Proposed amendments to the Delaware General Corporation Law (DGCL) are being considered by the Corporation Law Section of the Delaware State Bar Association. If approved by the Corporation Law Section and the Executive Committee of the Delaware State Bar Association, the proposed amendments will be considered by the Delaware legislature. The effective date for the proposed amendments would be August 1, 2014. Corporate and Financial Weekly Digest will provide updates as the proposed amendments move forward.
DGCL Section 251(h) – Back-end Mergers in Two-step Transactions
In 2013, the DGCL was amended to include DGCL Section 251(h), which provides that a vote of a target corporation’s stockholders is not required to authorize a back-end 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 acquiror 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 acquiror 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 acquiror 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.
Since its enactment, a number of transactions have been consummated under Section 251(h), but questions remain regarding the application of the statute, and there are several significant limitations on its application. The proposed amendments to Section 251(h) are designed to address some of those questions and limitations.
The proposed amendments to Section 251(h) would, among other things:
- eliminate the prohibition on using Section 251(h) in a transaction involving an interested stockholder, which would remove any question regarding the permissibility of voting agreements, tender and support agreements and rollover agreements in transactions utilizing Section 251(h);
- clarify that an acquiror is deemed to “own” shares irrevocably accepted for purchase or exchange pursuant to the offer and actually received (and not shares tendered by notice of guaranteed delivery and not yet delivered) by the depositary prior to the expiration of the offer, and all shares otherwise owned by the acquiror;
- permit treasury shares or shares of the target owned by the acquiror or its affiliates at the commencement of the offer to be treated differently than shares that are the subject of the offer;
- require that the merger agreement expressly provide that the back-end merger will be effected as soon as practicable after completion of the offer; and
- permit the target corporation and the acquiror to provide for a “dual track” structure in the merger agreement (i.e., the parties may abandon a two-step transaction in favor of a one-step merger).
If approved, the amendments to Section 251(h) would be effective with respect to agreements entered into on or after August 1, 2014.
DGCL Sections 141(f) and 228(c) – Board and Stockholder Actions by Written Consent
The proposed amendment to DGCL Section 141(f) responds to recent Delaware case law that held invalid written consents executed by individuals who are not yet directors at the time of execution. The proposed amendment to Section 141(f) would permit any person, whether or not then a director, to deliver a written consent to a future action by the board of directors occurring no later than 60 days after the written consent is delivered. The written consent will be deemed to have been given at the effective time of the future action so long as the person who delivered the consent is a director at the effective time and did not revoke his or her written consent.
Similarly, the proposed amendment to DGCL Section 228(c) would permit any person to deliver a written consent to a future action by stockholders occurring no later than 60 days after the written consent is delivered. The written consent will be deemed to have been given at the effective time of the future action so long as the person who delivered the consent is a stockholder at the effective time and did not revoke his or her written consent.
The foregoing amendments would seemingly endorse and expressly permit the standard practice in acquisition transactions of having persons who are to become directors or stockholders of a corporation upon consummation of an acquisition execute and deliver in escrow written consents and other documents authorizing transactions that will take place shortly after the acquisition, such as acquisition financing transactions.
DGCL Section 242 – Amendments to a Certificate of Incorporation
The proposed amendments to DGCL Section 242 would authorize a corporation’s board of directors to change its name and delete historical references to its incorporator, its initial directors, its initial subscribers or provisions regarding historical stock reclassifications and stock splits without the approval of the corporation’s stockholders. In addition, the proposed amendments would eliminate the requirement that the notice of a meeting at which an amendment to a corporation’s certificate of incorporation is to be voted on contain a copy or summary of the amendment when the notice constitutes a notice of internet availability of proxy materials under the Securities Exchange Act of 1934.
Section 8106 of the Courts and Judicial Procedure Law – Extended Statute of Limitations for Breach of Contract Claims
In addition to the proposed amendments to the DGCL, an amendment to Section 8106 of the Courts and Judicial Procedure Law was proposed to the Delaware State Bar Association that would permit parties to a written contract involving at least $100,000 to extend the statute of limitations for a breach of contract claim to up to 20 years from the accrual of the claim. The contracting parties would be required to expressly agree in the contract to extend the statute of limitations beyond Delaware’s default three-year statute of limitations for general breach of contract claims.