On June 16, 2016, Delaware Governor Jack Markell signed into law House Bill No. 371, which makes a number of noteworthy changes to the Delaware General Corporation Law (“DGCL”). The most significant 2016 amendments to the DGCL:
- Clarify the requirements and broaden the availability of Section 251(h) mergers consummated without stockholder approval following a first-step tender or exchange offer for all shares entitled to vote on the merger;
- Eliminate de minimis appraisal claims under Section 262; and
- Allow companies to make a pre-judgment payment to dissenting stockholders to reduce interest costs in connection with an appraisal action.
The above amendments apply to transactions consummated pursuant to merger agreements entered into on or after August 1, 2016. All other amendments are effective on August 1, 2016.
SECTION 251(h) MERGERS
By way of background, certain acquisitions employ a two-step structure in which the buyer first launches a tender or exchange offer for any and all outstanding shares of the target corporation. Upon the close of the tender or exchange offer, the buyer then acquires any shares not tendered in the offer by way of a second-step merger to complete the acquisition. If the buyer owns at least 90% of the outstanding stock after the first-step, the second-step merger may be effected as a short-form merger under Section 253 without the need for stockholder approval. Even if the buyer acquires less than 90% of the outstanding stock in the first-step, Section 251(h), adopted in 2013, allows, in certain circumstances, the consummation of a second-step merger without stockholder approval, thereby avoiding the time and expense involved in preparing, filing and mailing a proxy statement and holding a stockholders meeting necessary for a long-form merger.
The 2016 amendments to the DGCL remove certain ambiguities in a number of the requirements in, and broaden the availability of, Section 251(h) as described below.
To be eligible to use Section 251(h), the target corporation’s shares must be listed on a national securities exchange or held of record by more than 2,000 stockholders immediately prior to the execution of the merger agreement. The 2016 amendment to Section 251(h) clarifies that this subsection applies to a target corporation with any class or series of stock that is listed on a national securities exchange or held of record by more than 2,000 stockholders. In other words, not all classes or series of stock of the target corporation need to be listed on such exchange. For example, if a target corporation has a series of preferred stock that is not listed or held of record by more than 2,000 stockholders, it and its acquirer may rely on Section 251(h) as long as the target corporation’s common stock meets one of these requirements.
Additional Minimum Conditions
Amended Section 251(h)(2) provides that an offer for all of the outstanding stock of the target corporation may be conditioned on the tender of a minimum number or percentage of shares of the stock of such corporation (or any class or series thereof). Moreover, an offer under Section 251(h) may be effected through separate offers for separate classes or series of stock.
To effect a second-step merger without a stockholder vote under Section 251(h), the shares obtained by the buyer in the first-step must meet the transactional voting approval requirements under the DGCL as if Section 251(h) were not applicable, including any requirements in the target corporation’s certificate of incorporation or for a separate class or series vote.
The 2016 amendments permit, for purposes of calculating whether the buyer has obtained the minimum amount of target corporation stock required by statute or its certificate to approve a merger, the buyer to include (i) “rollover stock,” which are shares of stock subject to a written agreement requiring such shares to be delivered to the buyer in exchange for stock or other equity interests in the buyer (or an affiliate of buyer) and (ii) shares of target corporation stock held in treasury, or by any direct or indirect subsidiary of the target corporation or by buyer. Moreover, such shares may be excluded from conversion in the merger into, or into the right to receive, the merger consideration. These amendments will provide for a more direct means of enabling certain target stockholders to “rollover” their shares in the transaction.
Receipt of Stock
The amendments also clarify the definition of “received” shares for purposes of determining whether the minimum number of shares has been received to meet the offer condition. With respect to certificated shares, shares are received upon physical receipt of the stock certificates along with an executed letter of transmittal; provided that the stock certificate is not cancelled prior to consummation of the offer. With respect to uncertificated shares, shares that are held of record by a clearing corporation as nominee are received upon transfer into the depository’s account by means of agent’s message, and all other uncertificated shares are received upon physical receipt of an executed letter of transmittal by the depository; provided that, in either case, the uncertificated shares have not been reduced or eliminated due to any sale of such shares prior to consummation of the offer.
The Delaware legislature made two principal amendments to Section 262 of the DGCL. First, appraisal rights will no longer be available to de minimis appraisal claims in public company transactions. Second, the accrual of interest on a future award may be stopped or limited by paying an amount to the appraisal claimants prior to the resolution of the appraisal claim.
De minimis appraisal claims
The amendments to Section 262(g) provide that the Court shall dismiss appraisal proceedings as to all stockholders of shares of the constituent corporation unless:
- the total number of shares entitled to appraisal exceeds 1% of the outstanding shares of the class or series eligible for appraisal; or
- the value of the consideration provided in the merger or consolidation for such total number of shares exceeds $1 million.
Appraisal rights for short-form mergers under Section 253 or Section 267 of the DGCL are not subject to the de minimis limitations set forth above because appraisal may be the only remedy available to stockholders in such circumstances.
Accrual of Interest
Under the existing Delaware statutes, in an appraisal proceeding, interest on the amount that is determined to be the “fair value” of the appraisal shares will accrue at 5% over the Federal Reserve discount rate from the effective date of the merger through the date of payment of the appraisal award. Since payment of “fair value” in an appraisal proceeding is not made until such amount is determined after trial, interest accrues on the full amount of the award, even if the fair value is ultimately determined to be the same as or less than the consideration paid in the merger. There have been concerns that many appraisal claims were being brought largely to benefit from the attractive interest rate, which has been significantly more favorable than the interest rate payable on deposited funds (frequently referred to as “appraisal arbitrage”).
The amendment to Section 262(h) permits the surviving corporation to pay an amount in cash to dissenting stockholders prior to the entry of judgment in an appraisal proceeding for the purpose of stopping interest from accruing on that amount. Therefore, a surviving corporation will be able to reduce the attractiveness of the appraisal arbitrage strategy by limiting the interest the appraisal claimant will receive upon resolution of the appraisal proceeding. If the surviving corporation makes such a payment, interest will only accrue on (1) the difference, if any, between the amount paid by the surviving corporation and the fair value of the shares as determined by the Court and (2) interest already accrued at the time the surviving corporation makes such payment.
There is no requirement or inference that the amount prepaid by the surviving corporation is equal to, greater than, or less than the fair value of the shares to be appraised. However, the amendments to Section 262 do not explicitly provide for a return of the excess amount prepaid in the event that the Court determines that the fair value of the shares appraised is less than the amount prepaid. Thus, until the Delaware Court or legislature clarifies whether such excess prepayment is forfeited or returned, corporations should be conservative in determining the amount to be prepaid to appraisal claimants.
Court of Chancery Jurisdiction
Except to the extent a statute confers exclusive jurisdiction on a court, agency or tribunal other than the Court of Chancery, Section 111 of the DGCL provides the Court of Chancery with jurisdiction over civil actions to interpret, apply, enforce or determine the validity of the provisions of (1) the certificate of incorporation or the bylaws of a corporation and (2) any instrument, document or agreement by which a corporation creates or sells, or offers to create or sell, any of its stock, or any rights or options respecting its stock.
The amendment to Section 111 broadens the Court of Chancery’s jurisdiction to also include civil actions to interpret, apply, enforce and determine any instrument, document or agreement by which (1) a corporation and one or more holders of its stock are parties, and pursuant to which any such holder or holders sell or offer to sell any of such stock, or (2) a corporation agrees to sell, lease or exchange any of its property or assets, and which by its terms provides that one or more holders of its stock approve of or consent to such sale, lease or exchange.
Committee Quorum and Voting Requirements
The amendment to Section 141(c) provides a default rule for quorum of a committee of the board or a subcommittee, which shall be a majority of the directors serving on such committee or subcommittee. The default rule can be modified pursuant to the certificate of incorporation, bylaws, resolutions of the board establishing the committee or subcommittee (or resolutions of the committee establishing the subcommittee) so long as quorum is not less than one-third of the directors serving on the committee or subcommittee.
Similarly, at a meeting at which a quorum is present, the vote of the majority of the members of a committee or a subcommittee present shall be the act of such committee or subcommittee. This default voting rule can be increased (but not decreased) pursuant to the certificate of incorporation, bylaws, a resolution of the board or a resolution of the committee establishing the subcommittee.
Section 158 was amended to allow any two duly empowered officers of a corporation to execute stock certificates on behalf of the corporation. Previously, this section required the signatures of the chair or vice chair of the Board, the president or vice president, and the treasurer, assistant treasurer, secretary or assistant secretary. This amendment was implemented because many companies have replaced the titles of “President” and “Treasurer” with “Chief Executive Officer and “Chief Financial Officer,” respectively.
The amendments to Section 311 provide a procedure to restore a corporation’s certificate of incorporation after it has expired by its own limitation. Any corporation that revokes its dissolution or restores its certificate of incorporation pursuant to Section 311 shall file all annual franchise tax reports that the corporation would have had to file if it had not dissolved or expired, and shall pay all franchise taxes that the corporation would have had to pay if it had not dissolved or expired.
The amendments to Section 312 distinguish the procedure to extend the term of a corporation’s certificate of incorporation or to restore a corporation’s certificate of incorporation if it has expired by limitation from the procedure to revive a corporation’s certificate of incorporation when it has become forfeited or void. Section 312, as amended, only applies to a corporation whose certificate of incorporation has become forfeited or void. This section now uses only the term “revival” to reflect this process and eliminates the terms “renewal”, “extension” and “restoration”.
The procedure to extend a corporation’s duration is now solely governed by Section 242, which sets forth the manner in which a corporation’s certificate of incorporation is amended, including for the purpose of changing the period of duration of the corporation.
The other amendments to Section 312 clarify and simplify the procedures to revive a certificate of incorporation that has become void, including, most notably, providing that a majority of directors then in office, even if less than quorum, or the sole director in office, may authorize the revival of the certificate of incorporation.