On July 15, 2014, Delaware Governor Jack Markell signed Delaware House Bill No. 329, which makes a number of noteworthy changes to the Delaware General Corporation Law. The 2014 amendments address: (1) mergers under DGCL Section 251(h), the provision added in 2013 permitting a merger without a stockholder vote following certain tender or exchange offers; (2) director and stockholder actions by written consent with a future effective date; (3) certain amendments to the certificate of incorporation without stockholder approval; and (4) unavailable incorporators. The amendments will go into effect on August 1, 2014, with the changes to Section 251(h) mergers only applying to merger agreements entered into on or after August 1, 2014.
A second bill introduced to the Delaware legislature, Senate Bill No. 236, would have amended the DGCL, in light of the Delaware Supreme Court’s May 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, to prohibit bylaws shifting fees to unsuccessful stockholder plaintiffs in corporate litigation. The Delaware Senate has adopted a resolution not to take further action on that bill until January 2015.
Mergers under DGCL Section 251(h). In 2013, the Delaware legislature adopted DGCL Section 251(h), which allows public corporations to include a provision in a merger agreement that removes the need for a stockholder vote to approve a second-step merger following a public tender or exchange offer if, following the tender or exchange offer, the acquirer owns at least such percentage of stock as would otherwise be necessary to approve the merger and certain other conditions are met. As noted in the synopsis to House Bill No. 329, the 2014 “amendments do not change the fiduciary duties of directors in connection with mergers effected pursuant to Section 251(h) or the level of judicial scrutiny that will apply to the decision to enter into such a merger agreement, each of which will be determined based on the common law of fiduciary duty.” The 2014 amendments do, however, modify and clarify the requirements for use of Section 251(h) as follows:
The amendments make clear that the merger agreement may “permit” or “require” the merger to occur through Section 251(h). The change allows parties the option of abandoning the Section 251(h) merger and pursuing a merger under a different statutory provision. The Section 251(h) requirement to effect the merger as soon as practicable following the consummation of the offer would only apply to a merger actually effected under Section 251(h).
The amendments clarify that the tender or exchange offer, which must be for “any or all of the outstanding stock” of the target, may exclude certain target corporation stock. Specifically, the offer may exclude all stock owned by the target corporation, the acquirer, any person that directly or indirectly owns all outstanding stock of the acquirer, and any direct or indirect wholly-owned subsidiary of any of the foregoing.
The amendments remove the prohibition on using Section 251(h) when one of the merger parties is an “interested stockholder” under DGCL Section 203. Because DGCL Section 203 defines an “interested stockholder” to include any person who “has the right to acquire” 15 percent or more of the target’s voting stock, an acquirer may be disabled from using Section 251(h) if it enters into tender and support, voting or rollover agreements with stockholders that own 15 percent or more of the target’s voting stock. The amendment is intended to eliminate uncertainty regarding the use of tender and support, voting and rollover agreements in Section 251(h) transactions.
The amendments clarify the requirement that the acquiring corporation own the amount of target corporation stock otherwise necessary to approve a second-step merger. The 2014 amendments make clear that the acquiring corporation may count towards the required target ownership stock already owned by the acquiring corporation and all stock irrevocably accepted for purchase pursuant to the offer and received by the depository before the offer’s expiration.
Actions by Written Consent with Future Effective Dates (i.e., Escrowing Consents). The 2014 changes amend DGCL Sections 141(f) and 228(c) to expressly permit director and stockholder consents to corporate actions to take effect at a specified future time.
The Section 141(f) amendment allows a person (whether or not a director) to execute a consent that will be effective at a future time, including a time determined by the occurrence of an event, no later than 60 days after the person gives the consent. The consent will be deemed effective at that future time if the person is then a director and did not revoke the consent. Under the new provision, for example, persons who are to become the directors of a surviving corporation in a debt-financed acquisition transaction may authorize the transaction and related financing through consents to be held in escrow. The consents would become effective upon the person’s election or appointment to the board of the surviving corporation at the transaction’s closing.
Similarly, the Section 228(c) amendment clarifies that any person may execute a stockholder consent and provide that it is to be effective at a future time no later than 60 days after the person gives the consent. The consent will be deemed effective on that future date if the consenting person is then a stockholder and did not revoke the consent.
Amendments to Certificates of Incorporation without Stockholder Approval. The 2014 amendments modify Section 242 to allow corporations to amend certain provisions in the certificate of incorporation without stockholder approval. Under the amendments, a corporation may, without stockholder approval, change its name or delete provisions of the original certificate of incorporation that name the incorporators, the initial board of directors or original subscribers of shares, or provisions in certificate amendments necessary to effect a previously effected change, exchange, reclassification, subdivision, combination or cancellation of stock. The amendments to Section 242 also make a change to the rule requiring that notice of a meeting where the stockholders will vote on a proposed certificate amendment include a copy or summary of the amendment. The copy or summary of the amendment may in the future be omitted from the notice, but only when the notice constitutes notice of the internet availability of proxy materials under the Securities Exchange Act of 1934.
Incorporator Unavailability. DGCL Section 103(a)(1) provided that if an incorporator becomes unavailable for certain reasons, such as death or incapacity, a person for whom the incorporator was acting may instead execute documents. The 2014 amendments eliminate the Section 103 limitations on reasons for an incorporator’s unavailability. The amendments also modify DGCL Section 108 to provide that, if an incorporator is unavailable to act, any person for whom the incorporator was acting may take any action the incorporator was entitled to take under DGCL Section 107 or 108.
Proposed Legislation to Prohibit Fee-Shifting Provisions. On May 8, 2014, in ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court held that fee-shifting provisions in a Delaware non-stock corporation’s bylaws may be valid and enforceable. The bylaw at issue in the case shifted litigation costs to member plaintiffs who, in intra-corporate litigation, did “not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought.”
In response to the ATP Tour case, Delaware legislators proposed Senate Bill No. 236 on June 3, 2014. The legislation would prohibit bylaw or certificate of incorporation provisions of stock corporations that shift litigation costs to stockholder plaintiffs who bring unsuccessful intra-corporate lawsuits.
The U.S. Chamber Institute for Legal Reform, an arm of the U.S. Chamber of Commerce, vigorously opposed the bill, arguing that it protects frivolous lawsuits and the plaintiffs’ bar to the detriment of corporations and stockholders.
In response to the vocal opposition, the Delaware Senate adopted a resolution to continue examining the issue. The Delaware legislature will not take any further action on the bill until it reconvenes in January 2015.
Summer Associate Sarah Claypool provided significant assistance in the creation of this article.