The Delaware legislature adopted DGCL amendments that restore contract certainty for merger and stockholder agreements.

Takeaways

• The Delaware General Corporation Law (DGCL) now codifies the power of corporations to enter into valid and enforceable agreements with stockholders concerning certain governance rights regardless of whether such rights are expressly provided for in a corporation’s charter.
• Boards can validly approve transaction agreements that are in “substantially final form,” which need not include the surviving corporation’s charter or disclosure schedules.
• Damages provisions in merger agreements, including lost-premium damages and reverse termination fees, are valid and enforceable.

Significant amendments to the Delaware General Corporation Law (DGCL) were signed into law by Governor John Carney on July 17, 2024 (SB 313). These amendments were initially introduced in March 2024 in response to three controversial Delaware Court of Chancery rulings, Moelis, Activision and Crispo, which called into question the validity of several well-established and commonly used market practices. SB 313 went into effect on August 1, 2024, and applies retroactively to all contracts and agreements made by a corporation (including merger and consolidation agreements) and all agreements, instruments or documents approved by a board of directors. However, SB 313 will not apply to or affect any civil action or proceeding completed or pending on or before August 1, 2024.

The key DGCL amendments that are now in effect are discussed below.

Stockholder Agreements
In W. Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024), the Delaware Court of Chancery ruled that certain governance provisions in stockholder agreements were facially invalid under DGCL §141(a) because they improperly intrude on the authority of the board of directors. This decision called into question the widely adopted strategy of using stockholder agreements to provide stockholders with additional rights and control over Delaware corporations and would have resulted in a considerable change to market practice and invalidation of many existing stockholder agreements.

In response, SB 313 amends the first sentence of DGCL §122 to provide that a board may take any actions permitted under §122, whether or not the action is permitted in the corporation’s certificate of incorporation pursuant to DGCL §141(a). This explicitly addresses the Moelis decision as the court had suggested that such stockholder arrangements may have withstood challenge under Delaware law if such arrangements were incorporated properly into a corporation’s organizational documents, namely its certificate of incorporation.

Second, SB 313 adds a new paragraph (18) to §122, giving corporations the power to make contracts with current or prospective stockholders in exchange for consideration, so long as the provision does not conflict with the certificate of incorporation or Delaware law. The text provides examples of certain types of contracts that a corporation may agree to, including, but not limited to, restricting or prohibiting itself from taking certain actions specified in the agreement and requiring approval or consent from one or more stockholders before taking specified actions. However, the amendment provides corporations with the means to limit the application of new §122(18) by explicitly stating in its charter that the corporation lacks the power and authority to enter into contracts authorized under §122(18), or types of contracts that would otherwise be authorized by §122(18).

While clearly intended to respond to Moelis, the synopsis accompanying SB 313 states that the new §122(18) does not extend to certain other existing case law principles. For example, the amendment to §122(5) clarifies that management agreements appointing or delegating authority to officers or agents on behalf of the corporation will continue to be subject to §141(a). Further, §122(18) does not authorize contracts that seek to impose remedies or consequences on directors or bind directors as parties and is intended only to address the authorization of contracts. It does not address or relieve the fiduciary duties of officers, directors or stockholders owed to the corporation or its stockholders (including with respect to decisions to enter into, perform or breach stockholder agreements).

Board Approval and Merger Agreements
In Sjunde AP-Fonden v. Activision Blizzard, Inc., C.A. No. 2022-1001-KSJM (Del. Ch. Feb. 29, 2024), the Delaware Court of Chancery disrupted the “practical realities of negotiating merger agreements” by finding that a board must approve an “essentially complete” version of a merger agreement, rather than a substantially final form, and that the proxy notice to stockholders must also contain an “essentially complete” version of such agreement or brief summary thereof. In response, SB 313 creates new DGCL §§147 and 268, and amends DGCL §232.

Final or Substantially Final Form
New DGCL §147 provides that, where Delaware law expressly requires the board of directors approve or take other action with respect to an agreement, instrument or document, it must be approved in final form or a substantially final form. The accompanying synopsis acknowledges that competing interpretations of § 251(b) were previously addressed in Activision and states that §147 is intended to provide clarification by enabling the board of directors to approve or ratify an agreement, instrument or document if the material terms are (i) set forth therein or (ii) determinable through information or materials presented or known by the board of directors. §147 also provides a mechanism permitting the board of directors to ratify an agreement or document that has to be filed or is referred to in a certificate that has to be filed with the Secretary of State, and such ratification will be deemed to relate back to the time of the original approval, so long as the ratification occurs prior to the effectiveness of such filing.

Stockholder Notices
SB 313 amends DGCL §232 by introducing new paragraph (g), providing that documents enclosed with, annexed or appended to a notice given to stockholders are deemed to be included with such notice. However, such documents are incorporated solely for the purposes of satisfying the notice requirements of Title 8 of the DGCL, the certificate of incorporation or the bylaws, and further, are not intended to be deemed per se material to stockholders.

Approval of a Surviving Corporation’s Certificate of Incorporation in a Merger
New DGCL §268(a) dictates the necessary board approvals and requirements for a merger agreement (other than a holding company reorganization under DGCL §251(g)) that provides that all of the shares of capital stock of the constituent corporation are converted into or exchanged for cash, property, rights or securities. Specifically, §268(a) states that in this scenario, (i) board-approved merger agreements do not need to include any provision relating to the surviving corporation’s certificate of incorporation, (ii) any amendment to the surviving corporation’s certificate of incorporation may be adopted by the board or any other person acting at its direction, and (iii) any changes to the surviving corporation’s certificate of incorporation will not be considered an amendment to the merger agreement. The attached synopsis explains that §268(a) is drafted in direct response to the Activision decision, where the absence of the surviving company’s certificate of incorporation was considered a factor in determining that the merger agreement was not “essentially complete.”

Disclosure Schedules
New DGCL §268(b) provides that a disclosure schedule or similar document to a merger agreement will not be deemed part of the merger agreement as the default rule, unless otherwise expressly stated in the agreement. The accompanying synopsis clarifies the intent of DGCL §268(b) is to avoid any implication from the Activision decision that a disclosure schedule must be submitted to or adopted by the stockholders or must require formal approval by the board of directors.

Lost Premium Damages and Stockholder Representatives
In Luigi Crispo v. Elon R. Musk, C.A. No 2022-0666-KSJM (Del. Ch. Oct. 31, 2023), the Delaware Court of Chancery called into question the viability of two previously accepted interpretations in defining damages in merger agreements to include lost stockholder premiums, or so-called “Con Ed provisions” (adapted from Consolidated Edison, Inc. v. Northeast Utilities, 426 F. 3d 524 (2d Cir. 2005). In response, SB 313 amends DGCL §261 in two subsections to expressly address the uncertainty created by the Crispo ruling.

New DGCL §261(a)(1) clarifies that, through an express provision, parties to a merger or consolidation agreement may contractually specify the penalties or consequences (including a requirement to pay lost premium damages) of a party’s failure to perform its obligations under, or comply with the terms and conditions of, such agreement before the effective time of the merger, or to consummate the merger or consolidation. Such penalty may include payment obligations to the other party if the merger or consolidation is not consummated, such as termination fees, and that the nonbreaching corporation is entitled to retain such payment (so the corporation would not have to distribute the proceeds to its stockholders).

New DGCL §261(a)(2) further clarifies that, through an express provision, parties to merger or consolidation agreement may: (i) appoint a stockholders’ representative of any constituent corporation; (ii) delegate sole and exclusive authority to take action on behalf of the stockholders under the agreement to the stockholders’ representative, (iii) make such appointment irrevocable and binding on all stockholders from and after adoption of the agreement by the requisite vote of the stockholders; and (iv) agree that the foregoing provisions cannot be amended after the effective date of the merger or consolidation, or may be amended solely by consent or approval of specified persons. The accompanying synopsis elaborates on the stockholder representative’s authority to make clear that §261(a)(2) only authorizes the exercise of power to enforce rights under the agreement and does not extend beyond that. For example, §261(a)(2) does not authorize a stockholders’ representative, without express approval from stockholders, to waive, compromise or settle appraisal rights or direct claims for breach of fiduciary duty, or enter into restrictive covenants on their behalf.

Practice Considerations
The adopted 2024 DGCL amendments have been expressly touted, even in the accompanying synopses of SB 313, as an effort to address the concerns and market uncertainties created by the Delaware Court of Chancery’s decisions in Moelis, Activision and Crispo. While the amendments intended to address Activision and Crispo were generally welcomed as necessary clarifications to the DGCL, the Moelis amendments have generated continuing criticism and concerns in the legal community. As such, practitioners should keep an eye out for further developments in this space.

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