This article was republished by Westlaw Today on August 27, 2024.
According to the latest statistics from Delaware’s Division of Corporations, 68.2% of all Fortune 500 companies are incorporated in Delaware, 79% of US-based IPOs in 2022 listed Delaware as their “corporate home,” and there were 313,650 total business entity formations in 2022 in Delaware. There are numerous reasons why founders choose Delaware to incorporate their companies, particularly the flexible nature of their corporate laws, which are often more favorable to businesses than other states, allowing companies to structure in a way that best fits their needs.
But 2024 saw the Chancery Court wade into some murky waters, upending decades of market practice and expectations about what Delaware law means—some of these decisions nullified corporate decisions based on predictable and established market practices. The result created uncertainty. In response, more than one of America’s leading technology businesses have announced plans to move to Texas and other jurisdictions deemed more attractive for doing business.
And the legislature in Delaware has responded. On July 17, the Governor of Delaware signed a new bill that will amend the statute on corporations in the state, allowing agreements that would shift authority away from the board to founders or large shareholders for major decisions. That could be for a decision related to a merger or acquisition, board composition, or even a recapitalization. The bill allows corporations to enter into these agreements without triggering an amendment to the certificate of incorporation or other action that requires lugubrious shareholder approval.
A portion of the legislation was drafted in response to the Delaware Chancery Court’s decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company. In this case, the court invalided an agreement that enabled the founder of an investment bank to exercise approval rights over a wide gamut of potential actions, with the court holding that the delegation of authority from the board and shareholders to a single person violated Section 141(a) of the Delaware General Corporation Law and was therefore invalid and unenforceable. Effectively, the court’s decision prohibited delegations of corporate decision-making without explicit pre-approval from stockholders and compliance with other formalities. The Chancery Court’s decision caused an uproar among the corporate bar, as it turned market practice upside down when it effectively prohibited existing corporate decision-making structures.
New DGCL Section 122(18) authorizes corporations to enter into stockholder agreements subject to receipt of minimum consideration as approved by the board, as long as the agreement does not violate the company’s charter and would not violate Delaware law if included in the charter (other than DGCL §115 regarding forum selection provisions). Examples of permissible provisions include those that:
- Restrict or prohibit future corporate actions specified in the contract.
- Require the approval or consent of one or more persons or bodies before the corporation may take specified actions.
- Covenant that the corporation or one or more persons or bodies (including the board or current or future directors, stockholders, or beneficial owners) will take or refrain from taking specified action
The legislature clarified that contracts imposing remedies on the corporation are allowed, including for action or inaction of its board or stockholders. However, it does not authorize contracts that seek to impose remedies or consequences on directors or bind them as parties. Those contracts would be evaluated under existing law. The new law explicitly does not address or change the fiduciary duties of officers, directors, or stockholders.
In another 2023 case titled Sjune AP-Fonden v. Activision Blizzard, Inc., the Delaware Chancery Court made another surprising holding that reversed established practice. In its opinion, the Chancery Court held that the Activision Blizzard board of director’s approval of a merger agreement was invalid as a result of the document before it had been an incomplete, non-final version that did not include the disclosure letter, omitted the charter of the surviving corporation, omitted the amount of the deal consideration, and delegated to a committee responsibility for negotiating terms relating to pre-closing dividends. The decision introduced a significant amount of formality into the stockholder approval process that had never previously been viewed as substantive to decision-making, not to mention uncertainty, into the merger approval process. For practitioners, this meant being required to wait to seek board approval until a completely final version of the merger agreement was available to provide to directors, and that includes all ancillary documents, including the disclosure letter, each schedule to it, and the charter of the surviving corporation. The decision introduced formalities into the notice to stockholders process, not merely telling stockholders how to obtain a complete and final copy of the merger agreement but providing all.
Once again, the Delaware state legislature responded with amendments to the Delaware General Corporation Law to clarify:
- In new section 147 that the merger agreement provided to the board for approval must only be in “substantially final form” rather than final form, that the board can later ratify it, and that the board’s pre-approval can be based merely on a summary of the material terms.
- In new section 232(g) documents enclosed with or appended to notices to stockholders are deemed part of the notice for purposes of determining whether the notice has been duly given.
- In new section 268(a), the elimination of two other procedural technicalities introduced by the court, one relating to the charter of the surviving corporation and the other relating to the disclosure schedules.
- In new section 268(b), the disclosure schedules and ancillary documents are not deemed to be part of the merger agreement that is required to be approved by the board of directors or the stockholders.
The Delaware state legislature passed other amendments to the Delaware General Corporation Law to enable merger agreements that provide for penalties or consequences of a failure to perform before the effective time or a failure to consummate, including the loss of any premium or other economic entitlement, as well as to provide for the practice of appointing stockholder representatives in mergers and consolidations.
While the legislature attempted to reestablish Delaware’s position as the home of America’s corporations, the new law has attracted significant controversy. Some argue that these issues should have worked through the court system. Others argue that these kinds of provisions have long been commonplace, and the legislation was needed to provide the certainty to protect corporate actions from unforeseen challenges. The consequences of these amendments remain to be seen, and future litigation will demonstrate whether the legislation achieves the stated goals.
