On April 17, the Corporation Law Section of the Delaware State Bar Association proposed amending the Delaware General Corporation Law, 8 Del. C. §§ 1-101, et seq. (the DGCL). If the proposed legislation is enacted, the amendments would make several significant changes to the DGCL. The proposed legislation seeks to: (i) clarify some of the requirements relative to the need for a vote in a two-step merger involving a front-end tender or exchange offer under Section 251(h); (ii) authorize current and future directors and stockholders to “escrow” written consents to become effective at a future date; (iii) make it easier for the board to effect certain amendments to the certificate of incorporation and satisfy the accompanying notice requirements; (iv) authorize a corporation to deliver voting trusts to a corporation’s principal place of business instead of the corporation’s registered office; and (v) provide a means for corporate officers to take actions required to be taken by the incorporator where the incorporator is unavailable.
Eliminating the Stockholder Vote for Approval of a Second-Step Merger – Section 251(h)
The 2013 amendments to the DGCL added Section 251(h) to Delaware’s merger statutes, which authorized corporations to include a provision in merger agreements eliminating the requirement of a stockholder vote for approval of a second-step merger following a public tender offer or exchange offer. Since its adoption, questions have arose regarding its interpretation. As discussed below, the 2014 proposed amendments seek to address some of those questions.
Under the current version of Section 251(h), as established by the 2013 amendments, a board may eliminate the stockholder vote on a second-step merger if: (i) the merger agreement contains a provision expressly requiring the merger to be effected under Section 251(h); (ii) the first-step tender or exchange offer is for any and all of the outstanding stock of the target corporation and on the terms provided by the merger agreement; (iii) upon consummation of the tender or exchange offer, the acquiring corporation owns the amount of stock of the target corporation that would be otherwise necessary to approve the second-step merger; (iv) no party to the merger agreement, at the time approved by the board, is an “interested stockholder,” as defined in Section 203(c) of the DGCL; (v) the acquiring and target corporation merge pursuant to the agreement; and (vi) the holders of target shares that are not cancelled are paid identical consideration, in kind and amount, that was paid to the stockholders who tendered or exchanged their shares in the first step of the merger.
The 2014 proposed amendments to the DGCL would eliminate one of the requirements and modify four of the remaining five requirements. The first requirement of current Section 251(h) would be amended to clarify the section’s applicability to merger agreements that permit or require the merger to be effectuated under Section 251(h), rather than applying to only those merger agreements that require the merger to be effectuated under that section. This change expressly authorizes parties to provide in the merger agreement that a merger under Section 251(h) may be abandoned and consummated under a different statutory provision. This amendment would also clarify that the requirement to consummate the merger as soon as practicable following the consummation of the offer only applies if the merger is actually effected under Section 251(h).
The second requirement of Section 251(h) would be amended to clarify that, rather than being required to make a tender offer for all the outstanding stock of the target corporation, the acquiror may exclude from its offer all stock owned by: the target corporation; the acquiror; any person directly or indirectly owning all of the outstanding stock of the acquiror; and any direct or indirect wholly-owned subsidiary of any of the foregoing.
The 2014 proposed amendments would also clarify Section 251(h)’s third requirement regarding the timing of an acquiror’s post-merger ownership of a target’s stock. As currently structured, the post-merger ownership requirement mandates that, upon consummation of the merger, the acquiring corporation must own the amount of target corporation stock that would be otherwise necessary to approve the second-step merger. If the 2014 amendments were adopted, an acquiror would satisfy this requirement and count target shares for the purposes of determining whether the acquiror has sufficient shares necessary to consummate the second step merger by including both (i) the target corporation stock owned by the acquiring corporation and (ii) all the stock irrevocably tendered and “received” by the depository prior to expiration of the tender or exchange offer. The 2014 amendments would also specify that stock is “received” by the depository when stock certificates have been physically received, or for uncertificated stock, when such stock is transferred into the depository’s account or an agent’s message has been received by the depository. Shares tendered by guaranteed delivery without actual delivery would not qualify.
Notably, the 2014 proposed amendments would completely eliminate the fourth requirement of Section 251(h), which prohibits the section’s use where a party to the merger agreement is an “interested stockholder.” Because the definition of “interested stockholder,” as set forth in Section 203(c), encompasses any person who “has the right to acquire” 15 percent or more of the target’s voting stock, an acquiror may be prohibited from entering into tender, voting, and rollover agreements with stockholders that own more than 15 percent of the corporation’s voting stock, and such stockholders could be precluded from rolling over their shares as part of the transaction. Removing this requirement would, among other things, remove any question as to whether an acquiror that is party to a tender, voting, or rollover agreement is an “interested stockholder,” rendering it unable to utilize Section 251(h).
Section 251(h)’s sixth requirement would be amended to specify that stock that is the “subject of and not irrevocably accepted for purchase or exchange in the offer” is what is required to be converted into the same consideration paid for shares of the same class or series irrevocably accepted for purchase or exchange in the offer.
The 2014 amendments would not affect the fiduciary duties of directors in connection with mergers effected pursuant to Section 251(h). If enacted, the amendments will apply to merger agreements signed on or after August 1, 2014.
Escrowing Director and Stockholder Consents – Sections 141(f) and 228(c)
In order to provide certainty with respect to actions that need to be signed in advance of closing and other similar situations, the proposed amendments to Sections 141(f) and 228(c) of the DGCL would clarify that any person, whether or not then a director or stockholder, may execute written consents to be held in escrow, or some similar arrangement, and become effective at a future date, including upon the occurrence of an event. The escrowed consent will be deemed to have been granted on the effective date as long as the effective date is within 60 days of the consent being placed in escrow and the person granting such consent is a director or stockholder as of the effective date and did not, prior to the effective date, revoke the consent. Any consent that is “escrowed” may be revoked prior to the effective date.
The proposed amendments would, among other things, enable acquisition financing transactions to be structured such that the person or persons who are to become directors or stockholders may “escrow” written consents authorizing the financing transactions, and the consents will become effective upon the signing person’s or persons’ election to the board or becoming a stockholder concurrently with the closing of the transaction.
Amendments to the Certificate of Incorporation – Section 242
The proposed amendments would make two substantive changes to Section 242 of the DGCL, which governs amendments to a corporation’s certificate of incorporation. First, the proposed amendments would authorize a corporation to amend its certificate of incorporation to change the corporation’s name or delete historical provisions relating to the corporation’s incorporator, initial board of directors, or initial subscribers for shares without submitting the amendment for stockholder approval. Second, the proposed amendments would eliminate the requirement of including a copy of the amendment or summary thereof in the notice of the meeting to vote on the amendment, but only if the notice is a notice of Internet availability of proxy materials under the Securities Exchange Act of 1934.
Filing Voting Trusts – Section 218
Section 218 of the DGCL currently requires that a voting trust agreement, and any amendment thereto, be filed with the corporation’s registered office in the State of Delaware. The proposed amendments to Section 218 would permit voting trust agreements, and any amendment thereto, to be delivered to the corporation’s principal place of business instead of its registered office.
Incorporator Unavailability – Section 103(a)(1) and Proposed Section 108(d)
Section 103(a)(1) currently provides that if the incorporator is unavailable “by reason of death, incapacity, unknown address, or refusal or neglect to act,” a person for whom the incorporator was acting may, subject to certain conditions, execute any such certificate with the same effect as if it were executed by the incorporator.
The proposed amendments to Section 103(a)(1) would eliminate all limitations pertaining to the reason for the incorporator’s unavailability. In addition, the proposed amendments would add a new Section 108(d), which would provide that if an incorporator is not available to act, any person for whom the incorporator was acting may, subject to certain conditions, take any action that the incorporator would have been entitled to take under Sections 107 or 108 of the DGCL.
The amendments would become effective on August 1, 2014, except those relating to Section 251(h), which would apply only to merger agreements signed on or after August 1, 2014.