On June 24, 2015, Delaware Governor Jack Markell signed into law Senate Bill No. 75, which makes a number of noteworthy changes to the Delaware General Corporation Law (“DGCL”) effective August 1, 2015. The 2015 amendments to the DGCL:
- Prohibit fee-shifting provisions in a Delaware stock corporation’s certificate of incorporation or bylaws;
- Explicitly authorize Delaware exclusive forum-selection provisions in a Delaware corporation’s certificate of incorporation or bylaws for “internal corporate claims;”
- Provide the board greater flexibility in delegating authority for issuance of stock, stock rights and stock options;
- Clarify and streamline procedures for ratifying defective corporate acts under DGCL Sections 204 and 205; and
- Make a variety of other changes.
Prohibition of Fee-Shifting Provisions for Stock Corporations
Together, new Section 102(f) and amended Section 109(b) prohibit the inclusion of a provision in the certificate of incorporation or bylaws of a stock corporation that would impose liability on a stockholder for attorney’s fees or expenses in connection with an “internal corporate claim.” New Section 115 defines an “internal corporate claim” as claims (including those brought in the right of the corporation, i.e., derivative claims) that are (i) based upon a violation of a duty by a current or former director or officer or stockholder in such capacity or (ii) under the jurisdiction of the Court of Chancery as conferred by another provision of the DGCL. However, such fee-shifting provisions are not prohibited in written agreements signed by a stockholder, such as a stockholders’ agreement or stock purchase agreement. The prohibition also does not apply to other types of business entities that are governed by separate statutory provisions, such as limited partnerships or limited liability companies.
Amended Section 114(b)(2) makes clear that the amendments prohibiting fee-shifting provisions do not apply to Delaware non-stock corporations, which is consistent with the Delaware Supreme Court’s May 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014). While the ATP Tour decision upheld a bylaw imposing liability for certain legal expenses on the members of a non-stock corporation who participated in the dispute, the decision had been viewed by many as applying to Delaware stock corporations as well. The 2015 amendments make clear that fee-shifting provisions in connection with an internal corporate claim are permitted with respect to non-stock corporations and are not permitted with respect to stock corporations.
Delaware Exclusive-Forum Selection Provisions
In contrast to the prohibition on fee-shifting provisions in a Delaware corporation’s certificate or bylaws, new Section 115 specifically authorizes the inclusion of a forum-selection provision in a Delaware corporation’s certificate and bylaws that requires, consistent with jurisdictional requirements, that any “internal corporate claims” be brought solely and exclusively in any or all of the courts in the State of Delaware. While this new section does not prohibit (or expressly authorize) the selection of a forum for “internal corporate claims” in addition to Delaware, it does invalidate any provision in the certificate or bylaws that prohibits the litigation of “internal corporate claims” in Delaware.
New Section 115 confirms the Delaware Chancery Court’s 2013 holding in Boilermakers Local 154 Retirement Fund v. Chevron Corporation, 73 A.3d 934 (Del. Ch. 2013), that bylaws of a corporation may effectively specify, consistent with applicable jurisdictional requirements, that derivative, fiduciary duty, DGCL-violation and other internal affairs claims must be brought only in the Delaware courts. On the other hand, new Section 115 overturns the Chancery Court’s 2014 holding in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229 (Del. Ch. 2014) that bylaws of a Delaware corporation may exclusively select the courts of another state for “internal corporate claims,” such as the courts in the State where the corporation’s headquarters are located. A Delaware corporation could, under new Section 115, include a provision in its certificate or bylaws requiring the “internal corporate claims” be brought either in the Delaware courts or the courts in the State where its headquarters are located but in no other courts.
As with the fee-shifting provisions, a stockholders’ agreement or other writing signed by the stockholder against whom the provision is to be enforced may exclusively select a forum other than Delaware. Section 115 also does not apply to other types of business entities that are governed by separate statutory provisions, such as limited partnerships or limited liability companies.
Board Delegation for Issuances of Stock, Stock Rights and Stock Options
Amendments to Section 152 specifically allow a board of directors to authorize stock to be issued in one or more transactions in such numbers and at such times as is determined by a person or body other than the board of directors or a committee of the board, provided that the board’s resolution so authorizing such person or body (i) fixes the maximum number of shares that may be issued, (ii) sets a time period during which such shares may be issued and (iii) establishes a minimum amount of consideration for which such shares may be issued.
The amendments permit a formula to be used to determine the consideration for the stock, and such formula may include reference to or be made dependent upon the operation of extrinsic facts, such as market prices on one or more dates. As such, the board may authorize stock to be issued pursuant to “at the market” programs and does not require the board or committee of the board to authorize each individual stock issuance pursuant to such program.
An amendment to Section 157(b) makes the same changes for formulas used in determining the consideration for stock issued upon the exercise of rights and options.
Ratification of Defective Corporate Acts
Section 204 sets forth procedures for ratifying stock or corporate acts that would be void or voidable due to a "failure of authorization," i.e., the failure (i) to authorize or effect an act or transaction in compliance with the DGCL, the corporation’s certificate of incorporation or bylaws, or any plan or agreement to which the corporation is a party to the extent such failure would render such act or transaction void or voidable or (ii) of the board or any officer of the corporation to authorize or approve any act or transaction of the corporation that would have required for its due authorization the approval of the board or such officer. The 2015 amendments clarify and confirm certain provisions of the ratification process in Section 204 and make conforming changes to Section 205, which gives the Court of Chancery jurisdiction to hear and determine, among other things, the validity of any ratification effected pursuant to Section 204 and the validity of any corporate act or transaction.
Board Ratification of Multiple Defective Acts. The amendments to Section 204(b)(1) confirm that a single set of resolutions may be used by the board of directors to ratify multiple defective corporate acts. However, the quorum and voting requirements are determined on an act-by-act basis. In other words, if one act required two-thirds board approval and another act only required majority board approval, the ratifying resolutions will require two-thirds board approval for the former act and majority board approval for the latter act.
Board Ratification of Initial Board. New Section 204(b)(2) permits those persons who have been acting as the corporation’s directors to adopt resolutions ratifying the election of such persons who, despite having not been named in the certificate of incorporation or by the incorporator as the initial directors, first took action on behalf of the corporation as the board of directors. Such ratifying resolutions must state: (i) the name(s) of the person(s) who first took action in the name of the corporation as the initial board of directors, (ii) the earlier of the date on which such person(s) first took action or was purported to have been elected to the board and (iii) that the ratification of the election of such person(s) as the initial board is approved.
Stockholder Ratification of Multiple Defective Acts. Section 204(c) provides that a defective corporate act must be submitted to stockholders for their approval if such act would have required a vote of stockholders under the DGCL, the certificate of incorporation or bylaws of the corporation, or any plan to which the corporation is a party, either at the time of the defective corporate act or the time the board adopts the resolutions ratifying the act. As with director ratification of multiple defective acts, stockholder approval of each defective act must meet the applicable quorum and voting requirements on an act-by-act basis.
Stockholders Entitled to Vote. Per amended Section 204(d), the only stockholders entitled to vote on the ratification of a defective corporate act, or to be counted for purposes of a quorum for such vote, are the holders of record of valid stock as of the record date for determining stockholders entitled to vote thereon. In other words, the “retroactive” validity given to putative stock (i.e., the shares that, but for any failure to authorization, would constitute valid stock or cannot be determined by the board to be valid stock) will not result in such putative stock being considered valid stock as of the record date for the vote on the ratification of a defective corporate act or acts submitted to stockholders.
Election of Directors by Stockholders. Section 204(d)(2) provides that if the certificate of incorporation or bylaws in effect at the time of the vote on the ratification of the election of directors or at the time of the defective election require or required a larger portion of stock or of any class or series of stock or of a specified stockholder to elect such director, then the affirmative vote of such larger number or portion of stock or of any class or series of stock or of such specified stockholder will be required to ratify the election.
Certificates of Validation. As amended, Section 204(e) provides that a certificate of validation is no longer required to attach the board’s resolutions ratifying the defective corporate act, but rather must set forth the following information:
- Each defective corporate act, the date of such act and the nature of the failed authorization concerning such act;
- A statement that such defective act was ratified in accordance with Section 204, including the date the board and, if applicable, the stockholders ratified such act; and
- The applicable information required by one of the following paragraphs:
- where a certificate has been previously filed in respect of a defective corporate act and no changes are required, such previously filed certificate must be attached to the certificate of validation as an exhibit;
- where a certificate has been previously filed in respect of a defective corporate act and changes are required to that certificate, a certificate containing all of the information required under the applicable section of the DGCL must be attached to the certificate of validation as an exhibit; or
- where no certificate had previously been filed and the filing of a certificate was required to give effect to the ratification of a defective corporate act, a certificate containing all of the information required under the applicable section of the DGCL must be attached to the certificate of validation as an exhibit.
Finally, a separate certificate of validation must be filed in respect of each defective corporate act that requires the filing of a certificate of validation, except where (i) multiple defective corporate acts may have been included in a single certificate under another provision of the DGCL to effect such acts or (ii) two or more overissues of stock are being validated.
Challenges to the Ratification of Defective Corporate Acts. Amended Section 204(f) provides that no action challenging the ratification of a defective corporate act may be brought under Section 205 after the 120 day period commencing on the later of the validation effective time or the time notice of ratification, if required, is given to stockholders.
Notice when Stockholders are acting by Written Consent. Amendments to Section 204(g) clarify the following four matters relating to the procedures for notice when stockholders are acting by written consent:
- Corporations that have a class of stock listed on a national securities exchange may give the notice required by Section 204(g) by means of a public filing pursuant to specified provisions of the Securities Exchange Act of 1934;
- Where the ratification of a defective corporate act is approved by consent of stockholders in lieu of a meeting, the notice required by Section 204(g) may be included in the notice required to be given pursuant to Section 228(e);
- Where a notice sent pursuant to Section 204(g) is included in a notice sent pursuant to Section 228(e), the notice must be sent to the parties entitled to receive the notice under both Section 204(g) and Section 228(e); and
- No such notice need be provided to any holder of valid shares that acted by written consent in lieu of a meeting to approve the ratification of a defective corporate act or to putative stockholders who otherwise consented to the ratification.
Validation Effective Time. Section 204(h)(6) currently defines "validation effective time" as the later of:
- the time at which the ratification of the defective corporate act is approved by stockholders or, if no stockholder vote is required, the time at which the notice required by Section 204(g) is given; and
- the time at which any certificate of validation has become effective.
With respect to the ratification of any defective corporate act that requires stockholder approval but does not require the filing of a certificate of validation, the amendments to Section 204(h)(6) confirm that the "validation effective time" is the time at which the stockholders approve the ratification of the defective corporate act regardless of whether the stockholders are acting at a meeting or by written consent. A corresponding amendment to Section 204(g) confirms that the 120-day period during which stockholders may challenge the ratification of a defective corporate act commences from the later of (i) the validation effective time and (ii) the time at which the notice required by Section 204(g) is given.
Moreover, amended Section 204(h)(6) permits the board of directors to fix a future validation effective time for any defective corporate act that is not required to be submitted to a vote of stockholders and that does not require the filing of a certificate of validation. This amendment helps avoid logistical issues when delivering notices of multiple defective corporate acts being ratified at the same time by allowing the board to set one date on which the ratification of all defective corporate acts approved by the board will be effective, regardless of when the notice under Section 204(g) is sent.
Effective Time of Amendments to Sections 204 and 205. The amendments to Sections 204 and 205 are effective only with respect to defective corporate acts and proposed issuances of putative stock ratified or to be ratified pursuant to resolutions adopted by a board of directors on or after August 1, 2015.
Corporate Name. DGCL Section 102(a)(1)(ii) provides that a Delaware corporation’s name as set forth in its certificate of incorporation shall be such as to distinguish it upon the records of the Division of Corporations of the Delaware Secretary of State from the names that have been reserved for use with the Division and from the names on record with the Division of each other domestic or foreign entity, except with the written consent of the person reserving such name or the relevant entity. Amended Section 102(a)(1)(ii) adds an additional exception permitting the Division to waive the requirement for a distinctive corporate name, without prejudicing any rights of the person who has reserved such name or of the relevant other entity, if the corporation demonstrates to the satisfaction of the Delaware Secretary of State that (i) the corporation (or a predecessor entity) previously made substantial use of such name or substantially similar name, (ii) the corporation made reasonable efforts to secure written consent to use such name, and (iii) such waiver is in the interest of the State of Delaware.
Restated Certificate of Incorporation. 2014 amendments to DGCL Section 242 eliminated the requirement to obtain a stockholder vote on a certificate amendment solely to change the corporation’s name. The 2015 amendments change Section 245(c) to clarify that a restated certificate is not required to state that it does not further amend the provisions of the corporation's certificate of incorporation if the only amendment is to change the corporation's name without a vote of the stockholders.
Public Benefit Corporation Name. Amended Section 362(c) deletes the requirement that a public benefit corporation’s name include a specific identifier as such, but if such identifier is not included, then such public benefit corporation must notify purchasers of its shares that it is a public benefit corporation, unless the issuance is in a public offering registered under the Securities Act of 1933 or the corporation is an SEC-reporting company under the Securities Exchange Act of 1934 at the time of the issuance.
Merger or Conversion of a Corporation into a Public Benefit Corporation. Amended Section 363(a) changes the approval required for such action from 90% of the outstanding shares of each class of stock to two-thirds of the outstanding stock entitled to vote. Amended Section 363(b) adds a “market out” to the appraisal provisions available to a stockholder of a corporation that merges or converts into a public benefit corporation similar to the “market out” exception that applies generally to appraisal rights under DGCL Section 262.
Merger or Conversion of a Public Benefit Corporation into a Corporation. Amended Section 363(c) changes the approval required for such action from two-thirds of the outstanding shares of each class of stock to two-thirds of the outstanding stock entitled to vote.