In the last edition of the SPAC Notebook, we examined the current risks to SPACs incorporating in the Cayman Islands. In this edition, we turn our focus to Delaware and its new set of amendments to the Delaware General Corporation Law (DGCL). I am joined by two experts on this topic—Lisa Stark, founding partner at Delaware Corporate Council, and Glenn Pollner, partner at WilmerHale.
Here are the highlights of our conversation about the DGCL amendments, edited for length and clarity. You can watch the full video below.
See video Here
Yelena Dunaevsky: On March 25, Delaware enacted some significant DGCL amendments relating to transaction planning issues that come with being incorporated and present in Delaware. The amendments are a response to what some commentators call "DExit," referring to some large companies like Tesla, Dropbox, and TripAdvisor recently moving or considering a move out of Delaware to the greener pastures of other states like Texas and Nevada.
As many know, Delaware is home to 2.2 million incorporated entities and derives about $2.2 billion in annual revenue from corporate franchise taxes. So, this is a big deal.
What Are the New Amendments?
Lisa Stark: Let's focus on the amendments that relate to conflict transactions, both with and without a controller present. I do think the changes will have a significant impact on litigation in the Delaware Court of Chancery, including litigation relating to SPACs.
The DGCL has been amended to provide that no transaction involving an interested director or officer may be the subject of equitable relief or an award of damages if certain conditions are met—despite the fact that a majority of the board members have some sort of disabling interest in the transaction. A similar safe harbor provision has been added, which applies to controller transactions other than go-private transactions. Additionally, go-private transactions now have their own safe harbor provision.
New Safe Harbor Provisions
To fall within the safe harbor, an interested director transaction, which does not involve a controller, must be either:
The safe harbor differs from current common law in that the transaction need not be conditioned on one of these two procedural protections from the outset of the negotiations.
In the past, this has been tricky. After the negotiations have already started, transaction planners sometimes realize a little too late that they must use a procedural protection. This is an important distinction between existing law, where the board does not need to condition the transaction on one of these procedural protections from the outset of the negotiations.
Controller Transactions
Now, we come to the topic of controller transactions. A transaction involving a controller (other than a going-private transaction) is subject to the same statutory safe harbors as a majority-interested transaction. Where the controller transaction is conditioned on either of the two procedural protections discussed above (i.e., it has to be approved by a special committee or has to be subject to stockholder ratification) the principal difference is that the stockholder ratification condition has to be imposed before the board submits the matter to a stockholder vote. You can't have ratification after the fact.
Also, the main difference between the safe harbors for controller transactions and the current common law is that you only need one procedural protection.
There's no express timing requirement for when the board must condition the deal on the committee approach.
This will have a significant impact on stockholder litigation in Delaware. If the statutory safe harbors or the common law safe harbors aren't followed, then we're back to the exacting entire fairness standard of review.
How Is Controller Defined?
The amendment also defines a controller as a person that (together with such persons, affiliates, and associates) owns or controls the majority of the outstanding voting power. There is an alternative definition. Under the common law in Delaware, a controller could be someone who owns less than a majority of the outstanding voting power if they exercised effective control, either over the transaction specifically or over the corporation, generally. Under the new definition, the stockholder has to own at least a third of the outstanding voting power and has the power to exercise managerial authority over the business and affairs of the company.
The statute has a lot of details and defined terms that can be useful in transaction planning. It will likely have an impact, assuming transaction planners convince their clients of the benefit of going down this path.
How Will the Changes Affect SPACs?
Glenn Pollner: I think the amendments are helpful, but I have questions about how they will be applied in the SPAC context. First, can you find a majority of disinterested board members in the SPAC context to create a qualifying special committee to approve the transaction?
And secondly, are the courts going to respect the SPAC context? Are they going to say that because of the redemption rights, you have a decoupling of the ownership and voting interests that aren't respected?
It looked like there might be a glimmer of hope that not everything would survive a motion to dismiss after the Delaware Chancery Court dismissed the Hennessy fiduciary duty case. But another step backward was the more recent Mountain Crest decision in October 2024. The question is whether folks will be able to structure their deals in a way where they'll be able to get lawsuits out on a motion to dismiss.
Because of all the recent litigation, most of the newer vintage SPACs have been incorporating in Cayman. I think that will continue unless something happens on the Cayman side that causes people to take another look at Delaware.
At the de-SPAC stage, the recent DGCL amendments may cause folks to take another look at Delaware, sticking with what they have done historically.
Yelena Dunaevsky: That’s exactly right. In my conversations with some of the Cayman attorneys, all SPACs are in Cayman right now for the IPO portion and the pre-deal portion of their tenure. But at the de-SPAC portion, they are asking: Do we stay in Cayman, do we go to Nevada or Texas, or do we go to Delaware now that they are trying to amend the way they do business to attract additional companies?
How Will Non-SPAC Companies React?
Glenn Pollner: As for non-SPAC companies, I think the amendments are going to be very helpful in making companies reconsider Delaware. Clearly, Delaware takes this very seriously and proposed and got these amendments through the legislative process quickly.
For most companies, I think there's a huge benefit to having the wealth of experience and body of precedent case law in Delaware, which is helpful for transaction planning and can guide people as to potential outcomes on issues.
You have a very knowledgeable and especially dedicated set of courts handling these issues. When you start to look at other states, while there is a fair number of public companies incorporated in Nevada and Texas, it pales in comparison to what you see in Delaware. So, by and large, this should be extremely helpful in helping keep corporations in Delaware.
What About the Impact on Insurance?
Yelena Dunaevsky: Our reports from the beginning of this year show that there have been some fairly large settlements. For example, GeneDx Holdings settled in the Delaware Court of Chancery for $21 million for a breach of fiduciary duty, and XL Fleet settled for $5 million.
The SPAC teams and the insurance carriers paying for some of these costs are very much paying attention to these numbers.
Some of our clients are asking if they will see improvements in their D&O insurance premiums if they move outside of Delaware and go to Nevada or Texas.
The reality is that we are just coming out of a four-year soft D&O market. Even if insurance carriers feel that Texas or Nevada are less risky than Delaware for litigation purposes, I don't know how much lower they'll be able to reduce those premiums.
On the insurance side, things are really good right now. The terms are excellent both on the SPAC and de-SPAC sides. Generally, the market is still very competitive, and I'm not anticipating it changing anytime soon.
To learn more about the Delaware amendments and their impact on SPACs, watch the full conversation above.
