On June 30, 2023, the Delaware House of Representatives adopted amendments to the Delaware General Corporation Law (DGCL) that, among other things, facilitate stock splits, the ratification of defective corporate acts, and the sale of pledged assets. The Delaware Senate approved the amendments on May 16, 2023. If signed into law by Delaware's governor, the amendments, subject to limited exceptions, will be effective August 1, 2023. Below is a summary of the key provisions:
Stock Splits and Changes in the Number of Authorized Shares (DGCL Section 242(d))
- Forward Stock Splits – The amendments eliminate the stockholder approval requirement for amendments to a Delaware corporation's certificate of incorporation to affect forward stock splits (i.e., subdivisions of issued shares) and related increases in authorized shares (up to an amount proportionate to the forward stock split), provided that the corporation has only one class of stock outstanding and such class is not divided into series.
- Reverse Stock Splits and Changes in the Number of Authorized Shares – The amendments reduce the stockholder vote required to amend the certificate of incorporation to affect a reverse stock split, or to increase or decrease the number of authorized shares of a class (other than in connection with forward stock splits) from a majority of the outstanding shares to a majority of the votes cast. The reduced vote will apply only if the class of stock is listed on a national securities exchange and would continue to meet the listing requirements of the exchange immediately after giving effect to such amendment.
The amendments provide that a corporation's certificate of incorporation may "opt in" to the prior stockholder vote requirements for the above-referenced matters by expressly stating that the stockholder vote otherwise required under DCCL Section 242(b) is required to adopt any amendment to the certificate of incorporation specified in DCCL Section 242(d) or by expressly "opting out" of the provisions of DCCL Section 242(d).
Ratification of Defective Corporate Acts (DGCL Section 204)
The amendments simplify and streamline the procedures needed to ratify a defective corporate act that is void or voidable because of failure of authorization (e.g., stock issuances). Under the amended section, a corporation would be required to file a certificate of validation only in circumstances where any section of the DGCL would have required the filing of a certificate in connection with the corporate act and such certificate either was never filed or was filed but is required to be changed to give effect to the ratification. The amendments also simplify the information required to be included in the certificate of validation.
Sales of Mortgaged or Pledged Assets, Including to a Non-Lender Third Party, Without Stockholder Approval (DGCL Section 272)
The amendments expressly provide that selling, leasing, or exchanging all or substantially all of a corporation's assets that secure a mortgage or pledge ("Collateral Assets") does not require stockholder approval if the secured party can sell them without the corporation's consent under the law governing the mortgage or pledge or other applicable law. The amendments also permit a secured party and a corporation, with the approval of its board of directors, to agree to an alternative transaction relating to the Collateral Assets (e.g., a strict foreclosure or sale to a third party) without obtaining a vote of stockholders, as long as the value of the Collateral Assets sold, leased or exchanged is less than or equal to the amount of the liability or obligation being reduced or eliminated as a result of the transaction (the "Asset Value Test"). Pursuant to the amendments, a completed alternative transaction cannot be invalidated for failing the Asset Value Test if the transferee of the assets provided value therefor and acted in good faith. However, an alternative transaction may be enjoined prior to consummation, and a director or officer of the corporation remains subject to monetary liability for any claim based upon a violation of such director's or officer's fiduciary duty.
Transfers, Continuances, and Domestications to Non-U.S. Entities, and Stockholders' Appraisal Rights (DGCL Sections 390 and 262)
The amendments reduce the unanimous stockholder vote required for a domestication, transfer, or continuance of a Delaware corporation in a non-U.S. jurisdiction. Such actions may now be approved by a majority of the outstanding shares of stock entitled to vote on such transfer, domestication, or continuance. If a corporation is transferring into, domesticating, or continuing as a partnership with one or more general partners, the transfer, domestication, or continuance requires the approval of each stockholder who is to become a general partner of the partnership.
In connection with the change to the voting standard, the amendments also provide that stockholders of a Delaware corporation are now entitled to seek a judicial appraisal of the fair value of their stock in connection with a transfer, continuance, or domestication of such Delaware corporation to a non-U.S. entity, except where appraisal rights are denied under the "market out" exception set forth in Section 262(b) of the DGCL.
The amendments also made clarifying changes to the provisions of the DGCL governing (i) the creation and issuance of stock (including treasury shares) and rights and options to purchase stock (DGCL Sections 152, 153, 157, and 160), (ii) notice of actions taken by less than unanimous stockholder consent without a meeting (DGCL Section 228), (iii) actions taken pursuant to a plan of conversion (DGCL Sections 265, 266, and 390), and (iv) the authority of a corporation continuing or resulting from a conversion or domestication to issue bonds, other obligations, and securities (DGCL Section 260).
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Please contact the authors or your regular Venable contact if you would like to discuss the amendments or the implications of effecting a corporate act facilitated by the amendments.