (a) now expressly provides that emergency regulations may be adopted by the board of directors of the company or, if a quorum cannot easily be met for a meeting, by a majority of directors present.
- Give boards of directors greater flexibility in meeting shareholders in the event of an emergency. The amendments added a new Section 110 (i) to the DGCL, which expressly allows the board of directors of a Delaware corporation, regardless of any contrary provision of the DGCL or the certificate of incorporation or bylaws of the corporation, to “take any measure it determines to be practical and necessary to take into account the circumstances of [an] condition of urgency with regard to a meeting of shareholders. . . . In particular, the new DGCL § 110 (i) authorizes the board of directors of a Delaware corporation to (1) postpone any meeting of shareholders to a later date or time (the original registration date applying at that meeting) and (2) with with respect to listed companies, notify any postponement or change of meeting location (including moving to a virtual meeting) only by filing a document with the Securities and Exchange Commission. In addition, the new DGCL § 110 (i) provides that no one will be liable and that meetings of shareholders will not be canceled and need not be postponed, based on any breach of the law. provision of a list of shareholders under DGCL § 219 if it was not possible to authorize the inspection during the emergency.
- Allow boards to change the recording and payment date of a previously declared dividend in an emergency. The new DGCL § 110 (i) also allows boards of directors to change the registration and payment dates of previously declared dividends, provided that the registration date has not yet occurred and the company is complies with certain notice requirements.
Compensation and exemption provisions
The changes relating to compensation and exoneration will come into force with regard to behavior occurring after December 31, 2020. These changes:
- Restrict the universe of agents entitled to compulsory compensation under the DGCL § 145 (c). DGCL § 145 (c) provides that directors and officers who are successful in the defense of any action, suit or proceeding are entitled to compulsory compensation from the company. As amended, the DGCL § 145 (c), which previously did not specify which corporate officers are entitled to compulsory compensation, now provides (in the new DGCL § 145 (c) (1)) that corporate officers entitled Compulsory compensation only includes the President, CEO, COO, CFO, CFO, Controller, Treasurer or CFO, persons otherwise identified in its public records as one of its highest paid officers and persons who have consented to be identified as an “officer” by written agreement. However, as amended, the new § 145 (c) (2) of the DGCL allows companies to compensate other corporate officers in a manner compatible with the mandatory compensation provisions of the DGCL § 145 (c) (1).
- Provide that corporations cannot retroactively limit an exculpatory clause unless the certificate of incorporation expressly authorizes it to do so. As permitted by DGCL § 102 (b) (7), Delaware corporations generally include an exculpatory clause in their certificates of incorporation limiting or eliminating the pecuniary liability of a director for certain breaches of fiduciary duty as a administrator. The modifications to DGCL § 102 (b) (7) codify common practice by providing that companies cannot modify or repeal such a clause and apply that change retroactively unless the modified or repealed provision explicitly provides that the changes future could have a retroactive effect.
Electronic fulfillment and delivery
In 2019, the Delaware General Assembly adopted DGCL § 116, which provides, among other things, a non-exclusive safe harbor for the execution and delivery of documents under the DGCL. The 2020 amendments clarify and expand the 2019 amendments to further enable and facilitate the use of electronic means for the execution and delivery of documents, in particular by eliminating the exceptions for consents of directors, shareholders and founders previously included in DGCL § 116 and requiring any limitation on the ability to execute or electronically issue documents under the DGCL to be expressly included in the certificate of incorporation or, in some cases, the articles of association.
Electronic notices to shareholders
The 2019 changes to the DGCL removed the requirement that Delaware corporations receive shareholder consent to notify shareholders by email. The 2020 Amendments correct a potential ambiguity in the 2020 Amendments to remove any doubt that shareholders can receive notice of the company by email without any prior consent, as long as those emails include a proper caption. visible indicating that the communication is an important notice about the company.
Mergers of holding companies
Under DGCL § 251 (g), a Delaware corporation can reorganize into a holding company structure without shareholder approval as long as it meets certain requirements. Prior to the 2020 changes, DGCL § 251 (g) required that the organizational documents of the surviving entity contain provisions identical to the certificate of incorporation of the parent company before the merger. The amendments eliminate this requirement but do not eliminate the requirement that the surviving branch’s organizational documents contain provisions requiring the approval of the shareholders of the holding company for any act or transaction of the surviving branch which, s ‘it is taken by the company immediately before its reorganization into a holding structure, would have required shareholder approval.
Key Considerations for Delaware Corporate Boards
In general, the changes provide additional flexibility for Delaware corporations and their boards of directors to deal with issues arising during the continuing COVID-19 pandemic and otherwise with respect to taking and documenting company actions. . Boards should continue to carefully monitor the impact of the current COVID-19 pandemic and, where necessary, use the additional flexibility provided by the 2020 changes to the DGCL with respect to the adoption of regulations. emergency, postponement or change of location of shareholders’ meetings. and the deferral of the payment of dividends.
Outside of the COVID-19 emergency, in light of the upcoming effectiveness of changes to mandatory executive compensation provisions, the board of directors of every Delaware corporation should consider a comprehensive review of corporate protections. ‘indemnify the company for its officers (and directors) and make any adjustments that may be desirable. In addition, since most (if not all) Delaware corporations will benefit from the increased use of electronic means to execute and transmit documents and inform shareholders, Delaware corporations should review their existing organizational documents and policies in order to ” eliminate any provision that might inappropriately restrict such flexibility.