On July 17, 2023, Delaware Governor John Carney signed into law the 2023 amendments to the General Corporation Law of the State of Delaware (the “DGCL”), the Delaware Limited Liability Company Act (the “LLC Act”), the Delaware Revised Uniform Limited Partnership Act (the “LP Act”), and the Delaware Revised Uniform Partnership Act (the “Partnership Act”). The LLC Act, the LP Act and the Partnership Act are sometimes referred to as the “Alternative Entity Statutes.”
There were no amendments to the Delaware Statutory Trust Act.
Each of the amendments will become effective on August 1, 2023. Set forth below is a brief summary of the most significant changes contemplated by these amendments.
What You Need to Know:
Amongst other changes, these amendments:
- Simplify the process for ratifying defective corporate acts;
- Eliminate the need for stockholder approval for certain forward and reverse stock splits; and
- Establish an insolvency exception for sales of corporate assets.
General Corporation Law
Ratification of Defective Corporate Acts
The amendments to the DGCL simplify the procedure for ratifying defective corporate acts under Section 204. The current ratification process has been criticized for being needlessly cumbersome and complex.
Specifically, under the new Section 204, corporations are no longer required to file a certificate of validation with the Secretary of State for the ratification of all defective acts. Instead, the filing of a certificate of validation is now only required if another section of the DGCL requires a certificate to be filed for that act and that certificate was either not filed or must be amended.
The amendments also reduce the level of detail required to be included in the certificate of validation, further streamlining the ratification process.
The amendments clarify a number of the technical procedural requirements, including the necessary stockholder vote for the ratification of a defective act. Under the new amendments, all holders of valid stock who are entitled to vote at the time the board of directors adopts the resolution ratifying the defective act are likewise entitled to vote on the ratification.
Notice to Stockholders
Next, the 2023 amendments also provide clarity on which stockholders are entitled to receive notice of an action taken by the consent of stockholders in lieu of a meeting. Under amended Section 228(e), notice must be given to stockholders who:
- were stockholders as of the record date of the action taken by consent;
- did not consent to the action; and
- would have been entitled to receive notice of the meeting to vote on the action, had one been held, and the record date for the notice was the same as the record date for the action taken by consent.
The amendments also provide that a notice that constitutes notice of Internet availability of proxy materials under the federal Securities Exchange Act will be sufficient for notice purposes under Section 228(e).
Forward and Reverse Stock Splits
The DGCL has long provided that certain amendments to a corporation's certificate of incorporation may be taken without stockholder approval. New Section 242(d) creates additional categories of amendments where no stockholder approval (or a lower stockholder approval threshold) is required.
Pursuant to Section 242(d)(1), no stockholder vote will be required for any forward stock split, so long as the class of stock is the only class of such corporation's capital stock, and such class is not divided into series.
Section 242(d)(2) adjusts the stockholder voting requirements for reverse stock splits or increases or decreases the number of authorized shares of a class (other than forward stock splits). The stockholder vote required is a majority of the votes cast rather than a majority of shares outstanding, but only if class of stock is listed on a national securities exchange and the corporation would continue to meet the listing requirement relating to the minimum number of holders.
Importantly, Section 242(d) still allows a corporation's certificate of incorporation to adopt a majority of shares outstanding vote for forward and reverse stock splits. However, a corporation must affirmatively "opt out" of the provisions of Section 242(d) in its certificate of incorporation.
Conversions
Several amendments were made to the DGCL relating to conversions and domestications of corporations.
The amendments to Section 260 align the powers of a converted corporation following a conversion or domestication with those of a surviving or resulting corporation following a merger or consolidation.
Section 265 was amended to permit corporate actions set forth in a plan of conversion to be taken so long as approved by the converting entity. Any actions approved by the converting entity will be deemed authorized, adopted and approved by the converted corporation.
Section 266 was amended to clarify that a corporation may adopt a plan of conversion at the time of the adoption of a resolution approving the conversion, and sets forth what may be included in such plan of conversion.
Appraisal Rights
The amendments give appraisal rights to stockholders in connection with a domestication, transfer or continuance of a Delaware corporation to a non-U.S. jurisdiction under Section 390 of the DGCL. However, a domestication, transfer or continuance will not give rise to appraisal rights where the current "market out" exception under Section 262(b)(2) is applicable.
The Insolvency Exception for Sales of Assets
Lastly, the 2023 amendments establish a narrow "insolvency exception" to Section 271's general requirement for stockholder approval of a sale of all or substantially all of a corporation's assets.
In 2022, the Delaware Supreme Court settled the long-debated issue of whether there is an exception to Section 271's stockholder approval requirement for sales of all or substantially all of a corporation's assets. In Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A3d 323 (Del. 2022), the Delaware Supreme Court affirmatively held that no such insolvency exception exists under Delaware law. In response to this decision, Section 272(b) has been amended to allow a corporation to sell, lease or exchange property or assets subject to mortgages or pledges without stockholder approval if the secured party is legally permitted to sell, lease, or exchange the property or asset without the corporation's consent.
For the exception to apply either 1) the secured party must exercise its right to sell, lease, or exchange the property or asset, or 2) the board of directors must enter into an alternative transaction for the sale, lease, or exchange of the property or assets, which eliminates the liabilities and obligations secured by the property or assets. Importantly, for the alternative transaction to be valid, the value of the property or assets must not exceed the amount of liabilities or obligations reduced and the transaction must not be contrary to the law governing the secured party's mortgage or pledge.
Finally, the exception applies even if the corporation's certificate of incorporation expressly requires stockholder approval for sales of all or substantially all of the corporation's assets. The exception will not apply only if the certificate of incorporation explicitly contemplates the sale of secured property or assets contemplated in Section 272(b).
Alternative Entity Statutes
Merger & Amendment of Governing Documents
The Alternative Entity Statutes were each amended to clarify that an amendment to an operating agreement or partnership agreement made pursuant to the terms of an agreement of merger or consolidation or plan of merger applies only to the surviving or resulting limited liability company or partnership, as applicable, and not to a constituent limited liability company or partnership that is not a surviving entity from the merger.
Revocation of Dissolution/Termination of Series
The LLC Act and LP Act were each amended to permit the revocation of termination of a protected series or the revocation of dissolution of a registered series prior to filing a certificate of cancellation with the Delaware Secretary of State, unless the LLC's operating agreement or LP's partnership agreement prohibits such revocation. These amendments match language already in the LLC Act and LP Act to permit such a revocation for limited liability companies and limited partnerships, respectively, but which previously did not address protected or registered series.
Certificate of Division
The LLC Act and LP Act were each amended to require, for a period of six years following the effective date of a division of an LLC or LP, the prompt filing of a certificate of amendment to the certificate of division filed with the Delaware Secretary of State to reflect a change in: (a) the name or business address of the division contact or (b) the address where the plan of division is kept on file.
Irrevocability of Subscription
The Alternative Entity Statutes were each amended to clarify that a subscription for a limited liability company or partnership interest may be irrevocable if the subscription states it is irrevocable.
