What You Need To Know

• The amendments generally fall into three categories: Stockholder Agreements, Transaction Approval Requirements, and Target Corporation Lost-Premium Damages.
• The amendments will become effective on August 1, 2024.
• The amendments will apply retroactively to all contracts and agreements, including merger and consolidation agreements, made by a Delaware corporation—and all contracts, agreements, and documents approved by a Delaware corporation’s board of directors.
• The amendments were, in large part, adopted in response to controversial decisions the Delaware Court of Chancery recently issued, but a range of academic observers have criticized their swift adoption, raising concerns of imprecision and potential unintended consequences.

On July 17, 2024, Delaware Gov. John Carney signed into law significant amendments to the Delaware General Corporation Law (DGCL), which will become effective on August 1, 2024. The amendments were articulated in Delaware Senate Bill 313 (SB 313).

The amendments were largely intended to address three recent decisions of Delaware’s Court of Chancery: West Palm Beach Firefighters' Pension v. Moelis & Co.; Sjunde AP-Fonden v. Activision Blizzard Inc.; and Crispo v. Musk.

The amendments will apply retroactively to all contracts and agreements, including merger and consolidation agreements, made by a Delaware corporation—as well as all contracts, agreements, and documents approved by the board of directors of a Delaware corporation.

New Subsection 18 to § 122 of the DGCL—Stockholder Agreements

Perhaps the most controversial of all the amendments, the new subsection 18 to § 122 of the DGCL (Subsection 18) is intended to overturn the ruling in Moelis—where the Delaware Court of Chancery held that certain stockholder agreement provisions requiring pre-approval of corporate actions, as well as the composition of the board of directors and its committees by the company’s controlling stockholder—were facially invalid as an impermissible constraint on the board of directors’ authority under § 141(a) of the DGCL. Section 141(a) of the DGCL grants boards of directors (not stockholders) absolute power over managing Delaware corporations, except as otherwise provided in the DGCL or in the company’s certificate of incorporation.

The decision raised significant concerns in the legal community because it called into question the validity of stockholder agreements, which are commonly used—particularly as a resolution of stockholder activism.

The synopsis included in SB 313 cites to the Moelis decision and the Delaware Court of Chancery observation that “[t]he expansive use of stockholder agreements suggests that greater statutory guidance may be beneficial[.]” Notably, it took less than a month after the Moelis decision (which is currently being appealed) was released for the Corporation Law Council of the Delaware State Bar Association to begin drafting proposed amendments to the DGCL to, among other things, specifically permit the type of stockholder agreement that the Moelis decision called into question. The draft was quickly approved by the Delaware State Bar and submitted to the Delaware General Assembly, where the state House approved it 34-7 following limited testimony just a week after the state Senate approved it without dissent.

The amendments codified in Subsection 18 authorize the entry into contracts with one or more current or prospective stockholders (or one or more beneficial owners of stock), notwithstanding § 141(a) of the DGCL, in exchange for such minimum consideration as determined by the board of directors, so long as the agreement does not violate the company’s certificate of incorporation and is not contrary to Delaware law (other than § 115 of the DGCL regarding forum selection provisions) if included in the charter.

As cited in the new Subsection 18, examples of permissible provisions include those that:

• Restrict or prohibit the corporation from taking certain actions specified in the contract

• Require the approval or consent of one or more persons or bodies before the corporation may take actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders, or beneficial owners of stock of the corporation)

• Covenant that the corporation or one or more persons or bodies will take or refrain from taking actions specified in the contract (which persons or bodies may include the board of directors or one or more current or future directors, stockholders, or beneficial owners of stock of the corporation)

The synopsis to SB 313 clarifies several additional points, as described below:

• Notwithstanding any choice of law provision in the contract, the reference in the last sentence of Subsection 18 to the law “governing” the contract shall be deemed to refer to Delaware law if and to the extent choice of law principles (such as the internal affairs doctrine) so require.

• The carveout of § 115 of the DGCL (described above) is intended to permit corporations to include exclusive forum and arbitration provisions in their Subsection 18 contracts that select courts other than those sitting in Delaware to adjudicate claims under such contracts.

• A general recitation in the certificate of incorporation of the default provisions of § 141(a) of the DGCL would not be sufficient to render inoperable the provisions of Subsection 18. Instead, to limit the authority granted to the board of directors under Subsection 18, the certificate of incorporation could state that the corporation lacks the power and authority to authorize specific contracts, or types of contracts, that would otherwise be authorized by Subsection 18.

• New Subsection 18 does not authorize a corporation to enter contracts with stockholders or beneficial owners of stock that impose remedies or other consequences against directors if they take, or fail to take, specified actions as required by the contract—or that purport to bind the board or individual directors as parties to the contract. Contracts providing for such remedies would be evaluated under existing law. Instead, new Subsection 18 authorizes contracts that impose remedies only against the corporation, including as a result of any failure by the corporation; its board of directors; or its current or future directors, stockholders, or beneficial owners of stock to take, or refrain from taking, actions specified in the contract.

• If an action addressed in a covenant by the corporation requires director or stockholder approval under Title 8, that approval must still be obtained to effect the action pursuant to Title 8. For example, the lack of stockholder approval of an action under Title 8 requiring such approval would render specific performance of the covenant unavailable.

• New Subsection 18 does not relieve any directors, officers, or stockholders of any fiduciary duties they owe to the corporation or its stockholders, including with respect to deciding to cause the corporation to enter into a contract with a stockholder or beneficial owner of stock and with respect to deciding whether to perform, cause the corporation to perform, or to breach the contract, whether in connection with their management of the corporation’s business and affairs in the ordinary course or their approval of extraordinary transactions, such as a sale of the corporation.

Critics of SB 313 say that the bill is a hasty response to the Moelis decision. They worry that new Subsection 18 will allow corporate boards to contract away their authority and responsibilities to founders, activist investors, and other major stockholders without broader stockholder input. Some have also noted that the Council and the Delaware General Assembly’s approach rushing through legislation is at odds with Delaware’s long-standing reliance on its highly regarded and specialized Delaware Court of Chancery to evolve, shape, and clarify its corporate laws and the Delaware Supreme Court to provide the necessary review and oversight function.

Proponents of Subsection 18 applaud the legislature for mitigating the uncertainty created by the Moelis decision regarding the enforceability of stockholder agreements broadly used in venture capital and private equity-backed companies, activist settlements, founder arrangements, and other similar situations, restoring the status quo for these matters that preceded the Moelis decision.

Uncertainties continue to exist, however. For example, the drafter of the Moelis decision, Vice Chancellor J. Travis Laster, has questioned several aspects of Subsection 18 and presented hypotheticals where the application of Subsection 18 is—in his view—either unclear or troublingly permissive. If he’s right, it is possible that Subsection 18 may create more, not less, uncertainty and open the door to new litigation around the permissible scope of stockholder agreements or their application.

New § 147 of the DGCL—Authorization of Agreements and Other Instruments

The amendments codified in SB 313 also include a new § 147 to the DGCL, which provides that any agreement, instrument, or other document that requires board approval or other action under the DGCL may instead be approved by the board of directors in final form or in “substantially final” form.

Furthermore, if the board of directors shall have acted to approve or take other action with respect to an agreement, instrument, or document that is required to be filed with the Delaware Secretary of State or referenced in any certificate to be filed, the board of directors may, at any time after providing such approval or taking such other action and prior to the effectiveness of such filing, adopt a resolution ratifying the agreement, instrument, or document. A ratification under this section will be deemed to be effective as of the time of the original approval or other action by the board of directors and to satisfy any requirement that the board of directors approve or take other action with respect to such agreement, instrument, or document in a specific manner or sequence.

The synopsis to SB 313 clarifies that the ratification provision is available as an option to provide greater certainty in circumstances where there may be question as to whether the agreement, document, or instrument as initially approved was in substantially final form. Although a board may elect to use § 147’s procedure to ratify an agreement, document, or instrument that it had previously approved in substantially final form, no such ratification is required for the valid authorization of any such agreement, document, or instrument.

New § 147 is intended to overturn various procedural requirements in the merger approval process introduced in Activision, where the Court of Chancery held that the draft merger agreement approved by the Activision board of directors was not “essentially complete,” as required by § 251(b) of the DGCL, as it was missing certain relevant sections necessary for execution, such as the company disclosure letter or disclosure schedules (a common practice in merger negotiations), the surviving company’s charter, the amount of consideration, or Activision’s name as the target. It instead included placeholders for both (although the Court noted that these items are often not added until signing to preserve confidentiality) or resolution as to whether Activision would be permitted to declare and pay dividends between the merger’s signing and closing.

Amendments to § 232 of the DGCL—Delivery of Notice (Appendices)

Section 232 of the DGCL is amended by introducing a new paragraph (g), which clarifies that documents enclosed with or annexed or appended to notices delivered to stockholders under §§ 232(a)(1) or (2) of the DGCL will be deemed part of the notice for purposes of determining whether the notice has been duly given.

New § 232(g) is intended to solve a potentially serious procedural problem introduced by Activision, where the Court of Chancery found Activision’s notice to stockholders to be deficient.

Amendments to § 261 of the DGCL—Remedies; Appointment of Stockholder Representatives

A new paragraph (a)(1) is added to § 261 of the DGCL, which provides that the parties to a merger or consolidation agreement may provide for penalties or consequences to a party for failure to perform its obligations under such agreement, failure to comply with the terms and conditions of such agreement, or failure to consummate or cause the consummation of the transaction contemplated by such agreement. These penalties or consequences may include an obligation to pay an amount representing, or based on the loss of, any premium or other economic entitlement the other party’s stockholders would be entitled to receive if the deal were consummated in accordance with the agreement’s terms. Furthermore, if the agreement provides for a corporation to receive such a payment, the corporation will be entitled to enforce the payment obligation and retain the payment.

The synopsis to SB 313 indicates that the amendment is being adopted in light of the Court of Chancery’s decision in Crispo, where the Delaware Court of Chancery granted defendant Elon Musk’s motion to dismiss after holding that, among other things, a plaintiff stockholder was not a third-party beneficiary to a merger agreement for purposes of seeking specific performance of that agreement.

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

The amendments also introduce a new paragraph (a)(2) to § 261 of the DGCL, which expressly endorses the market practice of appointing a stockholder representative in mergers and consolidations. New § 261(a)(2) says that any merger or consolidation agreement may provide:

• For the appointment of one or more persons (which may include the surviving or resulting entity or any officer, manager or representative, or agent thereof) as a stockholder representative

• For the delegation to such stockholder representative(s) of the sole and exclusive authority to act on behalf of the stockholders under the agreement, including to enforce stockholders’ rights under the agreement

• That the appointment of such stockholder representative(s) is irrevocable and binding on all stockholders from and after adoption of the agreement by the requisite vote of stockholders

• That the foregoing provisions may not be amended after the merger or consolidation is effective, or that they may be amended only by consent or approval of persons specified in the agreement.

The synopsis to SB 313 clarifies that new § 261(a)(2) would not permit a provision of an agreement of merger or consolidation empowering a stockholder representative to exercise powers beyond those related to the enforcement of stockholders’ rights under the agreement. For example, stockholder representatives would not be permitted to waive, compromise, or settle appraisal rights or any direct claims for breach of fiduciary duty on behalf of stockholders—or enter restrictive covenants on their behalf (although stockholders could contractually empower stockholder representatives in that way by executing a joinder or support agreement).

New § 268 of the DGCL—Amendments to Certificate of Incorporation of the Surviving Corporation; Disclosure Schedules

The amendments codified in SB 313 also introduce a new § 268(a), which provides that if a merger agreement (other than pursuant to § 251(g) of the DGCL) provides that shares of a constituent corporation’s capital stock issued and outstanding immediately prior to the merger’s effective date shall be converted into or exchanged for cash, property, rights, or securities (excluding stock of the surviving corporation), then:

• The merger agreement approved by the board of directors does not need to include any provision regarding the certificate of incorporation of the surviving corporation for the agreement to be considered in final or substantially final form
• Any amendment and/or restatement of the surviving corporation’s certificate of incorporation may be adopted by the board of directors 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)
• No change to such certificate of incorporation will be deemed an amendment of the merger agreement.

The synopsis to SB 313 notes that this amendment is intended to 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. It also notes that, despite the additional statutory flexibility, a target corporation may still insist that the merger agreement expressly provides that the surviving corporation’s certificate of incorporation be adopted in a specified form or contain specified provisions, such as those relating to indemnification and advancement of expenses of directors, officers, and others.

Additionally, a new § 268(b) provides that, unless otherwise expressly provided in the agreement of merger or consolidation, disclosure schedules and similar documents or instruments delivered in connection with the agreement that modify, supplement, qualify, or make exceptions to representations, warranties, covenants, or conditions contained in the agreement will not be deemed part of the agreement for purposes of the DGCL. They therefore do not need to be delivered to the board or stockholders.

New § 268 addresses two other procedural problems identified in Activision, one relating to the surviving corporation’s certificate of incorporation and the other relating to disclosure schedules.

Conclusion

We expect that practitioners and corporations will generally appreciate the clarification and practical flexibility for executing complex transactions or facilitating governance arrangements embodied in these statutory amendments. However, it remains to be seen whether some of these amendments (particularly new Subsection 18 to § 122 regarding stockholder agreements) may require further clarification, which could open the doors to more litigation.