2022 Proposed Amendments to the General Corporation Law of the State of Delaware
April 21, 2022
Legislation proposing to amend the General Corporation Law of the State of Delaware (the “DGCL”) is expected to be introduced to the Delaware General Assembly for consideration during its 2022 regular session. If enacted, the 2022 amendments to the DGCL will, among other things, (i) enable corporations to include in their certificates of incorporation provisions exculpating specified executive officers for certain breaches of fiduciary duty; (ii) harmonize the provisions governing the issuance of stock, on the one hand, and options and rights to acquire stock, on the other, including with respect to the board’s delegation of the power to issue stock and options and rights to acquire stock; (iii) reduce the vote required to effect a conversion of a Delaware corporation to another entity; (iv) provide additional flexibility to non-U.S. entities domesticating to Delaware as a corporation to effect corporate acts in connection with a plan of domestication, including by dispensing with the need for approvals by the directors and stockholders of the domesticated corporation in respect of matters approved by the non-U.S. entities pursuant to the plan; (v) revise the provisions governing appraisal rights, including to allow beneficial owners to make appraisal demands in their own name and to provide appraisal rights in the case of a conversion of a Delaware corporation to another entity; (vi) eliminate the requirement to make the stocklist available during a meeting of stockholders, including a meeting conducted solely by remote communication; (vii) update the provisions relating to notice of stockholders’ meetings to add procedures governing the adjournment of virtual meetings in circumstances where a technical failure has occurred; and (viii) require corporations whose duration expire by a specified date to file a certificate of dissolution in connection with the expiration of their duration.
If enacted, except as noted below, the amendments will become effective on August 1, 2022. The amendments to Section 262 (dealing with appraisal rights) will be effective only with respect to mergers, consolidations or conversions adopted or entered into, as applicable, on or after August 1, 2022. The amendments to Section 266 will be effective only with respect to corporations converting pursuant to resolutions of the board of directors approving such conversion that are adopted on or after August 1, 2022. The amendments to Section 388 will be effective only with respect to corporations as to which a plan of domestication is entered into on or after August 1, 2022, or, if no plan of domestication is entered into in connection with the domestication, any such corporations with respect to which the approvals required by Section 388(h), as amended, are obtained on or after August 1, 2022.
Exculpation of Specified Executive Officers
The 2022 amendments will revise Section 102(b)(7) of the DGCL to authorize a corporation to include in its certificate of incorporation a provision to eliminate or limit the monetary liability of specified executive officers for breach of the duty of care. As used in amended Section 102(b)(7), the term “officer” means a person who at the time of an act or omission as to which liability is asserted is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to Delaware’s long-arm statute, Section 3114(b) of title 10 of the Delaware Code. As Section 3114(b) does not apply to residents of Delaware, given that they are already subject to personal jurisdiction in Delaware, Section 102(b)(7), as amended, treats Delaware residents as if they were non-residents. Thus, by reference to Section 3114(b), the “officers” entitled by statutory default to be covered by an exculpatory provision are (i) the corporation’s president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer; (ii) an individual identified in public filings as one of the most highly compensated officers of the corporation; and (iii) an individual who, by written agreement with the corporation, has consented to be identified as an officer for purposes of Section 3114(b).
As with directors, the provision may not exculpate such officers from liability for breach of the duty of loyalty; acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; illegal stock redemptions, stock repurchases or dividends; or any transaction in which the officer derived an improper personal benefit. Unlike the elimination and limitation of liability allowed for directors, Section 102(b)(7), as amended, will not allow for any elimination or limitation of liability of the covered officers for claims brought by or in the right of the corporation, including derivative claims.
Section 102(b)(7) was originally adopted in 1986, largely in response to the crisis in the directors’ and officers’ insurance market that followed the Delaware Supreme Court’s opinion in Smith v. Van Gorkom, where it found that the directors had acted with haste in approving a merger and failed to consider all material information available to them, thereby breaching their duty of care. 488 A.2d 858 (Del. 1985). At the time, Delaware’s Corporation Law Council, which is responsible for proposing amendments to the DGCL, considered several alternatives to address the issue, including amending Section 145(b) of the DGCL to allow the corporation to indemnify directors for judgments and amounts paid in settlement of claims brought by or in the right of the corporation, amending Section 145(g) to allow for captive insurance, and imposing statutory limits on liability. Those alternatives were rejected at the time, as the Council at the time of the original adoption of Section 102(b)(7) concluded that giving corporations the power, through their certificates of incorporation, to determine whether to limit or eliminate director liability more directly addressed the issue.
By its terms, Section 102(b)(7), as originally adopted, applied only to directors. The original omission of officers was deliberate. First, it was believed that officers would bring matters to the board of directors and would be protected by the fact that the board will have made the decision. Second, at the time Section 102(b)(7) was adopted, Section 3114 of Title 10 provided that directors were deemed to consent to service of process in the State of Delaware, but it did not apply to officers. Thus, other than officers who also served as directors, it was difficult for non-resident officers to be named as defendants in proceedings in Delaware. In 2003, however, in the wake of a series of corporate scandals involving Enron, Worldcom and others, and in light of the fact that changes in corporate governance stemming from, among other things, the Sarbanes-Oxley Act resulted in a reduction in the number of inside directors, Section 3114 was amended to add the executive officers noted above. In the years following the amendment to Section 3114, fiduciary litigation involving officers solely in their capacity as such remained relatively rare, but more recent changes in the M&A litigation landscape have made executive officers a target for claims of breach of fiduciary duty, including the duty of disclosure. For example, in Morrison v. Berry, 2019 WL 7369431 (Del. Ch. Dec. 31, 2019), the Court of Chancery dismissed claims against the outside directors of Fresh Market that had approved the company’s acquisition by a private equity firm, but allowed the claims against the company’s general counsel and chief executive officer to proceed on the basis that, in light of the plaintiff-friendly pleading standard, the Court found it reasonably conceivable that the officers were grossly negligent in preparing the disclosure document. The Morrison Court’s ruling essentially held that, once a disclosure violation had been found, allegations against officers who prepared the disclosure document would effectively proceed (even where the omitted disclosures may have been close calls that the Court of Chancery itself did not initially deem material omissions). Subsequent opinions of the Court of Chancery have followed that reasoning. See, e.g., City of Warren Gen. Emps.’ Ret. Sys. v. Roche, 2020 WL 7023896 (Del. Ch. Nov. 30, 2020); In re Baker Hughes Inc. Merger Litig., 2020 WL 6281427 (Del. Ch. Oct. 27, 2020).
In large part, the amendments to Section 102(b)(7) were enacted in response to the perverse outcome in which claims for breach of the duty of disclosure against directors were being dismissed, while the same claims against the officers were allowed to proceed. Given corporate law’s stringent construction of “gross negligence,” which requires a showing of conduct bordering on recklessness, it is difficult to conceive of a fact pattern in which an officer of a public company that, with the assistance of outside counsel, prepared a disclosure document was in fact “grossly negligent” in doing so. Nevertheless, the lack of exculpation for officers gives stockholder plaintiffs the ability to continue to exert litigation pressure to drive a settlement. Despite the difficulty those plaintiffs would face in proving, after trial, that an officer was grossly negligent, defendants rationally may wish to settle the claims to avoid the costs and distraction of litigation.
While the amendments to Section 102(b)(7) would protect specified executive officers from monetary liability arising out of claims for breach of the duty of care brought directly against them by stockholders, as is frequently the case in the M&A context, they would not prevent the board of directors from pursuing claims against officers in the name of the corporation, nor would they prevent stockholders from bringing derivative claims in which officers are alleged to have breached their duty of care. Thus, the amendments recognize the basic structure of the Delaware corporation—that directors are principally responsible for oversight of the corporation and the long-term best interests of stockholders, while officers are responsible for management of the corporation’s day-to-day affairs. Given that basic design, directors must have the ability to rely on officers—and should have the opportunity to pursue claims for breach of the duty of care against officers who fall short of their obligations. In terms of derivative litigation, the board of directors will in most cases retain the ability to determine whether to pursue claims for breach of the duty of care against officers, given that stockholders will either have to make a demand on the board to pursue litigation or demonstrate that such a demand would be futile, which should prove difficult where the board is composed of a majority of disinterested, independent directors.
As with an exculpatory provision that applies to directors, an exculpatory provision for officers will not apply by default; it must be included in the certificate of incorporation and will apply only with respect to acts or omissions occurring while it is in effect. Similarly, if the provision were subsequently amended to eliminate the exculpatory protection afforded to officers, the exculpatory protection will continue to apply with respect to acts or omissions taken while the provision was in effect, unless the provision otherwise provides at the time of the act or omission. As exculpatory provisions for officers must be included in the certificate of incorporation, it is likely that many newly formed corporations, as well as corporations that are pursuing an initial public offering, will include provisions in their certificates of incorporation that exculpate officers to the fullest extent permitted by law. In the current interim period after the announcement of the proposed amendment but before its enactment, corporations that are presently being formed or would like to secure the protection for officers at such time the statutory amendment becomes effective should consider adopting a provision to the effect that the exculpatory provision will cover officers if and to the extent the statute is amended to allow for exculpation of officers. It remains to be seen how institutional investors and proxy advisors will react to proposals to amend the certificate of incorporation of existing public companies to provide exculpation to officers. In light of the structure of the proposed amendments to Section 102(b)(7), which would not allow for exculpation of officers against claims brought by or in the right of the corporation and would principally protect them for a narrow class of direct claims in which executive officers are alleged to have breached their duty of care, there would not seem to be a principled objection to the inclusion of such a provision.
Issuance of Stock and Options
Historically, the creation and issuance of stock and options and rights to acquire stock were within the sole province of the board or a duly empowered committee of the board. In 2001, Section 157 was amended to allow the board to delegate to officers the power to allocate options and rights to purchase stock, subject to certain limitations. The 2001 amendment to Section 157, however, continued to require the board to fix the terms of the rights or options, including the purchase price. In 2013 and 2015, primarily in response to questions around the validity of stock issued in connection with at-the-market programs, Section 152 was amended to allow the board to delegate the power to issue stock, subject to broad parameters fixed by the board. At that time, no corresponding changes were made to Section 157, which already included provisions allowing for a limited measure of delegable authority.
The 2022 amendments will make several changes to Sections 152, 153 and 157 to harmonize the process by which the issuance of stock and options or rights to acquire stock may be authorized. The current differences in the statutory procedures applicable to the authorization of stock issuances, on the one hand, and issuances of options and rights to acquire stock, on the other hand, create some complications, particularly for those responsible for the design of equity incentive plans. By creating greater consistency among the statutory provisions governing the issuance of stock and options and rights to acquire stock, the 2022 amendments will help to eliminate the opportunity for “foot-faults” in authorization and give corporations greater flexibility in establishing their internal procedures for equity incentive programs.
Specifically, the proposed amendments will allow the board (or a duly empowered committee) to delegate its authority to issue stock or options or rights to acquire stock by adopting a resolution that fixes the following: (i) the maximum number of shares of stock, rights or options that the delegate may issue or sell, (ii) a time period during which the issuances or sales may occur, and (iii) the minimum amount of consideration to be received for the issuances or sales. Consistent with the current provisions of the DGCL, under the amendments, such minimum consideration to be received for the issuance of stock having a par value may not be less than the par value of the shares so issued, but an amount equal to the par value of any treasury shares would not need to be received in exchange for their disposition, as the corporation would have already received the minimum consideration for the issuance of such shares. Where the delegation applies to the issuance of rights or options, the resolutions must fix the foregoing parameters for the rights or options to be issued and the shares of stock issuable on exercise thereof. That is, the resolutions must specify, for example, the maximum number of options or rights that are available for issuance by the delegate as well as the maximum number of shares that may be purchased upon the exercise of the rights or options. In addition, the resolution that provides for the delegation to a person or body may not permit the person or body to issue rights or options to such person or body.
Sections 152, 153 and 157 permit delegation to a person or body “in addition to the board of directors.” This language is intended to confirm that the procedures relating to the delegation of power under Sections 152(b), 153(c) and 157(c), and the statutory restrictions on delegated power, do not apply to delegations to committees of the board, which may, as is currently the case, be delegated full powers of the board, without regard to any of the other limitations on the authority of a delegate. Moreover, the proposed amendments make clear that a duly empowered committee of the board may delegate the committee’s authority to issue or sell stock, rights or options to a person or body by complying with the applicable provisions of the DGCL relating to delegation.
Sections 152, 153 and 157 also clarify that a board resolution providing for the issuance or sale of stock, rights, or options may be made dependent on “facts ascertainable” outside the resolution. The 2022 amendments continue to provide that the consideration paid for issuances or sales of stock, rights and options may be set by reference to a formula provided in the board resolution (e.g., market price at the time of issuance). In addition, if the board is authorizing a transaction for the issuance or sale of stock by, for example, approving a stock purchase agreement, the consideration received by the corporation and the other terms of the issuance may be made dependent on the provisions in the agreement and on determinations by a person or body, such as an expert who makes determinations that might result in an adjustment to the number of shares issued. By contrast, if the board is delegating to a person or body the authority to enter into a transaction to issue or sell stock, rights or options, such as authorizing an officer to make stock or option grants to employees or to issue stock in an “at-the-market offering,” the delegate cannot make the determinations regarding the three parameters in Sections 152(b) and 157(c). Thus, the board (or committee) would have to establish the minimum consideration, the maximum number of shares or options or rights, as applicable, and the period during which the issuances or sales could be made.
In addition to broadening the authority that may be delegated under Section 157, the 2022 amendments will eliminate the requirement that the terms of a right or option be set forth or incorporated by reference in an instrument evidencing the rights or options. Thus, the amendments expressly clarify that rights or options may be issued in book-entry or electronic form.
Section 265 of the DGCL, which governs the conversion of other entities to a Delaware corporation, is being amended to specify that the approval of the conversion under the document, instrument, agreement or other writing governing the internal affairs of the converting entity, and the approval of the certificate of incorporation by the same authorization required to approve the conversion, must occur before the time the certificate of conversion filed with the Delaware Secretary of State to effect the conversion becomes effective.
Section 266 of the DGCL, which governs the conversion of a Delaware corporation to another entity, currently requires the unanimous consent of all stockholders, voting or nonvoting, to approve the conversion. At the time the conversion statute was adopted, the unanimity requirement served as a means to avoid the need to address whether appraisal rights should apply in the context of a conversion. It also served to ensure that if stockholders became owners of an entity with dramatically different attributes—including an entity like a general partnership that would render equity holders liable for the debts of the partnership—the stockholders will have consented to that treatment. In practice, the unanimity requirement limited the use of the conversion statute to wholly owned subsidiaries or closely held corporations.
Section 266 is being amended to provide that a conversion may be approved by the vote of the holders of a majority in voting power of the outstanding shares entitled to vote thereon. In recognition of the fact that a conversion could result in a corporation becoming a partnership (with stockholders becoming general partners with unlimited liability for the debts of the partnership), the amendments require the express consent of any stockholder that will become a general partner in connection with a conversion. In addition, given that many stockholders, including preferred stockholders, invested on the basis that conversions would be practically impossible to consummate (and they negotiated protective provisions or other rights with that premise in mind), the amendments make clear that any provision of the certificate of incorporation of a corporation incorporated before August 1, 2022, or voting agreement or other written agreement between the corporation and any stockholder entered into before that date, that restricts or prohibits the consummation of a merger or consolidation shall be deemed to apply to a conversion unless the certificate of incorporation or agreement otherwise provides. Thus, for example, protective provisions of existing corporations that require a separate vote of the holders of preferred stock (or one or more series thereof) to approve a merger will be construed to require the same vote to effect a conversion. Nevertheless, going forward, investors should be careful to ensure that, if they want to obtain veto rights over conversions, they specifically negotiate for blocking rights over conversions. Without those express contractual rights, investors run the risk of having their shares cancelled or converted into another form of consideration (either cash, securities or other property) in a conversion. Investors should also review the terms of any “deemed liquidation” provisions to ensure that they will obtain the rights they seek to receive if the corporation consummates a conversion transaction that changes the nature of their investment. Although investors should consider negotiating for such rights, they will not be entirely unprotected. As described below, Section 262 of the DGCL is being amended to give stockholders appraisal rights in connection with conversions. From a practical standpoint, the availability of appraisal rights will have the effect of deterring many private corporations from converting to another entity, as the prospect of a liquidity event will make it economically infeasible to complete the conversion.
The 2022 amendments will make several significant changes to Section 388 of the DGCL, which allows for the domestication of a non-U.S. entity to a Delaware corporation. Under amended Section 388, the non-U.S. entity may adopt a plan of domestication setting forth the terms and conditions of the domestication, including the manner of exchanging or converting the equity interests of the non-U.S. entity to be domesticated and any other details or provisions deemed desirable. The plan may also set forth corporate action to be taken by the domesticated corporation in connection with the domestication. Those specified corporate acts must be approved in accordance with the requirements of applicable non-U.S. law before the effectiveness of the domestication. Once so approved, any such corporate action that is within the power of a Delaware corporation under the DGCL that is set forth in the plan of domestication will be deemed to have been authorized, adopted and approved, as applicable, by the domesticated corporation and its board of directors, stockholders or members, as applicable, and will not require any further action of the board of directors, stockholders or members of the domesticated corporation. If any such corporate action requires the filing of a certificate with the Delaware Secretary of State (e.g., a certificate of amendment or a certificate of merger), the certificate shall state that no action by the board of directors, stockholders or members of the corporation otherwise required by any other section of the DGCL is required in accordance with Section 388 of the DGCL. The amendments provide that the terms of a plan of domestication may be made dependent upon facts ascertainable outside of such plan if the manner in which such facts operate upon the terms of the plan is clearly and expressly set forth in such plan. The amendments further provide that a certificate of domestication shall certify that, prior to the time the certificate of domestication becomes effective, the domestication will be approved in accordance with the document, instrument, agreement or other writing, as the case may be, governing the internal affairs of the non-U.S. entity and the conduct of its business or by applicable non-U.S. law. If a plan of domestication is adopted, the certificate of domestication must certify that all provisions of the plan shall be approved prior to the effectiveness of such certificate in accordance with all applicable non-U.S. law (including any approval required under non-U.S. law for the authorization of the type of corporate action specified in the plan of domestication). The amendments to Section 388 will provide transaction planners substantial flexibility in structuring transactions in which an entity domesticates to Delaware. For example, if a special purpose acquisition corporation (or SPAC) domesticates to Delaware in connection with a proposed business combination transaction, it could include as part of its plan of domestication further amendments to its certificate of incorporation—and it could rely on the approval of the plan of domestication to effect those changes, without the need for additional board and stockholder approval of the newly domesticated Delaware corporation.
Section 262 is being amended in several respects. First, the amendments provide that beneficial owners may, in their own name, make a demand for appraisal, subject to specified procedures and requirements. Under current Section 262, only stockholders of record may make a demand for appraisal. As a result, stockholders of public companies, many of whom hold their shares in “street name,” are currently required to cause the actual registered owner of the shares (usually Cede & Co.) to submit the demand on their behalf. In recognition of the fact that, where shares are held in street name, the record owner is not the real party in interest, Section 262 was amended in 2007 to allow beneficial owners to initiate an appraisal proceeding and to exercise other rights under the statute, such as requesting the statement regarding the number of shares not voted in favor of the transaction and for which appraisal demands have been received and the number of holders thereof. But the statute continued to require the initial demand to be made by the holder of record. The 2022 amendments will allow beneficial owners, in their own name, to make the demand for appraisal. A beneficial owner must comply with the requirements of Section 262(d)(3) to demand appraisal, including its requirement that the beneficial owner who demanded appraisal directly continuously maintains beneficial ownership of the shares. Conforming changes to the other subsections of Section 262 clarify the manner in which a beneficial owner may participate in the appraisal process and an appraisal proceeding. Among other things, these conforming changes confirm that beneficial owners and record holders who have duly demanded appraisal may request a statement setting forth the aggregate number of shares not voted in favor of a merger, consolidation or conversion, as applicable, and with respect to which appraisal demands have been received, and the aggregate number of stockholders or beneficial owners holding or owning such shares (with the record holder of shares owned by a beneficial owner who has duly made an appraisal demand not being considered a separate stockholder holding such shares for purposes of calculating the aggregate number of holders).
In connection with the amendments to Section 266 reducing the vote required to approve a conversion, Section 262 is being amended to provide appraisal rights to stockholders in connection with a conversion of the corporation, unless appraisal rights are denied pursuant to the “market out” exception set forth in amended Section 262(b). In general, current Section 262(b)(2) provides that, where shares of stock are listed on a national securities exchange or held of record by more than 2,000 stockholders on the record date for determining stockholders entitled to notice of the meeting of stockholders to vote upon the merger or consolidation, those holders will not be entitled to appraisal rights in such merger or consolidation unless their shares are converted into anything other than shares of the surviving corporation, shares of stock of another corporation (or depository receipts in respect thereof) that are listed on a national securities exchange or held of record by more than 2,000 stockholders, cash in lieu of fractional shares, or any combination of the foregoing. The reference in Section 262(b) that conditioned the first prong of the market out exception on the stockholders’ holding listed shares (or shares held of record by more than 2,000 stockholders) as of the record date for determining stockholders entitled to notice of the meeting to vote upon the merger or consolidation gave rise to the question as to whether the language of the market out should be clarified to confirm that the exception, if otherwise applicable, should apply regardless of whether the relevant transaction is approved at a meeting or by consent in lieu of a meeting. Accordingly, in addition to ensuring the market out exception that would otherwise apply will govern conversions, mergers and consolidations, the 2022 amendments revise Section 262(b) to confirm that the market out exception, if available, applies regardless of whether the merger, consolidation or conversion was approved at a meeting of stockholders or by consent of stockholders in lieu of a meeting. In addition to making changes to the market out exception, Section 262(b) is being amended to eliminate appraisal rights in connection with a merger, consolidation or conversion of an entity that has domesticated as a Delaware corporation pursuant to Section 388, if the merger, consolidation or conversion is authorized in accordance with Section 388, as amended pursuant to the 2022 amendments.
Section 262 currently requires that a copy of Section 262 (and if the corporation is a nonstock corporation, Section 114) be included in the notice of appraisal rights. In general, the statute is reproduced in full as an annex to the notice. The amendments to Section 262(d) provide that, in lieu of reproducing the applicable sections of the DGCL in full, a corporation may instead include in the notice information directing the persons entitled to appraisal to a publicly available electronic resource to access Section 262 (and Section 114, if applicable) without subscription or cost. An electronic resource would include the website maintained on behalf of the State of Delaware on which those statutes are posted.
Sections 262(j) and (k) are being amended to clarify the manner in which the expenses of a stockholder or beneficial owner who participated in an appraisal proceeding may be charged pro rata against the value of all the shares entitled to an appraisal award. Unless the Court of Chancery orders otherwise, expenses awarded under Section 262(j) are not charged against a person who properly withdraws such person’s demand for appraisal or is dismissed from the proceedings under Section 262(k) without a reservation of jurisdiction. The amendment to Section 262(k) further clarifies that a stockholder or beneficial owner may withdraw a demand for appraisal with respect to less than all of the shares for which such person initially demanded appraisal.
Section 219 currently requires corporations to prepare a list of stockholders entitled to vote at a meeting of stockholders and to make the list available for ten days before the meeting and during the time and place of the meeting, including, in the case of a virtual meeting, on a reasonably accessible electronic network. Although the requirement to make the list available during the meeting has been included in the DGCL since its enactment in 1899, it has little practical benefit in the modern era. The list is of no use to an insurgent stockholder mounting a proxy contest; rather, an insurgent will typically need to obtain a stocklist pursuant to Section 220 of the DGCL well in advance of the meeting. The lack of a practical use for making the list available at the meeting was balanced against legitimate concerns regarding the potential for misuse of the list, particularly where the corporation is holding a virtual meeting and is required to post the list on an electronic network.
Notice of Meetings
Section 222, which deals with the requirement to give notice of meetings of stockholders, is being amended in several respects. First, Section 222(a) is being revised to make clear that notice of a meeting of stockholders shall be given in accordance with Section 232, which was amended in 2019 to specify the manner in which notice may be given, clarifying that notice could be given by mail, courier or electronic mail or, with the consent of a stockholder, pursuant to other specified means of electronic transmission. Second, Section 222(b) is being amended to address issues that are unique to the functioning of virtual stockholders’ meetings. The amendments make clear that, unless the bylaws otherwise require, when a meeting is adjourned, including due to a technical failure to convene or continue the meeting by remote communication, notice need not be given if the time, date and place of the meeting (and, to the extent applicable, the means of remote communication for the meeting) are announced at the meeting, displayed during the time scheduled for the meeting on the electronic network used for the virtual meeting, or set forth in the notice of the meeting. Thus, to address the possibility that technical failures may prevent the meeting from being convened, corporations may include in their meeting notices a statement that provides an advance adjournment notice. To address the possibility that a meeting site will crash while a virtual meeting is underway, corporations may post on the meeting site the adjournment procedures in the event of a crash.
In 2014, Section 141(f), which allows unanimous consent of directors in lieu of a meeting, and Section 228, which deals with consent of stockholders in lieu of a meeting, were amended to provide that directors or stockholders could execute a consent and that such consent could be placed in escrow (or similar arrangement), to become effective at a future date within 60 days. At the time, Section 141(f) made clear that any consent delivered by a person who was not then a director could give a consent that would become effective at such a future date, so long as the person was a director at the time the consent became effective. That provision was deemed necessary in light of case law holding that only directors could give consents. A similar provision was not included in Section 228 on the theory that Section 213(b) of the DGCL already provides for the fixing of a record date for determining stockholders entitled to give consent. Nevertheless, to avoid any uncertainty on the issue, Section 228(c) is now being amended to confirm that a person may give a consent of stockholders, to be effective at a future date or in accordance with instructions, before such person is a stockholder, so long as the person is a stockholder as of the record date for determining stockholders entitled to consent to the action. These provisions of amended Section 228(c) also apply to consents given by members of nonstock corporations.
By default, a Delaware corporation has perpetual existence. Under Section 102(b)(5), however, a corporation may include in its certificate of incorporation a provision limiting its existence to a specified date. Currently, where a corporation has so limited the duration of its existence, there is no express requirement for the corporation to file any additional instrument with the Delaware Secretary of State confirming that it has ceased to exist. The lack of a requirement to file such an instrument has created challenges for the Secretary of State in determining the status of corporations whose terms have expired. The 2022 amendments would require any corporation that has adopted a provision limiting its existence to a specified date to file a certificate of dissolution. Consistent with Section 103(d), which allows for a certificate to be filed with a future effective date within 90 days of the filing date, The certificate of dissolution must be filed within 90 days of the date on which the corporation’s duration is fixed to end. The certificate, when filed in advance, would specify the date on which it would become effective (i.e., the date on which the corporation’s duration terminates). The amendments also recognize that not all corporations with a limited duration will file a certificate of dissolution as required. The amendments provide that the failure to timely file a certificate of dissolution shall neither affect the expiration of any corporation’s existence on the date specified in its certificate of incorporation nor eliminate the requirement that the corporation file a certificate of dissolution. To address the possibility that a corporation will so fail to file a certificate of dissolution, the statute, as amended, provides that any certificate of good standing issued after the date on which the corporation’s existence terminates shall be of no force or effect.
The DGCL requires various instruments—including certificates of incorporation and amendments thereto as well as instruments to effect various acts, such as mergers, conversions and dissolutions—to be filed with the Delaware Secretary of State. In general, any such instrument is effective at the time it is filed with and accepted by the Secretary of State, unless it provides that it will become effective at a specified date within 90 days after the filing date. Under Section 103(b)(2) of the DGCL, a person’s filing of an instrument with the Secretary of State constitutes an oath or affirmation, under penalty of perjury, that the facts stated therein are true. The 2022 amendments will amend Section 103(b)(2) to clarify that a person’s execution of an instrument constitutes an oath or affirmation, under penalty of perjury, that the facts stated therein are true at the time such instrument becomes effective.
Section 502(a)(3) of Title 8 of the Delaware Code is being amended to clarify that the principal place of business address included in the annual franchise tax report that a corporation is required to file may not be the address of the corporation’s registered office unless the corporation maintains its principal place of business in Delaware and serves as its own registered agent.
Section 503 of the Title 8 of the Delaware Code is being amended to make changes regarding the large corporate filer status and the effectiveness of any re-designation thereof. In general, corporations that are classified as large corporate filers, and therefore subject to the increased franchise tax rates, will need to notify the Secretary of State if they cease to meet the criteria for being treated as large corporate filers. If the notice is not given, they will continue to be taxed at the rate applicable to large corporate filers. Accordingly, the provision of such notice to the Secretary of State should be added to the closing checklists for going-private mergers involving public corporations.
The 2022 amendments to the DGCL make several important changes, continuing Delaware’s commitment to updating its corporate law annually to address issues affecting corporations and practitioners.