On June 30, 2013, Governor Jack Markell of Delaware signed into law amendments to the Delaware General Corporation Law (DGCL) that affect a number of provisions in the current DGCL and could have substantial effects on the process through which public companies are merged. The new legislation became effective August 1, 2013, except for the amendment regarding the ratification of defective corporate acts which will become effective April 1, 2014.
Ratification of Defective Corporate Acts. New Sections 204 and 205 of the DGCL reverse the case law holding that certain defective corporate acts are void (and not voidable). Section 204 allows for a corporation to ratify the over-issuance of stock and the taking of a defective corporate action with approval from the board of directors. Approval of stockholders is required if stockholder action would have been required for original authorization. Once the ratification approvals are obtained, the corporation will be required to file a “certificate of validation” with the Delaware secretary of state and provide notice to the non-approving stockholders.
In addition, the new Section 205 confers jurisdiction on the Court of Chancery to hear disputes about the ratification or to determine the validity of a ratification using either the traditional method or the new Section 204.
The new legislation does not affect other traditionally effective means of ratification of voidable corporate acts.
Elimination of Required Vote in Certain Second-Step Mergers. New subsection (h) of Section 251 of the DGCL eliminates the need for a stockholder vote on a back-end merger that follows a public tender or exchange offer, subject to certain conditions.
Termed “top-up options,” in a non-hostile takeover, a target corporation grants a bidder a “top-up option” to acquire additional shares in the target once the bidder obtains at least 50 percent of the capital stock of a corporation. Once the bidder obtains control of the target, the bidder exercises an option to obtain additional stock to bring its holdings to 90 percent of the capital stock of the target. Once at 90 percent, a short-form “squeeze out” merger can be completed, without the need for additional board (or dissenting stockholder) approval. The top-up option procedure allows for a bidder to complete the back-end merger more quickly and cheaply than waiting to get 90 percent of the issued stock through a tender or to obtain the necessary stockholder approvals.
Top-up options only work, however, if the target corporation has a capitalization structure that can withstand the potential issuance of a large number of new shares. With new subsection 251(h), the need for the actual issuance of top-up options is eliminated.
Under new subsection 251(h), a vote of the stockholders of a target corporation listed on a national exchange, or one with more than 2,000 stockholders, would not be required to authorize the back-end merger if the following qualifications are met:
- the merger agreement must expressly provide that the merger shall be governed by new subsection 251(h) and shall be effected as soon as practicable following the consummation of the offer described below
- the corporation must consummate a tender or exchange offer for any and all of the outstanding stock of the target corporation on the terms provided in the merger agreement that would otherwise have required a stockholder vote on its adoption
- following the consummation of the offer, the bidding corporation must own at least the percentage of the stock of the target corporation that otherwise would be required to adopt the merger agreement
- at the time the target corporation’s board of directors approves the merger agreement, no other party to the merger agreement can be an “interested stockholder” (as defined in Section 203(c) of the DGCL) of the target corporation
- the corporation consummating the offer must merge with the target corporation pursuant to such merger agreement
- the outstanding shares of the target corporation not canceled in the merger must be converted in the merger into the same amount and kind of consideration paid for shares in the offer
Certain other sections of the DGCL have been amended to reflect the applicability of new Section 251(h).
Formula for Stock Issuance Consideration. Section 152 of the DGCL has been amended to confirm the board’s authority to establish a formula (such as the market price of the stock measured over a period of time) for determining the consideration the corporation receives for the issuance of capital stock.
Restrictions on “Shelf” Corporations. Sections 312(b) and 502(a) of the DGCL have been amended to deter the establishment of “shelf” corporations — those corporations that are formed without directors or stockholders and with the purpose of “aging” the corporation for use many years in the future. These amendments limit the powers of the incorporator by requiring the signature of a director or officer of the corporation on the annual report that is required to be filed annually with the Delaware secretary of state. The amendments also require the authorization of the board of directors to file a request for renewal or revival of a forfeited or voided corporation.
Public Benefit Corporations. New subchapter XV of the DGCL authorizes the creation of “public benefit corporations.” Public benefit corporations (PBC) are for-profit entities chartered by the state that balance (i) the financial interests of the PBC’s stockholders; (ii) the best interests of the parties affected by the PBC’s conduct; and (iii) the public benefit as specified in the PBC’s charter. In order to form such a corporation, the specific public benefit must be stated in its charter and its status as a PBC must be clearly indicated in its name. PBCs may also qualify for tax-free status under the Internal Revenue Code.