[co-author: Caitlan Carberry]
On June 23, 2020 the Delaware General Assembly adopted a number of important amendments to the Delaware General Corporation Law (DGCL) that were signed into law by the Governor on July 16, 2020. In particular, these amendments (1) clarify and increase the powers of boards of directors of Delaware corporations during an emergency (including, specifically, a pandemic such as the novel coronavirus (COVID-19)), (2) strengthen the exculpatory provisions for directors and revise the indemnification provisions for officers, (3) confirm and clarify the ability of corporations to execute and deliver documents and notices electronically and (4) facilitate holding company mergers without stockholder approval.
Emergency Powers of the Board of Directors
As discussed in our earlier alert, Annual Meetings in a World Without Meetings: The Impact of COVID-19 on Public Companies, on March 13, 2020 the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) issued guidance in response to the COVID-19 pandemic permitting public companies to change the date, time and location of their meetings of stockholders without mailing additional soliciting materials to stockholders.
That guidance did not preempt state law requirements, however, and on April 6, 2020 the Governor of Delaware also made compliance obligations more lenient for publicly traded Delaware corporations. For more information on the Governor’s April 6, 2020 order, see our previous alert titled Delaware Provides Emergency Relief from Requirements for Meetings of Stockholders.
Several of the amendments to the DGCL build on, clarify and otherwise protect companies and their boards of directors who relied on the Governor’s earlier orders, particularly with regard to the emergency powers of the board. These amendments are effective retroactively as of January 1, 2020. In particular, these amendments:
- Clarify the application and scope of DGCL § 110. DGCL § 110 provides boards of directors of Delaware corporations with emergency powers in response to catastrophes. As amended, DGCL § 110 now lists epidemics, pandemics and declarations of a national emergency by the United States government as specific examples of the types of catastrophes that trigger the emergency powers provided to boards of directors in DGCL § 110.
- Make it easier for boards of directors to adopt emergency bylaws. As amended, DGCL § 110(a) now expressly provides that emergency bylaws may be adopted by the corporation’s board of directors or, if a quorum cannot be readily convened for a meeting, by a majority of the directors present.
- Give boards of directors greater flexibility with respect to meetings of stockholders during an emergency. The amendments added a new Section 110(i) to the DGCL, which expressly permits a Delaware corporation’s board of directors, regardless of any contrary provisions in the DGCL or the corporation’s certificate of incorporation or bylaws, to "take any action that it determines to be practical and necessary to address the circumstances of [an] emergency condition with respect to a meeting of stockholders . . . ." In particular, new DGCL § 110(i) authorizes a Delaware corporation’s board of directors to (1) postpone any meeting of stockholders to a later date or time (with the original record date applying to such meeting) and (2) with respect to publicly traded corporations, provide notice of any postponement or change of the place of the meeting (including changing to a virtual meeting) solely by filing a document with the Securities and Exchange Commission. In addition, new DGCL § 110(i) provides that no person shall be liable, and meetings of stockholders will not be voided and need not be postponed, based upon any failure to make a stockholder list available under DGCL § 219 if it was not practicable to allow inspection during the emergency.
- Authorize boards to change the record and payment date of a previously declared dividend during an emergency. New DGCL § 110(i) also authorizes boards of directors to change the record and payment dates for previously declared dividends, provided that the record date has not yet occurred and the corporation complies with certain notice requirements.
Indemnification and Exculpation Provisions
The amendments with respect to indemnification and exculpation will be effective with respect to conduct occurring after December 31, 2020. These amendments:
- Narrow the universe of officers entitled to mandatory indemnification under DGCL § 145(c). DGCL § 145(c) provides that directors and officers who are successful on the merits in the defense of any action, suit or proceeding are entitled to mandatory indemnification by the corporation. As amended, DGCL § 145(c), which previously did not specify which corporate officers are entitled to mandatory indemnification, now provides (in newly numbered DGCL § 145(c)(1)) that the officers entitled to mandatory indemnification only include the corporation’s president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer, individuals otherwise identified in its public filings as one of its most highly compensated officers and individuals who have consented to be identified as an “officer” by written agreement. However, as amended, new DGCL § 145(c)(2) provides corporations with the ability to indemnify other corporate officers in a manner consistent with the mandatory indemnification provisions of DGCL § 145(c)(1).
- Provide that corporations may not retroactively limit an exculpatory clause unless the certificate of incorporation specifically authorizes it to do so. As permitted by DGCL § 102(b)(7), Delaware corporations commonly include an exculpatory clause in their certificates of incorporation limiting or eliminating the monetary liability of a director for certain breaches of fiduciary duty as a director. The amendments to DGCL § 102(b)(7) codify common practice by providing that corporations may not amend or repeal such a clause and apply that change retroactively unless the amended or repealed provision explicitly provided that future changes could have a retroactive effect.
Electronic Execution and Delivery
In 2019, the Delaware General Assembly adopted DGCL § 116, which provides, among other things, a non-exclusive safe harbor for executing and delivering documents under the DGCL. The 2020 amendments clarify and expand upon the 2019 amendments to further permit and facilitate the use of electronic means for executing and delivering documents, including by eliminating the exceptions for director, stockholder and incorporator consents previously included in DGCL § 116 and by requiring any limitations on the ability to electronically execute or deliver documents under the DGCL to be expressly included in the certificate of incorporation or, in certain cases, the bylaws.
Electronic Notices to Stockholders
The 2019 amendments to the DGCL eliminated the requirement that Delaware corporations receive consent from stockholders to provide notice to stockholders by email. The 2020 amendments address a potential ambiguity in the 2020 amendments to eliminate any doubt that stockholders may receive notice from the corporation by email without any prior consent so long as such emails include a prominent legend stating that the communication is an important notice regarding the corporation.
Holding Company Mergers
Under DGCL § 251(g), a Delaware corporation may reorganize itself into a holding company structure without stockholder approval so long it adheres to certain requirements. Prior to the 2020 amendments, DGCL § 251(g) required that the organizational documents of the surviving entity contain provisions that were identical to the certificate of incorporation of the parent corporation prior to the merger. The amendments eliminate this requirement but do not eliminate the requirement that the organizational documents of the surviving subsidiary contain provisions requiring approval of the holding company’s stockholders for any act or transaction by the surviving subsidiary that, if taken by the corporation immediately prior to its reorganization into a holding structure, would have required stockholder approval.
Key Considerations for Boards of Directors of Delaware Corporations
In general, the amendments provide additional flexibility to Delaware corporations and their boards of directors to deal with issues arising during the continued COVID-19 pandemic and otherwise with respect to taking and documenting corporate actions. Boards of directors should continue to carefully monitor the impact of the current COVID-19 pandemic and, as needed, utilize the additional flexibility provided by the 2020 amendments to the DGCL with respect to adopting emergency bylaws, postponing or changing the place of meetings of stockholders and delaying dividend payments.
Outside of the COVID-19 emergency, in light of the upcoming effectiveness of changes to the mandatory indemnification provisions for officers, each Delaware corporation’s board of directors should consider a holistic review of the corporation’s indemnification protections for its officers (and directors) and make any adjustments that may be advisable. In addition, as most (if not all) Delaware corporations will benefit from the increased use of electronic means of executing and delivering documents and providing notice to stockholders, Delaware corporations should review their existing organizational documents and policies to eliminate any provisions that may inappropriately restrict such flexibility.