The latest amendments (the “Amendments”) to the Delaware General Corporation Law (the “DGCL”) went into effect today, August 1, 2024, to address, among other things, (i) stockholder agreements related to corporate governance; (ii) remedies for terminating merger agreements, including lost premium damages; and (iii) what form documents must be in for a board of directors to properly approve a merger.
The Amendments apply retroactively, except with respect to any civil action or proceeding completed or pending on or before August 1, 2024.
Stockholder Agreements and Section 122
The synopsis of the amendments (the “Synopsis”) references an observation made by the Court of Chancery in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.: “[t]he expansive use of stockholder agreements suggests that greater statutory guidance may be beneficial[.]”[1] The Amendments seek to provide such guidance with the addition of new DGCL § 122(18) which expressly authorizes entry into stockholder agreements, notwithstanding DGCL § 141(a), for such minimum consideration as determined by the board of directors and provided that no provision of the stockholder agreement is contrary to the certificate of incorporation or the laws of Delaware if included in the certificate of incorporations (other than forum selection provisions under DGCL § 115).
New DGCL § 122(18) provides a non-exclusive list of types of provisions that a corporation may agree to in a stockholder agreement, including those that:
- restrict or prohibit future corporate actions specified in the contract;
- require the approval or consent of one or more persons or bodies (including the board of directors or one or more current or future directors, stockholders or beneficial owners of stock) before the corporation may take actions specified in the contract; and
- covenant that the corporation or one or more persons or bodies (including the board of directors or one or more current or future directors, stockholders or beneficial owners of stock) will take, or refrain from taking, future actions specified in the contract.
As noted in the Synopsis, the Amendments are drafted in a manner not to impact certain other principles in existing case law. New DGCL § 122(18) does not change existing law related to contracts that impose remedies or other consequences against directors for taking, or failing to take, actions required by contracts; rather the new DGCL § 122(18) authorizes contracts that impose remedies only against the corporation. The Synopsis provides that because new DGCL § 122(18) authorizes stockholder agreements if the agreement is supported by consideration received by the corporation and the minimum amount of that consideration is approved by the board of directors, “new [DGCL] § 122(18) would not change the outcome in cases that invalidated bylaws, and other arrangements, where consideration had not been provided to the corporation and the provisions at issue conflicted with § 141(a) of Title 8.” Further, new DGCL § 122(18) does not relieve directors, officers or stockholders of fiduciary duties they owe to the corporation or its stockholders, including with respect to entering into a stockholder agreement and with respect to performing or breaching the stockholder agreement. Lastly, DGCL § 122(5) was amended to clarify that management contracts and other arrangements delegating authority to an agent on behalf of the corporation remain subject to DGCL § 141(a) and related common law on delegation of duties and authority by a board of directors.
Lost Premium Damages, Stockholders’ Representatives and Section 261
The Synopsis provides that “[n]ew § 261(a)(1) is being adopted in light of the Court of Chancery’s decision in Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023), to clarify the authority under Title 8 to include in an agreement of merger or consolidation provisions for penalties or consequences (including a requirement to pay lost premium damages) upon a party’s failure to perform or consummate the merger or consolidation, regardless of any otherwise applicable provisions of contract law, such as those addressing liquidated damages and unenforceable penalties.” New DGCL § 261(a)(1) confirms that constituent corporations have the authority to agree in an agreement of merger or consolidation to penalties or consequences for failure to consummate a transaction. Such penalties or consequences may expressly include, but are not limited to, an amount based on the loss of any premium or other economic entitlement the stockholders of such other party would be entitled to receive pursuant to a merger agreement if the merger was consummated.
New § 261(a)(2) also confirms that parties to an agreement of merger or consolidation may expressly appoint one or more persons to serve as the representative of stockholders of any constituent corporation, including stockholders whose shares shall be cancelled, converted or exchanged in the merger or consolidation, and to delegate to such person(s) the exclusive authority to enforce the rights of such stockholders. The Synopsis states that new § 261(a)(2) “confirm[s] that a stockholders’ representative appointed pursuant to the terms of a merger agreement may be delegated powers, exercisable after the effectiveness of the merger, in addition to the power to make adjustments in respect of the nature or amount of merger consideration.” The powers of the stockholder representative under new § 261(a)(2) are limited to enforcement of the rights of stockholders under the merger agreement and would not empower the stockholder representative, for example, to waive any rights to appraisal or consent to restrictive covenants in the name of a stockholder.
Board Approval of Agreements and Sections 147, 232 and 268
The Synopsis, referencing Sjunde AP-Fonden v. Activison Blizzard, Inc., states that “[t]he Delaware Court of Chancery recently considered competing interpretations of § 251 of Title 8 as to whether a board of directors must approve an agreement of merger on final or essentially final terms.” In this regard, the Amendments include new DGCL §§ 147, 232(g) and 268 to clarify procedural requirements in the merger approval process.
New DGCL § 147 provides that whenever the DGCL requires the board of directors to approve or take any action with respect to any agreement, instrument or document, “such agreement, instrument or document may be approved by the board of directors in final form or substantially final form.” The Synopsis provides that new DGCL § 147 is intended to allow a board of directors to approve an agreement “if, at the time of board approval, all of the material terms are either set forth in the agreement, instrument or document or are determinable through other information or materials presented to or known by the board.” Additionally, new DGCL § 147 confirms that a board of directors may ratify any such agreement, instrument or document (in addition to any ratification or validation available under DGCL §§ 204 and 205). The board of directors may, at any time after such approval but prior to the filing of such document with Delaware’s Secretary of State, adopt resolutions ratifying it. Ratification under new DGCL § 147 will satisfy any requirement under the DGCL relating to the board’s authorization, whether in terms of the manner or sequence in which it is provided. As stated in the Synopsis, this is in order to “provide greater certainty in circumstances where there may be a question as to whether the agreement, document or instrument as initially approved was in substantially final form.”
New DGCL § 232(g) provides that a notice given to stockholders is deemed to include any document enclosed with, or appended or annexed to, such notice. For example, a proxy statement provided along with a notice of a stockholder meeting to approve an agreement of merger will be deemed to be included in such notice. The Synopsis provides that new DGCL § 232(g) incorporates a document in a notice solely for purposes of satisfying the requirements of giving notice under Title 8, the certificate of incorporation or the bylaws. The Synopsis also states this amendment is not intended to suggest all included materials should be considered as “per se” material to stockholders. In this regard, the Synopsis states the amendment “does not affect the equitable disclosure obligations of directors or officers (or, as applicable, stockholders) with respect to any corporate action as to which notice is given.”
Finally, new DGCL § 268 addresses two other issues raised in Activision. First, new DGCL § 268(a) provides that, in mergers where a constituent corporation’s stockholders will not continue as stockholders of the surviving corporation, the merger agreement approved by such corporation’s board of directors need not include any provision relating to the certificate of incorporation of the surviving corporation. Further, in those circumstances, the board of directors or any person acting at its direction may approve any amendment or amendment and restatement of the certificate of the surviving corporation, and no alteration or change to the certificate of incorporation of the surviving corporation will be deemed to constitute an amendment to the merger agreement. The Synopsis provides “this amendment will provide flexibility to a buyer in a typical ‘reverse triangular merger’ to adopt the terms of the certificate of incorporation of the corporation that, following the effectiveness of the merger, will be wholly owned and controlled by the buyer.” Second, new DGCL § 268(b) provides that, unless otherwise expressly provided in a merger agreement, any disclosure schedules or similar documents or instruments delivered in connection with the agreement shall not be deemed part of the agreement of merger for purposes of any provision of this title, but shall have the effects provided in the agreement of merger. That is, in order to duly authorize a merger agreement, the board of directors need not approve final or substantially final disclosure schedules. Nor must disclosure schedules be submitted to or adopted by the stockholders. The Synopsis notes that “disclosure schedules and similar documents frequently operate as extrinsic facts incorporated by reference into the agreement but are not themselves part of the agreement and, as such, may be negotiated and prepared by officers and agents at the direction of the board of directors without the need, as a statutory matter, for formal approval by the board of directors.”
[1] See Synopsis to S.B. 313, available at https://legis.delaware.gov/BillDetail/141480 (citing West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., 2024 WL 747180 (Del. Ch. Feb. 23, 2024) at n.272).
