Richards Layton & Finger
 

2010 Amendments to the DGCL: Nonstock Corporations, Short Form Mergers, Indemnification and Other Changes

May 3, 2010

Nonstock Corporations

The General Corporation Law of the State of Delaware (the “DGCL”) has long contained provisions for both corporations authorized to issue capital stock and corporations not authorized to issue capital stock (commonly known as nonstock corporations). Among the proposed 2010 amendments is a comprehensive revision of the DGCL intended to make consistent the DGCL’s application to nonstock corporations.

The nonstock amendments would add to the DGCL Section 114, which is a “translator” provision setting forth which provisions of the DGCL apply to nonstock corporations generally and which provisions apply to non-profit nonstock corporations specifically. That is, proposed Section 114(a) generally provides that each provision of the DGCL—unless otherwise provided in Sections 114(b) or 114(c)—applies to nonstock corporations by translating the stock corporation terms in each applicable provision into nonstock corporation terms.

While the nonstock amendments are primarily intended to clarify the application of certain provisions of the DGCL to nonstock corporations, the amendments also involve some substantive changes to existing law regarding nonstock corporations. Among the more significant changes contemplated by the nonstock amendments are the following:

  • Nonstock corporations will be expressly required to have members, but the amendments will add a savings clause to ensure that any nonstock corporation failing to have members is not invalidated for that reason. If a nonstock corporation has failed to set forth the conditions of membership in its certificate of incorporation or bylaws, following the amendments, its members will be deemed to be those who elect the members of the governing body. 
  • The proposed amendments will provide that the record date is presumably the date of the meeting or corporate action, although the amendments will provide several methods of altering this presumption.
  • Nonstock corporations will be able to effect a short-form merger with a subsidiary corporation, so long as the parent nonstock corporation is the surviving corporation, and so long as such merger would not impair the charitable status of a charitable nonstock corporation.
  • The amendments will simplify the procedure for authorizing mergers of domestic nonstock corporations in situations where there are no members of the corporation entitled to vote on the merger other than the members of the governing body themselves. The amendments will provide that the approval of any such merger may be obtained at a single meeting, by the vote of a majority of the total number of members of the governing body. Currently, these mergers must be approved first by a majority of a quorum of the governing body and then re-approved by two-thirds of the total number of members of the governing body at a second meeting.

Short-Form Mergers with Non-Corporate Entities

Section 253 of the DGCL allows a corporation to merge with its subsidiary if the parent owns at least 90% of the outstanding shares of each class of stock entitled to vote on a merger merely by filing a certificate of stock ownership and merger. Proposed amendments to the DGCL will add new Section 267 to provide a mechanism for a short-form merger of a subsidiary corporation or corporations and a parent non-corporate entity having such 90% ownership. Non-corporate entities listed in Section 267 will include general partnerships, limited liability partnerships, limited liability companies, joint-stock associations, and certain unincorporated associations or trusts. Notably, Section 267 will not apply to nonstock corporations.

Indemnification and Advancement

Section 145 of the DGCL addresses indemnification and advancement of expenses. Proposed amendments to Section 145 will clarify two subsections to draw a clearer distinction between current officers and directors of a corporation, and persons serving at the request of the corporation as directors or officers of another corporation, partnership, joint venture, trust or other enterprise.

The first amendment will clarify that the second sentence of Section 145(d), which requires that a determination that indemnification is proper be made by one of four specified decision-making bodies in certain circumstances, applies when the potential indemnitee is a director or officer of the corporation at the time of such determination (as opposed to when a potential indemnitee is not a director or officer of the corporation at such time but is serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise).

The second amendment will clarify that the first sentence of Section 145(e) is intended to apply to advancement of expenses to present officers and directors of the corporation providing the advancement (and not to advancement to persons serving at the request of the corporation as officers and directors of another corporation, partnership, joint venture, trust or other enterprise). The second amendment will further clarify that expenses may be advanced upon such terms and conditions, if any, as the corporation deems appropriate to persons serving at the request of the corporation as directors, officers, employees or agents of another corporation, partnership, joint venture, trust or other enterprise.

Other Amendments

The proposed 2010 amendments would effect other changes to the DGCL, including clarifying that the DGCL’s dissolution procedures apply to special purpose acquisition companies (SPACs) and other corporations that (by virtue of their certificates of incorporation) expire after a specified term, modernizing the procedure for service of process on the Delaware Secretary of State, and expanding the types of entities that may serve as registered agents for foreign corporations qualified to do business in Delaware. The proposed amendments would also clarify the following:

  • The decision to include either a copy or a summary of a proposed amendment to the certificate of incorporation under Section 242(b) of the DGCL or an agreement of merger or consolidation under Section 251(c) of the DGCL need not be approved by a specific act of the board of directors.
  • In a merger, the certificate of incorporation of the surviving corporation may be amended and restated in its entirety.

Effective Date

The 2010 amendments to the DGCL are anticipated to become effective in August 2010.