Delaware Enacts Controversial Market Practice Amendments to Its General Corporation Law

Delaware’s Legislature passed significant amendments to the Delaware General Corporation Law (the “DGCL”) in June, at the end of its legislative session. These amendments were signed into law by Governor John Carney on July 17, 2024, and will become effective on August 1, 2024. The amendments were largely intended to overturn three recent decisions of Delaware’s Court of Chancery. While proponents of the bill have argued that they are intended merely to protect current market practice, the amendments have sparked controversy and drawn criticism from the bench, the bar, and academia.

The Moelis Decision

The amendments introduce a new subsection 18 to DGCL §122 that is intended to overturn the ruling in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.[1] In Moelis, the Delaware Court of Chancery held that provisions of a stockholder agreement violated DGCL §141(a) and were therefore invalid and unenforceable, where they imposed a stockholder pre-approval requirement prior to permitting certain company board action and imposed various other obligations and restrictions on the board.[2] The decision caused consternation in the legal community because it was perceived as running contrary to market practice, at least insofar as it called into question the enforceability of stockholder agreements commonly entered into in situations such as resolution of stockholder activism.

New Section 122(18) authorizes entry into of stockholder agreements, notwithstanding DGCL §141(a), for such minimum consideration as is authorized 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:

1. Restrict or prohibit future corporate actions specified in the contract;
2. Require the approval or consent of one or more persons or bodies before the corporation may take specified actions; and
3. 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 synopsis accompanying the amendments makes clear that Section 122(18) authorizes contracts that impose remedies on the corporation, including for action or inaction of its board or stockholders, but does not authorize contracts that seek to impose remedies or consequences on directors or to bind directors as parties. Those contracts would be evaluated under existing law.[3] The synopsis also makes clear that Section 122(18) was intended to address only the authorization of contracts and not fiduciary duties of officers, directors, or stockholders.

As they were working their way through the legislative process, the amendments were assailed by law professors. In a letter to the Delaware legislature, a group of more than 50 law professors criticized the proposed amendments as rushed, going beyond overturning Moelis, and enabling “corporate boards to unilaterally contract away their powers without any shareholder input.” In social media posts, Vice Chancellor Laster, who penned the Moelis decision, has called into question several aspects of Section 122(18) and has posted a number of hypotheticals that illustrate situations where the effect of Section 122(18) is either unclear or troublingly permissive. Accordingly, Section 122(18) seems unlikely to herald the end of litigation around the permissible scope of stockholder/governance agreements or their application (including through fiduciary duty challenges) in particular situations.

Sjunde AP-Fonden v. Activision Blizzard, Inc.

The amendments introduce several changes in order to overturn various procedural requirements in the merger approval process introduced in Sjunde AP-Fonden v. Activision Blizzard, Inc.[4]A new DGCL §147 provides that where the DGCL requires the board to approve or take other action with respect to an agreement or other document, the board can do so for the agreement in “substantially final” form. If the agreement or document has to be, or is referred to in a certificate that has to be, filed with the Secretary of State, between the time of such approval or other action and effectiveness of the filing, the board can ratify the agreement or document, and the ratification is deemed to relate back to the time of the original approval or other action. The synopsis makes clear that new Section 147 permits boards to approve an agreement or other document that may not contain all of the material terms as long as those terms have been presented to, or are known by, the board. If there is uncertainty as to whether the form of agreement presented to the board was substantially final, the board can ratify the final agreement before the applicable filing effective date. Section 147 therefore dispenses with the complexities around board approval of merger agreements that were introduced by Sjunde AP-Fonden.

DGCL §232 is amended by introducing a new paragraph (g), which provides that documents enclosed with or appended to notices to shareholders under DGCL §232(a)(1) or (2) are deemed part of the notice for purposes of determining whether the notice has been duly given. This solves a potentially serious foot-fault problem introduced by Sjunde AP-Fonden.

A new DGCL §268 also solves two other procedural technicalities introduced by Sjunde AP-Fonden, one relating to the charter of the surviving corporation and the other relating to disclosure schedules. Section 268(a) provides that if a merger agreement (other than pursuant to DGCL 251(g)) provides that the shares of capital stock of a constituent corporation are converted into cash, property, rights, or securities in the merger (excluding stock of the surviving corporation):

• The merger agreement approved by the board does not need to include any provision regarding the charter of the surviving corporation in order to be considered in final or substantially final form;
• An amendment and/or restatement of the charter of the surviving corporation can be adopted by the board of the constituent corporation or any person acting at its direction (or if the equity interests of a constituent corporation are converted into all the shares of the surviving corporation, the board of such constituent corporation or other person acting at its direction); and
• No change to such charter is deemed an amendment of the merger agreement.

Section 268(b) provides that unless provided otherwise in the merger agreement, disclosure schedules and similar documents are not deemed part of the merger agreement for purposes of the DGCL. They therefore do not need to be delivered to the board or stockholders.

Crispo v. Musk

The amendments also address Crispo v. Musk,[5] where the court identified significant challenges for target companies seeking to recover lost merger premium in busted deals.[6] In Crispo, a Twitter stockholder sued Elon Musk and related entities for breach of their merger agreement with Twitter. After the acquisition was completed, the stockholder sought a mootness fee for his purported role in persuading defendants to close the transaction. In rejecting the requested mootness fee, the Court of Chancery analyzed whether the stockholder had standing to pursue a claim for breach of the merger agreement, under a provision that permitted recovery of lost merger premium in the event of a buyer breach. In concluding that the stockholder lacked standing, the court also noted challenges a target company would face in seeking lost merger premium, whether as a designated agent of the stockholders or as liquidated damages. The amendments address these concerns by introducing a new paragraph (a)(1) to DGCL §261, which provides that the parties to a merger or consolidation agreement may provide for the penalties or consequences of a failure to perform prior to the effective time of the transaction, or a failure to consummate the transaction. These consequences may include an obligation to pay an amount representing “the loss of any premium or other economic entitlement” the other party’s stockholders would be entitled to receive if the deal were consummated. If the agreement provides for a corporation to receive such a payment, the corporation shall be entitled to enforce the payment obligation and retain the payment.

The synopsis clarifies that Section 261(a)(1) does not foreclose other remedies, or alter the fiduciary duties of directors, including with respect to payment of a termination fee.

Shareholder Representatives

The amendments introduce a new DGCL §261(a)(2), which expressly endorses the market practice of appointing stockholder representatives in mergers and consolidations. Section 261(a)(2) provides that any merger or consolidation agreement can provide:

• For the appointment of one or more persons as stockholder representative;
• For the delegation to the stockholder representative the sole and exclusive authority to take action on behalf of the stockholders under the agreement, including to enforce the terms of the agreement;
• That the appointment is irrevocable and binding on all stockholders from and after adoption of the agreement by the requisite vote of stockholders; and
• That the foregoing provisions cannot be amended after the merger or consolidation is effective, or may be amended only by consent or approval of persons specified in the agreement.

The synopsis makes clear that the amendments only authorize stockholder representatives to exercise power to enforce rights under the agreement and do not, for example, authorize stockholder representatives to waive, compromise, or settle appraisal rights or direct claims for breach of fiduciary duty on behalf of stockholders, or enter into restrictive covenants on their behalf (although stockholders could contractually empower stockholder representatives in that way by executing a joinder or support agreement).

結論

Given the breadth of the amendments addressing the Moelis decision and the concerns they have elicited in the legal community, it will remain to be seen — through future litigation — whether they achieve their stated goals. The other amendments described above generally provide welcome simplification and clarification for deal practitioners.

To read all Foley Corporate Governance Updates, click here.

[1] 2024 WL 747180 (Del. Ch. Feb. 23, 2024).

[2] For a more detailed summary of the decision, see: https://www.foley.com/wp-content/uploads/2024/04/Significant-Private-Company-MA-Decisions-2023-002-Final.pdf.

[3] See Original Synopsis to S.B. 313, available at https://legis.delaware.gov/BillDetail/141480 (citing Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956), which was the case relied on in the Moelis decision).

[4] 2024 WL 863290 (Del. Ch. Feb. 29, 2024). A description of this case is included in the article referenced in footnote 2 above.

[5] 304 A.2d 567 (Del. Ch. Oct. 31, 2023). A longer analysis of this case is included in the article referenced in footnote 2 above.

[6] The issue is one that came to prominence under New York law in Consolidated Edison, Inc. v., Northeast Utilities, 426 F.3d 524 (2d Cir. 2005).