Delaware Implements New Amendments to Delaware General Corporations Law

Effective August 1, 2022, the Delaware General Corporation Law (the DGCL) – the statutory code that governs Delaware corporations – was amended to make several important changes. Among other things, the amendments will allow Delaware corporations to adopt charter provisions to exempt officers from personal liability in certain contexts, and the amendments will also give corporations greater flexibility in delegating powers to officers and others to grant stock options and other rights to acquire stock. . These changes are in addition to legislative changes passed earlier this year allowing Delaware corporations to provide their own D&D insurance through a wholly owned subsidiary. The new changes are described below.

Exoneration of officers

In recent years, shareholder plaintiffs have increasingly named executives as defendants in fiduciary duty litigation. This is partly because directors have historically lacked some of the protections enjoyed by directors, particularly since the DGCL had long provided that a company’s charter could exonerate directors from personal liability in the event of breach of the fiduciary duty of care, but did not allow such exculpation for executives. Effective August 1, Delaware corporations can now enact charter provisions that will, in effect, allow directors to be exonerated from breaches of the fiduciary duty of care in certain contexts. Notably, under the amendments, executives can now be exonerated for direct shareholder claims, which typically arise in the context of mergers and acquisitions. The new amendments will allow not permit such exculpation of directors in derivative claims brought by or on behalf of the company. The statute further provides that officers who may be exonerated in this manner are only those officers who, at the time of an act or omission for which liability is asserted, are deemed to have consented to service of process. to the registered agent of the company as provided by 10 Of the. vs. § 3114(b) (generally, officers, officers identified in the company’s SEC filings as one of the company’s highest-paid officers at the time of the alleged wrongdoing, and officers who have agreed in writing to appoint an officer for this purpose). Despite these limitations, the additional protection available under the Amendments should be helpful to executives and mitigate certain types of shareholder disputes.

To adopt the new officer protection, newly formed corporations may include a charter provision permitting such protection. Existing corporations will need to amend their charter, which will usually require board and shareholder approval.

Delegation of power to grant stock options and other rights

In recent years, the DGCL has authorized boards of directors and board committees to delegate limited powers to executives to grant stock options or other rights to acquire stock, but in within certain parameters defined by the board or a committee of the board. In particular, so long as the board or a committee of the board sets a numerical “ceiling” within which such awards may be made and approves the terms of the awards, officers may select other officers and employees who will receive such awards. and the size of their grants. Although the DGCL has been expanded in recent years to grant managers or other delegates a fairly broad power to issue shares, these narrower limitations have remained in place with respect to stock options and other rights. to acquire shares.

The new DGCL amendments harmonize the legal provisions relating to the issuance of shares and the granting of options and other rights. Under the amendments, boards of directors and board committees can now authorize officers and other officers to have expanded powers in the context of granting options and rights, including to select a wider universe of beneficiaries. broad as officers and employees and to change the terms of the grants. However, it is important to note that this delegation to managers or other persons must define certain parameters, in particular: 1) the maximum number of shares, rights or options (including the maximum number of shares that may be issued under such rights or options) which may be granted, 2) the period during which the issue of shares, rights or options (including shares issuable on exercise under such rights or options) may take place, and 3) the minimum amount of consideration to be received for the issuance of shares, rights or options (and the shares issuable upon exercise under such rights or options). The minimum amount of consideration can always be based on a formula or other “verifiable facts” such as the average trading price on a specific date or dates.

The legislative changes in this context should provide welcome flexibility to companies, particularly in designing or redesigning their stock award programs. That said, it is important to continue to be mindful of technical requirements in the context of stock issuance and stock allotment because, according to a long line of Delaware cases, foot faults in this context may invalidate share awards.

Other statutory changes

While the above two sets of changes will have the most impact for many companies, the changes also introduce several other notable changes:

  • A company’s stock list will no longer need to be made available for review at a shareholders’ meeting. The stock list shall always be available for inspection for a period of 10 days prior to the meeting. This change may be a reaction to the increasing and continued use of virtual meetings and the fact that making the list available for inspection at such a meeting can be a logistical challenge. The DGCL has also been amended to allow companies to include provisions in their notices of shareholder meetings to allow adjournments in the event of a technical breakdown during virtual meetings. Companies should keep these changes in mind when considering updating their bylaws, which often address meeting mechanisms.
  • The valuation law – Article 262 of the DGCL, which allows shareholders to seek the “fair value” of their shares following a merger – has been amended to allow a beneficial owner of shares to require an assessment directly instead of relying on the registry holder. Certain other procedural aspects of section 262 have also been amended or clarified. For example, the expenses of a shareholder or beneficial owner who participated in a valuation proceeding may be charged pro rata to the value of all shares qualifying for a valuation award, and an unconditional dismissal in under amended section 262(k) terminates the Delaware court of chancery jurisdiction over a person who has requested an assessment under section 262. In addition, amended section 262(d) provides that instead of including in an appraisal rights notice a copy of Section 262, a company may instead include in the notice information directing appraisers to an electronic resource accessible at public to access Section 262 (and Section 114, if applicable), including the website operated on behalf of the State of Delaware on which such laws are posted. The ability to provide a link to Section 262, rather than attaching a copy of the statute, should help avoid the footsteps that have manifested themselves in case law when a company attaches an outdated or incomplete copy of the statute. Section 262. These changes to the Valuation Section will only be effective with respect to mergers effected under agreements adopted or entered into on or after August 1, 2022.
  • The shareholder approval required to convert a Delaware corporation into a foreign corporation or any other entity has been lowered from unanimous to majority approval. If the corporation converts into a partnership with one or more general partners, each shareholder who will become a general partner of that partnership must also approve the conversion. Lowering this approval threshold will make it easier for Delaware corporations to convert, if they choose, to a different form. Prior to this amendment, the unanimity requirement included non-voting shares and the new majority voting requirement would only include voting shares. Since shareholder approval of a conversion no longer has to be unanimous, non-consenting shareholders will now have valuation rights in connection with a conversion. These amendments are also effective only with respect to conversions approved by the Board of Directors on or after August 1, 2022. a separate written agreement between such company and one or more of its shareholders limiting or conditioning mergers shall be deemed to apply also to conversions, unless the charter or other agreement expressly provides otherwise. That said, we would expect companies and investors to implement changes in shareholder agreements and protection provisions to deal with these changes in the context of conversion.
  • The DGCL Amendments also make various adjustments to facilitate the process of incorporating non-US entities into Delaware.

If you have any questions about these changes, please contact Amy Simmerman, Ryan Greccher, Adrian Broderick, James Griffin-Stanco, or any other member of the Delaware office or corporate department of the company.

Luisa D. Fuller