The Corporate Council of the Corporation Law Section of the Delaware State Bar Association released proposed legislation to amend certain provisions of the Delaware General Corporation Law (DGCL). The proposed amendments are primarily technical and attempt to clarify and resolve certain ambiguities and inconsistencies in the DGCL by, among other changes, (1) further align the merger statutes with the appraisal statute and (2) clarify the manner in which defective corporate acts may be ratified.
- The proposed amendment to Section 262(b) would extend the so-called “market out exception” to the availability of statutory appraisal rights in “intermediate-form” mergers (exchange offers followed by control mergers) pursuant to Section 251(h). If the amendment is adopted, appraisal rights would not be available for holders of shares of target corporations listed on national securities exchanges or held of record by more than 2,000 holders immediately prior to the execution of an exchange and merger agreement, as long as such holders are not required to accept in exchange of their shares anything except: (1) stock of a surviving corporation; (2) at the effective time of the merger, stock of any other corporation listed on a national securities exchange or held of record by more than 2,000 holders; (3) cash in lieu of fractional shares or fractional depository receipts; or (4) any combination of the foregoing. In effect, such proposed amendments would reduce the number of transactions that would be subject to appraisal claims, and therefore potentially increase the number of transactions taking advantage of intermediate-form mergers rather than more traditional “long-form” mergers involving proxy solicitations.
- Section 204 of the DGCL enables ratification of defective corporate acts, a potentially very valuable power to address innocent mistakes made in the course of managing a corporate family. The proposed amendments would clarify (1) that ratification of defective corporate acts pursuant to Section 204 may be used where there is no valid stock outstanding (e.g., immediately following formation of a subsidiary, but prior to issuance of stock), even if such acts require stockholder approval; (2) which holders must receive notice of such ratification; (3) that Section 204 may apply to any act or transaction within a corporation’s power under subchapter II of the DGCL (expanding the scope and usefulness of Section 204); and (4) that the definition of “failure of authorization” includes any failure of an act or transaction to be approved in compliance with a disclosure set forth in any proxy or consent solicitation statement. Such proposed amendments should provide in-house counsel further power to address prior defective acts, and comfort that Delaware is serious about ensuring the efficacy of Section 204.
If approved by the Corporation Law Section, these amendments will be introduced to the Delaware General Assembly.
The proposed amendments are available here.