On June 24, Delaware’s Governor signed legislation approving amendments to the Delaware General Corporation Law (DGCL). While annual amendments to the DGCL typically involve technical fixes, this year’s legislation addresses a number of substantive issues described below:
- Fee Shifting. The Delaware Supreme Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), upholding the validity of an aggressive fee-shifting bylaw adopted by a non-stock corporation, generated significant controversy. Effectively overruling that decision, new Section 102(f) (Contents of Certificate of Incorporation) and new language in Section 109(b) (Bylaws) bar certificates of incorporation and bylaws of corporations (other than non-stock corporations) from imposing liability on stockholders for the attorneys’ fees or expenses of the company or any other party. The prohibition applies to “internal corporate claims,” meaning claims (including derivative claims) based upon (1) a violation of a duty by a current or former director or officer or controlling stockholder in such capacity or (2) claims for which the Delaware Court of Chancery has jurisdiction. One of the principal concerns prompting this prohibition was that fee-shifting could preclude not only meritless claims but also claims with merit.
The prohibition does not affect the ability of parties to provide for fee-shifting in stockholders or other agreements signed by a stockholder.
- Exclusive Forum. Provisions in certificates of incorporation and bylaws requiring that intra-corporate claims be litigated exclusively in a designated forum, typically in the company’s state of incorporation, have become increasingly popular and have generally been upheld when tested in a foreign court. These provisions are intended to address the phenomena of multi-forum litigation and forum shopping that are most commonly known in the context of merger litigation.
New Section 115 (Forum Selection Provisions) specifically approves the inclusion of provisions in bylaws and certificates of incorporation that select Delaware courts (including federal courts) as the exclusive forum for “internal corporate claims.” The provision does not bar a corporation from including an additional forum outside Delaware, but prohibits stripping the Delaware courts of jurisdiction. Bylaws mandating arbitration of internal corporate claims would not be permissible because they would deprive the Delaware courts of jurisdiction.
Consistent with the fee-shifting amendments, Section 115 does not prohibit parties from including exclusive forum provisions in stockholders or other agreements signed by a stockholder.
- Facilitating At-The-Market Offerings. Delaware corporations have often delegated the pricing of public offerings to a board pricing committee, although the logistics for such committee can present practical challenges. In order to make it easier for public companies to issue stock as part of “at-the-market” programs, the 2015 legislation allows a board to delegate pricing authority to individuals who are not directors, and does not require that each individual stock issuance be separately authorized. The amendments also will permit boards to delegate authority to officers to issue restricted stock. More specifically, amended Section 152 (Issuance of Stock; Lawful Consideration; Fully Paid Stock) allows the board to authorize stock to be issued in one or more transactions, in such amounts and at such times as are determined by or in the manner set forth in the relevant board resolution, as determined by a person or body that need not be the board or one of its committees, provided that the board resolution:
- sets a ceiling on the number of shares that may be issued;
- fixes a time period for the issuance of such shares; and
- sets minimum consideration for which the shares may be issued. The minimum must not be less than the par value of shares that have a par value. The board may determine the amount of consideration by (1) setting minimum consideration or (2) approving a formula by which the amount or minimum amount of consideration is set. A formula for determining consideration may include reference to (or be made dependent upon) extrinsic facts, such as market prices or averages of market prices on one or more dates.
- Consideration for Options or Rights. Consistent with the approach to Section 152, the 2015 legislation amends Section 157(b) (Rights and Options Respecting Stock) to provide that a formula used to determine the consideration for stock issuable upon the exercise of rights and options may also be dependent upon extrinsic facts.
- Ratification of Defective Corporate Acts. In 2014, Delaware adopted new Sections 204 (Ratification of Defective Corporate Acts and Stock) and 205 (Procedures Regarding Validity of Defective Corporate Acts and Stock) that set out procedures to ratify stock or corporate acts that would otherwise be “void” or “voidable” due to a “failure of authorization.” The 2015 legislation clarifies and confirms the operation of specified provisions, and makes certain other changes relating to the procedures for ratification.
The effective date for the amendments (other than those relating to the ratification of defective corporate acts) is August 1. The amendments to Sections 204 and 205 will be effective for board resolutions adopted on or after August 1 ratifying defective corporate acts.
The full text of the amendments is available here.