New Amendments to Delaware Law Impacts Mergers and Defective Corporate Acts

Delaware recently passed amendments to its General Corporation Law, which will impact corporate and acquisition rules for the automotive industry. The amendments add several new provisions to the DGCL, including provisions that (1) allow a corporation to opt into a streamlined back-end merger process by removing the need under certain circumstances for a stockholder vote, (2) authorize the ratification of certain defective corporate acts and stock issuances, and (3) permit the use of a formula in connection with the consideration for an issuance of stock. A number of other technical and conforming revisions are also made. These amendments are made effective as of August 1, 2013, except for the amendments authorizing the ratification of certain defective corporate acts, which will become effective on April 1, 2014.

Prior to the enactment of new Section 251(h), an acquirer contemplating a back-end merger was required to obtain an affirmative stockholder vote, even if the acquirer owned enough shares to assure such approval will be obtained, unless the acquirer owned at least 90 percent of each class of the target’s voting stock. The addition of new Section 251(h) allows a corporation to execute a back-end merger without the need for a stockholder vote, as long as the parties to the merger agreement comply with the terms of the new statute. Section 251(h) provides that, unless otherwise required by the target company’s certificate of incorporation, a merger agreement involving a publicly held Delaware corporation may permit the acquiring company to approve a back-end merger without the need for a stockholder meeting. A Delaware public corporation is defined as a corporation whose stock is listed on a national securities exchange or held of record by more than 2,000 stockholders. Furthermore, the following conditions must be met: (1) the merger agreement should state that the contemplated transaction is governed by Section 251(h), and the back-end merger is required to be completed “as soon as practicable” following the consummation of the first-step tender or exchange offer; (2) the offer is for any and all of the target’s outstanding voting stock; (3) following the consummation of the tender or exchange offer, the acquirer must own the percentage of target stock required by the DGCL to adopt the merger agreement, or any higher threshold required by the target’s certificate of incorporation; (4) no other party to the agreement is an “interested stockholder” (as defined in Section 203 of the DGCL) at the time the board of directors approved the agreement; (5) the entity making the tender offer is required to merge with or into the target corporation in accordance with the terms of the merger agreement; and (6) the target’s outstanding shares that are not cancelled are entitled to receive the same amount and type of consideration paid in the tender or exchange offer.

New Sections 204 and 205 sets forth procedures to ratify defective corporate actions and vests the Court of Chancery with jurisdiction over disputes regarding such actions. Prior to new Sections 204 and 205, Delaware corporate law distinguished between “void” and “voidable” defective corporate acts, whereby “voidable” acts may be ratified but “void” acts may not. Post-amendment, the term “defective corporate act” will cover all corporate acts that are within the power granted to a corporation under the DGCL, but that are otherwise defective based on a “failure of authorization” due to non-compliance with the DGCL, the corporation’s organizational documents or any plan or other agreement to which the corporation is a party and where such noncompliance would result in such act being void or voidable. If ratified in accordance with Section 204 or if validated by the Court of Chancery in a proceeding brought under Section 205, no defective corporate act would be void or voidable solely as a result of a failure of authorization. Further, new Sections 204 and 205 do not provide for an exclusive means of ratifying a defective corporate act as such acts are capable of ratification under common law by obtaining post-facto approval from the board or stockholders, as applicable.

Section 152 of the DGCL was also amended to clarify that the board of directors may approve the consideration for the issuance of stock by using a formula rather than approving a fixed price.