Key Takeaways

• A number of amendments to the Delaware General Corporation Law became effective on Aug. 1, 2023. The amendments enhance the internal consistency of the Delaware General Corporation Law, clarify ambiguities and reduce administrative burdens associated with various corporate actions.
• Certain public corporations contemplating reverse stock splits will directly benefit from an amendment that reduces the requisite level of stockholder approval required for such charter amendments, subject to certain qualifying conditions. This amendment is expected to facilitate stockholder approvals, as unreturned proxies (including broker non-votes) will no longer be counted as votes “against” such proposals.
• Other amendments streamline and make more efficient, for example, the delivery of notices under §228(e) to stockholders who did not sign a written consent and the process and required filings to validate defective corporate acts under §204.

Introduction

A number of amendments to the Delaware General Corporation Law (the DGCL) became effective on Aug. 1, 2023. Set forth below is a brief summary of the amendments.

§242 – Amendments to Certificate of Incorporation

Section 242 of the DGCL governs the procedures by which a corporation may amend its certificate of corporation, or charter, and generally requires approval by (a) the board of directors and (b) holders of a majority in voting power of the outstanding stock entitled to vote thereon and by the holders of a majority in voting power of each class entitled to vote thereon as a class, subject to limited exceptions.

The recent amendments to Section 242 of the DGCL, which add a new §242(d), eliminate or reduce the statutory stockholder approval threshold required for a corporation to obtain when amending its certificate of incorporation to effect certain forward or reverse stock splits and to otherwise increase or decrease the number of its authorized shares. Though not universally applicable, these revisions will generally reduce hurdles that corporations often face when soliciting stockholder approval of related charter amendments.

Forward Stock Splits and Proportionate Authorized Share Increases

Under the new §242(d), a corporation is no longer required to conduct a meeting or solicit stockholder votes to amend its charter to (a) effectuate a forward stock split and (b) proportionately increase its authorized shares, so long as the applicable corporation has only one class of stock outstanding and it is not divided into series. For example, a qualifying corporation with 1,000,000 authorized shares seeking to effect a 5:1 forward stock split and increase its total authorized shares up to 5,000,000 may do so without conducting a stockholder meeting or a vote of stockholders.

Reverse Stock Splits and Other Changes to Number of Authorized Shares

By introducing a lower stockholder approval threshold, the new §242(d) also allows certain public corporations to more easily obtain approval for (a) reverse stock splits and (b) any increases or decreases in their authorized shares (other than in connection with a forward stock split).

The lowered stockholder approval threshold only applies to public corporations with a class of securities listed on a national securities exchange. For such companies, charter amendments to effectuate reverse stock splits or changes in authorized shares (other than as provided above in connection with forward stock splits) will now only require the affirmative vote of a majority of the votes cast by the stockholders entitled to vote thereon at a stockholder meeting, acting as a single class; provided that the affected class of stock continues to meet the listing requirements of the applicable national securities exchange regarding any minimum number of holders after giving effect to such amendment.

Looking Behind the Stockholder Approval Thresholds

While the changes to §242 are not all exclusively applicable to public corporations, they appear to be geared, at least in part, toward making it easier for public corporations to adopt the specified charter amendments.

Forward Stock Splits and Proportionate Authorized Share Increases

Public corporations often implement forward stock splits when their stock price has risen so high that it might become an impediment to future investors. The removal of the requirement to obtain stockholder approval of proposed forward stock splits and proportionate increases in authorized shares in the circumstances specified in §242(d) will make it easier for public corporations to remedy this problem and facilitate continued capital formation. Private corporations that desire to implement forward stock splits covered by §242(d) for other purposes would also benefit from the removal of the requirement to obtain stockholder approval, though this scenario is less common. In each case, corporations (public or private) with more than one class of stock (e.g., those that have any classes of preferred stock or more than one class of common stock) are not able to take advantage of the elimination of this stockholder voting requirement.

Reverse Stock Splits and Other Changes to Number of Authorized Shares

Anecdotal evidence suggests that public corporations are encountering increasing difficulties securing the votes for charter amendments generally required by §242(b), for reasons not always related to the merit of the proposed charter amendments. These difficulties may have prompted the inclusion of the parts of §242(d) reducing stockholder approval thresholds in connection with reverse stock splits and changes in authorized shares (other than in connection with forward stock splits), which apply specifically to corporations with shares listed on a national securities exchange.

For public corporations, the challenge securing the required stockholder vote under §242(b) often stems from a lack of sufficient shares voted at stockholder meetings. Today, there are also more retail investors than ever participating in the stock market; however, retail investors are sometimes more passive investors than their institutional counterparts – and could be less likely to vote at stockholder meetings. Additionally, some brokers have instituted policies requiring them to decline to exercise their discretionary authority to vote shares held in “street name,” resulting in additional shares not voted, which could jeopardize a corporation’s ability to obtain the requisite level of stockholder approval in dire situations. The impact of the amendments to §242, in part, helps qualifying corporations obtain those approvals more easily by eliminating the need for a stockholder vote to effect forward stock splits, and, for qualifying public corporations, by providing a pathway to securing approval of an amendment to effect a reverse stock split that is pegged to participating stockholders.

These changes may be most welcome by public corporations seeking to implement reverse stock splits, due to the circumstances in which proposals for reverse stock split charter amendments typically arise. Such corporations often attempt to implement reverse stock splits with the primary purpose of increasing their stock price in order to regain compliance with a national securities exchange’s listing standard requiring a minimum price. Failure to do so may catastrophically result in the applicable class of securities being delisted from such exchange.

An exchange delisting can decimate a public corporation’s ability to raise capital, prevent institutional investment, and cause an array of other adverse consequences to its liquidity and capital resources. It can be equally injurious to its investors, who may no longer hold a liquid security.

The new voting threshold set forth in §242(d) will make it easier for public corporations to address this urgent situation by implementing reverse stock splits. By using a votes cast standard, stockholders cannot negatively affect the outcome by taking no action.

Opt In

The new §242(d) provides that the eliminated or reduced stockholder approval thresholds will govern “unless otherwise expressly required by the certificate of incorporation.” Accordingly, if a corporation’s existing charter expressly requires the preexisting stockholder approval thresholds, those historic thresholds will continue to govern. If a corporation’s board of directors determines that the amendments provided by the new §242(d) are not desirable, such boards should consider amending their charter to either specifically opt out of §242(d) or expressly provide that the stockholder approval thresholds otherwise required by §242(b) will govern.

Taking Advantage of New §242(d)

Boards of directors interested in taking advantage of the lowered stockholder voting thresholds offered by §242(d) should review their existing charters and amend them if they contain conflicting language.

§228(e): Notice of Action by Consent of Stockholders in Lieu of a Meeting

Two amendments have been made to §228(e) of the DGCL, which provides that when a corporation’s stockholders take an action by written consent without a meeting, the corporation is required to send a notice of such action to the stockholders who did not sign the written consent.

The amendments (i) clarify the date for determining the stockholders of a corporation entitled to notice of a stockholder action by written consent and (ii) ease the administrative burden on public corporations of providing such notice by permitting them to provide such notice online, as long as certain requirements are met.

The first set of changes serves to enhance the internal consistency of the DGCL. Prior to the recent amendments, a corporation was required to notify those stockholders who had not executed the written consent and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of the meeting had been the date that consents signed by a sufficient number of holders to take the action were delivered to the corporation as provided in §228. That standard for determining the stockholders entitled to a notice under §228(e) was, for unknown reasons, internally inconsistent with §213(b) of the DGCL, which sets forth the requirements for setting a record date for determining the stockholders entitled to act by written consent – and that inconsistency has now been corrected.

Section 228(e) now provides that the stockholders entitled to notice of a corporate action are those who would have been entitled to notice of the meeting if the action had been taken at a meeting and the record date for the notice of the meeting were the record date for the action by consent. The record date for an action by consent, set pursuant to Section 213(b), may be one of the following:

• A record date fixed by the board, which date may not precede the date upon which the board fixes the record date and which may not be more than ten days after the date of such resolution.
• If no record date is fixed by the board, and no prior action of the board is required by the DGCL, the first date on which a signed consent is delivered to the corporation.
• If no record date is fixed by the board and prior action of the board is required under the DGCL, the date on which the board adopts the resolutions taking such prior action.

It is worth noting that such record date may, in some cases, precede the date that signatures are received by a corporation from a number of stockholders sufficient to take an action by written consent; accordingly, corporations should take note of this change when preparing §228(e) notices to ensure they send them to the correct set of stockholders.

The second set of changes to §228(e) streamlines the ability of public corporations to provide notices to their stockholders of actions taken by written consent without a meeting. Under the revised §228(e), such notices may be provided by way of a notice “which constitutes a notice of internet availability of proxy materials under rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).” Public corporations familiar with making other information available to their stockholders using the “access equals delivery” method may have enhanced comfort with this process.

§157: Power to Delegate the Authority to Issue Options or Other Rights to Purchase Stock

The amendments to §157 of the DGCL build on prior amendments made in August 2022 and pertain to the power of a corporation’s board of directors (or a duly authorized committee thereof) to delegate authority to issue options or rights to purchase shares of such corporation’s stock.

In August 2022, §157 was amended to, among other things, permit a corporation’s board of directors (or a duly authorized committee thereof) to delegate the authority to issue options or rights to purchase shares of such corporation’s stock to “any person or body,” rather than just to “officers”; provided that the board of directors or applicable committee established certain parameters in its delegating resolutions. The 2023 amendments expand the powers of the “person or body” to whom such authority is delegated and implement technical changes to the parameters that must be set by the board or applicable committee.

The applicable “person or body” under §157 is now expressly empowered to determine “the terms upon which shares may be acquired from the corporation upon the exercise of any such rights or options,” including, without limitation, terms relating to price (and formulas for determining price), vesting, acceleration, forfeiture and clawback provisions – some of the most significant terms in any equity award.

However, some parameters on these terms remain, and the recent amendments implement minor changes to what must be set forth in the board or committee’s delegating resolutions. First, such parameters must include the maximum number of shares issuable upon the exercise of the rights or options but no longer need to include the maximum number of rights or options themselves issuable pursuant to such resolution. Second, the amendments also clarify that the board or committee’s resolutions must establish two relevant timeframes: the time period during which the applicable rights or options may be issued, and the time period during which the shares issuable upon exercise thereof, may be issued. Finally, the resolutions must set the minimum consideration (if any) for which such rights or options may be issued and the minimum consideration for the shares issuable upon exercise thereof – this last requirement remains unchanged from the preexisting §157.

§204: Ratification of Defective Corporate Acts

Section 204 of the DGCL has been amended to streamline the requirements for filing, and the contents of, a certificate of validation upon the ratification of a defective corporate act (i.e., void or voidable corporate acts due to a failure in authorization). Historically, a certificate of validation was required to be filed with the secretary of state of the State of Delaware upon the ratification of a defective corporate act in circumstances where any section of the DGCL would have required the filing of a certificate in connection with the corporate act. Pursuant to the amended §204, a certificate of validation is only required to be filed in circumstances where a certificate in connection with the corporate act was required and was either (i) filed but is required to be changed to give effect to the ratification or (ii) never filed. The amendments also simplify the information required to be included in the certificate of validation, which will decrease the administrative burdens associated with such filings.

§272: Mortgages or Pledges of Assets

Section 272 of the DGCL has been amended to clarify that the general rule, under §271 of the DGCL, that the vote of a majority-in-interest of a corporation’s stockholders is required to authorize a sale, lease or exchange of all or substantially all the assets of the corporation does not apply in the context of either of the following:

• Transactions pursuant to which a secured party is exercising its rights under applicable law with respect to collateral
• In lieu of a secured party exercising its rights with respect to collateral, an alternative transaction authorized by the board of directors of a corporation that results in the reduction or elimination of the total liabilities or obligations secured by the applicable collateral; provided that (x) the value of the property or assets is less than or equal to the total amount of such liabilities or obligations being eliminated or reduced and (y) such transaction is not prohibited by the law governing the applicable mortgage or pledge.

The amendments provide that while a transaction that fails to satisfy the value test expressed in the foregoing clause (x) may be enjoined prior to consummation, the failure to satisfy the value test will not invalidate a transaction after consummation. However, no party will be relieved of liability for monetary damages for any claim based upon a violation of fiduciary duty by a current or former director or officer or stockholder that arises from any such transaction.

§262: Appraisal Rights

Section 262 of the DGCL has been amended to (i) expand the transactions pursuant to which statutory appraisal rights are available in order to include transfers, domestications, and continuances and (ii) require that withdrawal of a demand for appraisal rights be made within 60 days following the effective date of the transaction triggering such appraisal rights and that after 60 days, the withdrawal must be approved by the corporation in writing.

Additional Amendments

The amendments also made clarifying changes to the provisions of the DGCL governing (i) the creation and issuance of stock (including treasury shares) (DGCL §§152, 153 and 160), (ii) actions taken pursuant to a plan of conversion (DGCL §§265, 266 and 390), and (iii) the authority of a corporation continuing or resulting from a conversion or domestication to issue bonds, other obligations and securities (DGCL §260).

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