Effective as of August 1, 2013, the Delaware legislature adopted several significant amendments to the Delaware General Corporation Law (DGCL).
No Stockholder Vote Required in Certain Second-Step Mergers
Prior to the adoption of the amendment to Section 251 of the DGCL, following the consummation of a tender or exchange offer, an acquirer was required to obtain approval of a second-step merger from the target corporation’s stockholders unless the acquirer owned at least 90% of each class of the target corporation’s voting stock. That was the case whether such ownership was acquired directly in the first-step tender or exchange offer or through the use of a “top-up option” following the offer. That meant that, if the target corporation was a public company and the acquirer failed to achieve the 90% threshold, the target corporation would need to prepare and file with the Securities and Exchange Commission a proxy or information statement with respect to the stockholder vote (which proxy or information statement would have been subject to potential SEC review). As a result, there could have been a meaningful delay between the closing of the tender or exchange offer and the completion of the second-step merger, which could adversely impact debt financing for the transaction.
Under new subsection (h) of Section 251, unless the target corporation’s certificate of incorporation expressly requires otherwise, a vote of the target corporation’s stockholders would not be required to authorize a second-step merger following a tender or exchange offer if: (1) the merger agreement expressly provides that the merger will be governed by Section 251(h) and that the second-step merger will be consummated as soon as practicable following the offer; (2) the acquirer consummates the offer for any and all of the outstanding stock of the target corporation that would otherwise be entitled to vote on the adoption of the merger agreement; (3) following the consummation of the offer, the acquirer owns at least the percentage of the stock of the target corporation that otherwise would be required to adopt the merger agreement; (4) at the time the target corporation’s board of directors approves the merger agreement, no other party to the merger agreement is an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target corporation; (5) the acquirer merges with the target corporation pursuant to the merger agreement; and (6) the outstanding shares of the target corporation not canceled in the merger are converted into the right to receive the same amount and kind of consideration paid for shares in the offer.
Section 251(h) applies only to target corporations with shares listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the merger agreement.
Pursuant to a parallel amendment to Section 262 of the DGCL, appraisal rights are available to the target corporation’s stockholders in connection with a second-step merger effected pursuant to Section 251(h), unless all of the stock of the target corporation is owned by the acquirer immediately prior to the merger.
Ratification of Defective Corporate Acts
Under new Section 204 of the DGCL, no corporate act or purported stock issuance would be void or voidable solely on the basis of a failure of authorization, so long as the act is ratified in accordance with the procedures outlined in new Section 204 or validated by the Delaware Court of Chancery in a proceeding under new Section 205.
In order to ratify a defective corporate act, the board of directors of the corporation is required to adopt a resolution stating (1) the defective corporate act to be ratified, (2) the time of the defective corporate act, (3) if such defective corporate act involved the issuance of shares of stock, the number and type of shares of stock issued and the date or dates upon which such shares were purported to have been issued, (4) the nature of the failure of authorization in respect of the defective corporate act to be ratified and (5) that the board of directors approves the ratification of the defective corporate act. The corporation’s stockholders are also required to adopt the resolutions adopted by the board of directors, unless (1) stockholder approval was not required at the time of the board’s adoption of such resolutions or would not have been required at the time of the defective act and (2) the defective act did not result from a failure to comply with Section 203 of the DGCL (the business combinations statute).
New Section 205 grants the Delaware Court of Chancery exclusive jurisdiction to determine the validity of any defective corporate acts ratified pursuant to Section 204. Under Section 205, the Delaware Court of Chancery has broad powers to determine the validity of any defective corporate act, including the power to modify or waive any provision of Section 204.
Formula for Stock Issuance Consideration
Section 152 of the DGCL was amended to clarify that a board of directors may determine the price at which the corporation’s stock is issued by approving a formula by which such price is determined.
Public Benefit Corporations
New Sections 361 through 368 of the DGCL authorize the formation of for-profit corporations, known as “public benefit corporations,” that are formed for the purpose of promoting public benefits. A “public benefit” is broadly defined as a “positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests.” The board of directors of a public benefit corporation is required to balance the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in the public benefit corporation’s certificate of incorporation when it manages the corporation’s business and affairs. The stockholders of a public benefit corporation owning a specified threshold of the corporation’s outstanding shares are permitted to bring a derivative suit asserting that the board of directors is not fulfilling the public benefit mandate.
Amendments to Sections 312(b) and 502(a) of the DGCL are designed to discourage the establishment of “shelf” corporations having no activities, directors or stockholders. As amended, Section 312(b) provides that only directors or stockholders may authorize a renewal or revival of a corporation that has ceased to be in good standing. As amended, Section 502(a) prohibits an incorporator from signing any annual franchise tax reports (other than the corporation’s initial report) and requires a corporation to list at least one director on its franchise tax reports.