The following is a brief summary of certain recent amendments to the Delaware General Corporation Law (DGCL) that are relevant to corporate practitioners in merger and acquisition (M&A) transactions. Although many of the amendments are technical in nature and do not reflect any deep substantive changes in the law, they are nonetheless worth noting. These amendments became effective August 1, 2007.
Section 141(d) of the DGCL governs, among other matters, board committees and the voting power of directors. Subsection (d) of Section 141 permits a certificate of incorporation to confer upon one or more directors voting powers that are greater or less than those of other directors. Subsection (d) was amended to clarify that when a certificate of incorporation confers upon directors voting powers that vary from those of other directors, such varied voting powers will also apply to any votes cast by such director in any board committee or subcommittee, unless otherwise provided in the certificate of incorporation. Accordingly, if a special committee is established to approve or make a recommendation to the board regarding a change of control transaction, M&A practitioners should take care to ensure that any unusual voting powers of the directors are carefully considered when determining which board members will serve on such committee.
Stockholder Appraisal Rights
Section 262 of the DGCL, which governs stockholder appraisal rights, was amended as set forth below. These amendments will apply to transactions consummated pursuant to agreements entered into after August 1, 2007.
- Subsections (e) and (k) of Section 262 were amended to clarify that a stockholder who has demanded appraisal in connection with a merger or consolidation may withdraw that demand within 60 days after the effective date of the merger or consolidation so long as the stockholder has not filed a petition for appraisal in the Court of Chancery or joined any such proceeding as a named party.
- Subsection (e) of Section 262 was amended to permit beneficial owners of shares of stock to do each of the following in their own names: file a petition for appraisal before the Court of Chancery, and request a statement of shares with respect to which demands for appraisal have been made. Prior to this amendment, petitions for appraisal could only be filed by the stockholder of record. Accordingly, holders of record (such as Cede & Co.) will no longer have to serve as a nominee petitioner in an appraisal proceeding. Note, however, that the written demand for appraisal must still be submitted to the corporation by the holder of record.
- Subsection (h) of Section 262 was amended to establish a presumption that interest will be awarded in appraisal proceedings for the period from the effective date of the merger until the date of payment of judgment, and will compound quarterly and accrue at a rate of 5 percent over the Federal Reserve discount rate. The Court of Chancery, however, retains the discretion to depart from this presumption if good cause, such as bad faith on the part of one of the litigants, is shown. Previously, Section 262 did not state what interest rate should apply in appraisal cases. This amendment was intended to eliminate needless litigation concerning the rate of interest in these cases and the presumptive rate reflects what had become, as a practical matter, the default rate in the Court of Chancery.
- Subsection (h) of Section 262 was also amended to clarify that in appraisal proceedings the Court of Chancery will not determine the fair value of shares on its own initiative. Appraisal proceedings are adversary proceedings, and the Court will determine the fair value of the shares in these proceedings only upon demand by the surviving corporation or the stockholder seeking appraisal.
The following amendments were made to the DGCL relating to filing requirements in connection with mergers or consolidations: Several amendments to Section 251 eliminate the requirement that an agreement of merger or consolidation include a certification from the secretary or assistant secretary of the corporation to the effect that the agreement of merger or consolidation was adopted by the requisite vote of the stockholders or members, as applicable, if a certificate of merger is filed with the Delaware Secretary of State in lieu of the agreement.
- Similar amendments were made to Section 255 regarding a merger or consolidation of domestic non-stock corporations. The certification requirement was also eliminated from Sections 252, 254, 256, 257, 258, 263 and 264 by cross-references to Sections 251 and 255.
- An amendment to subsection (b) of Section 258 clarifies that each constituent foreign corporation must also certify the agreement of merger or consolidation in accordance with the laws under which it was formed.