On August 1, several amendments to the Delaware General Corporation Law, 8 Del. C. § 1-101 et seq. (the DGCL), became effective. The most notable amendments alter (1) the availability of statutory appraisal rights and (2) the availability of, and procedures for, ratifying defective corporate acts.
Statutory Appraisal Rights
The 2018 amendments to section 262 extend the applicability of the “market out” exception to appraisal rights in a so-called “intermediate form” merger, in which there is an exchange offer followed by a back-end merger consummated without the vote of stockholders pursuant to section 251(h). Section 262(b)(1) of the DGCL provides a market-out exception to stockholders’ appraisal rights when stock of the target corporation is (1) listed on a national securities exchange or (2) held of record by more than 2,000 holders. Section 262(b)(2) of the DGCL provides an exception to the market-out exception, under which appraisal rights remain available to target stockholders (even if the target corporation’s stock was listed on a national exchange or held by more than 2,000 holders), when the target stockholders receive consideration of any form other than stock, depository receipts in respect thereof, cash in lieu of fractional shares, or any combination thereof.
Further, the version of section 262(b)(3) that was in effect just prior to the 2018 amendments provided that appraisal rights would be available in any intermediate-form merger effected pursuant to section 251(h) unless the acquiror owns all of the stock of the target immediately before the merger. In cases where a stock-for-stock exchange offer was effected pursuant to section 251(h), target stockholders were entitled to appraisal rights under section 262(b)(3), even though such holders would not have been entitled to appraisal rights if the transaction were structured as a long-form merger.
The 2018 amendments to section 262 seek to rectify this incongruity by eliminating the carve-out of intermediate-form mergers from section 262(b)(3). Now, as a result of the 2018 amendments, section 262 of the DGCL treats intermediate-form mergers and long-form mergers consistently with respect to the availability of appraisal rights.
In addition, the amendment to section 262(e) clarifies what information must be included in the statement by the surviving corporation required to be furnished to dissenting shareholders in connection with an intermediate-form merger under section 251(h). As previously formulated, section 262(e) required a statement from the surviving corporation setting forth the number of shares “not voted in favor of the merger.” Because no shares are voted in a back-end merger following an exchange offer under section 251(h), the amendments clarify that the statement must set forth the number of shares that were not tendered or exchanged in connection with a tender or exchange offer.
Ratification of Defective Corporate Acts
The amendments also make a number of changes to DGCL section 204, including changes intended to clarify the circumstances in which corporations may use section 204 to ratify defective corporate acts.
Section 204 provides an avenue for a corporation to ratify defective corporate acts. As part of the amendments, section 204 has been modified to confirm that it may be utilized when there is no valid stock outstanding (whether because the corporation has not validly issued any shares or because all of the shares are putative stock), even if ratification would have otherwise required stockholder approval pursuant to section 204(c).
Section 204 has also been amended to clarify that, in the event a stockholder vote is scheduled for a ratification of a defective corporate act that itself involved the establishment of a record date, the notice that is required must also be sent to all holders of valid or putative stock as of the record date originally established for approval of that defective corporate act. Relatedly, section 204(g) has been amended to provide that public companies may give the notice through documents publicly filed with the Securities and Exchange Commission.
The amendments also modify DGCL section 204(h)(1) to clarify that ratification is available for any act that a corporation is permitted to take under DGCL subchapter II. More specifically, the amendments to the definition of “defective corporate act” clarify that the failure to approve an act in accordance with the DGCL, corporate charters or corporate bylaws does not preclude a corporation from ratifying such an act under section 204. This amendment is a response to a 2017 Court of Chancery decision, which suggested that ratification was not available for acts that were not approved in accordance with the DGCL or the corporation’s bylaws or certificate of incorporation. The amendment broadens the scope of corporate acts that may be ratified pursuant to section 204, though it does not restrict the Court of Chancery’s powers to find an act invalid or refuse to validate a corporate act that has been ratified in accordance with section 204.
The amendments also authorize nonstock corporations to ratify defective corporate acts pursuant to sections 204 and 205 by amending DGCL section 114.
The 2018 DGCL amendments also modify section 102(a)(1), which governs the naming requirements of a corporation’s certificate of incorporation. The amendment will add the requirement that the corporate name also be unique from that of any registered series of a limited liability company, or any name reserved for a registered series of a limited liability company. Before this amendment, a corporate name needed only to be unique from all other corporations, partnerships, limited partnerships, limited liability companies and statutory trusts.
The amendments also clarify DGCL section 284(a), which governs revocation or forfeiture of a corporate charter, to make clear that the state attorney general has the exclusive power to seek such a revocation. Further, given that electronic filing is mandated in the Court of Chancery, language has been stricken from section 284(a) that formerly required that proceedings to revoke or forfeit a charter be filed in the county in which the registered office of the corporation is located. Finally, section 284(b), which describes the authority of the Court of Chancery in a revocation or forfeiture proceeding, has been amended to allow — in addition to the power to appoint a receiver — the power to appoint a trustee for the corporation.
Finally, the amendments propose revisions to DGCL sections 313(b) and 502(a), both of which govern exempt corporations, to more accurately reflect the current practices of the Office of the Secretary of State.
The amendments to DGCL section 102(a) become effective on August 1, 2019. The sections of the amendments relating to DGCL section 204 are effective only as to “defective corporate acts ratified or to be ratified pursuant to resolutions adopted by a board of directors on or after August 1, 2018.” The amendments related to statutory appraisal rights are only effective as to mergers or consolidations “consummated pursuant to an agreement entered into on or after August 1, 2018.”