In its current session, the Delaware legislature passed a number of amendments to the Delaware General Corporation Law (the “DGCL”), the Delaware Limited Liability Company Act (the “DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) and the Delaware Revised Uniform Partnership Act (“DRUPA” and, together with the DLLCA and DRULPA, the “alternative entity statutes”). Delaware Governor John Carney recently signed the package of bills into law. The amendments become effective on August 1, 2022, with certain caveats relating to the amendments discussed below concerning corporate conversions (DGCL Section 266) and domestications (DGCL Section 388).
The amendments include a number of substantive, technical and clarifying changes. Most notably, the DGCL has been amended with respect to (i) the limitation of monetary damages of certain corporate officers for breaches of fiduciary duty, (ii) the delegation by the board of directors of the authority to issue stock, sell treasury shares and issue rights or options to acquire stock, and (iii) the direct exercise of appraisal rights by beneficial owners of stock instead of requiring the record holder to make the demand on behalf of the beneficial owner. The changes this year to the alternative entity statutes are less extensive. Details regarding the various amendments are as follows.
Amendments to the DGCL
Contents of Certificate of Incorporation (DGCL Section 102). Section 102 of the DGCL details the provisions that are required or permitted to be included in a certificate of incorporation, and subsection 102(b)(7) previously allowed a provision eliminating or limiting the personal liability of directors to the corporation or its stockholder for monetary damages for breaches of fiduciary duty (frequently referred to as an “exculpatory provision”), while specifying certain categories of liabilities (such as liability for breaches of the duty of loyalty) that cannot be eliminated or limited. Subsection 102(b)(7) has been amended to allow exculpatory provisions in a certificate of incorporation that cover not just the corporation’s directors but also its president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer and chief accounting officer. In the case of officers, such exculpation is not permitted in any action by or in the right of the corporation.
Issuance of Stock; Lawful Consideration; Fully Paid Stock (DGCL Section 152); Consideration for Stock (DGCL Section 153); and Rights and Options Respecting Stock (DGCL Section 157). A suite of amendments was made to these sections with the effect of harmonizing the rules that apply in order for board of directors (or a committee thereof) to delegate the authority to issue stock (Section 152), sell treasury shares (Section 153) and issue stock options (Section 157). Under the revised rules, the board (or committee) resolution in which the authority is delegated must fix the maximum number of shares or options that can be issued or sold, the time period during which the issuances or sales may occur, and the minimum amount of consideration to be received for the issuances or sales. For the issuance of options, the resolutions must fix these parameters both for the options to be issued and also for the shares of stock issuable upon exercise of the options. The suite of amendments also further clarify when the board (or committee) resolutions may be made dependent on facts ascertainable outside of the resolutions.
List of Stockholders Entitled to Vote; Penalty for Refusal to Produce; Stock Ledger (DGCL Section 219). In recognition of the continuing modern march towards electronic records and away from printed records (and the fact that such list still must be made available for ten days prior to the meeting), the amendments remove the long-standing requirement for a corporation to keep at any stockholder meeting a list of stockholders entitled to vote at such meeting.
Appraisal Rights (DGCL Section 262). Notably, a new subsection 262(d)(3) has been added to the appraisal rights statute that now permits a beneficial owner of stock to demand appraisal directly instead of requiring the record holder to make the demand on behalf of the beneficial owner. The amendments extend appraisal rights to stockholders in connection with a conversion to a foreign corporation or any other entity under Section 266 and eliminate appraisal rights in connection with mergers of entities that domesticated as a Delaware corporation pursuant to Section 388 if the merger was authorized in accordance with Section 388. In addition, the amendments now do away with the requirement that a corporation include in its notice of appraisal rights a full copy of Section 262 if the corporation instead includes in the notice information directing the persons entitled to appraisal to a publicly available electronic resource to access Section 262 (including the website maintained on behalf of the State of Delaware to which those statutes are posted).
Conversion of Domestic Corporations to Other Entities (DGCL Section 266). The requisite stockholder vote for the approval of a conversion of a Delaware corporation to another entity has been revised from the affirmative vote of holders of all of the outstanding shares to the holders of a majority of the outstanding shares entitled to vote on a conversion. If the corporation is being converted to a partnership, then such conversion also requires the approval of each stockholder who will become a general partner of such partnership. For corporations incorporated prior to August 1, 2022, any provision in the certificate of incorporation or a written agreement of such corporation with one or more stockholders that restricts the consummation of a merger is also deemed to apply to a conversion unless the certificate of incorporation or such agreement otherwise expressly specify.
Dissolution Generally; Procedure (DGCL Section 275); and Dissolution of Nonstock Corporation; Procedure (DGCL Section 276). These sections have been amended to require that any corporation that has included in its certificate of incorporation a provision limiting the duration of the corporation to a specified date must file a certificate of dissolution with the State of Delaware within ninety days prior to such date.
Domestication of Non-United States Entities (DGCL Section 388). Under amended Section 388, a non-United States entity that adopts a plan of domestication may set forth in such plan corporate actions to be taken by the domesticated corporation in connection with the domestication, each of which must be approved in accordance with the requirements of the non-United States law applicable to the pre-domesticated entity, and once so approved such corporation action that is within the power of a Delaware corporation shall be deemed authorized under the DGCL without further action.
Annual Franchise Tax Report; Contents; Failure to File and Pay Taxes; Duties of Secretary of State (DGCL Section 502). Section 502(a)(3) has been amended to clarify that the principal place of business address included in a corporation’s annual franchise tax report shall not be the address of the registered office in Delaware unless the corporation maintains its principal place of business in this State and serves as its own registered agent.
Other Amendments. Several other clarifying, confirming and technical changes were made to the DGCL, including the deletion of certain provisions that were no longer consistent with current practice.
Amendments to the DLLCA
Definition of Limited Liability Company Agreement (DLLCA Section 18-101(9)). Section 18-101(9) was amended both to confirm that any registered series or protected series of a limited liability company (“LLC”) is bound by the limited liability company agreement of the LLC regardless of whether the series executed the limited liability company agreement and also to confirm that a limited liability company agreement may include or incorporate multiple documents that may govern the business or affairs of the LLC of any of its series.
Service of Process on Managers and Liquidating Trustees (DLLCA Section 18-109). Section 18-109(b) was amended to provide that when service of process is being effected on a manager or liquidating trustee of an LLC, the Prothonotary or the Register in Chancery of the court in which the civil action or proceeding is pending shall address the required copies and statements to the manager or liquidating trustee of the LLC at the principal place of business of the LLC (if such address is known) and to the manager’s or liquidating trustee’s address last known to the party desiring to make such service.
Delegation of Rights and Powers to Manage (DLLCA Section 18-407). Section 18-407 was amended to provide that a member or manager may delegate any of its rights, powers or duties irrespective of whether the member or manager has a conflict of interest with respect to the matter as to which such rights, powers or duties are being delegated, and that the person or persons to whom any such rights, powers or duties are being delegated shall not be deemed conflicted solely by reason of the conflict of interest of the member or manager. The amendment is intended to vary from recent case law providing that a conflicted principal is legally disabled from delegating authority over the subject matter as to which the principal is conflicted even to an independent delegatee.
Law Applicable to Statutory Public Benefit Limited Liability Companies; How Formed (DLLCA Section 18-1201). Section 18-1201 was amended to provide for the manner in which an LLC may become a statutory public benefit LLC, by inserting new language indicating that, if an LLC is not formed initially as a statutory public benefit LLC, it may become a statutory public benefit LLC in the manner specified in its LLC agreement or by amending its LLC agreement and certificate of formation to comply with the requirements of the DLLCA sections governing statutory public benefit LLCs.
Statutory Public Benefit Limited Liability Company Defined; Contents of Certificate of Formation and Limited Liability Company Agreement (DLLCA Section 18-1202). Subsection 18-1202(a) was amended to provide that an LLC agreement of a statutory public benefit LLC must state that the LLC is a statutory public benefit LLC and must set forth the specific public benefit or benefits to be promoted by the company. The Subsection was also amended to provide that, in the event of any inconsistency between the public benefit(s) as set forth in the company’s LLC agreement and its certificate of formation, the LLC agreement controls as among the members, the managers and other persons who are party to or otherwise bound by the liability company agreement. The subsection was further amended to provide that any provision of an LLC agreement or certificate of formation of a statutory public benefit LLC is not effective to the extent that it is inconsistent with the requirements of the DLLCA sections governing statutory public benefit LLCs, and to require that the manager (or member, if there is no manager) of a statutory public benefit LLC must amend the certificate of formation if such manager (or member, if there is no manager) becomes aware that the specific public benefit or benefits to be promoted by the LLC as set forth in its LLC agreement are inaccurately set forth in its certificate of formation.
Other Amendments. Several other clarifying, confirming and technical changes were made to the DLLCA.
Amendments to DRULPA
Sections 17-101, 17-113, 17-204, 17-215, 17-217, 17-1110 and 17-1111 of DRULPA were amended in a manner parallel to the amendments discussed above to Sections 18-101, 18-113, 18-204, 18-212, 18-214, 18-1108 and 18-1109 of the DLLCA.
Amendments to DRUPA
Sections 15-101, 15-105, 15-124, 15-901 and 15-904 of DRUPA were amended in a manner parallel to the amendments discussed above to Sections 18-101, 18-113, 18-204, 18-212 and 18-214 of the DLLCA, but not including the changes to Section 18-101 relating to protected and registered series since DRUPA does not include protected and registered series provisions.
Messrs. Conway and Gallagher are partners at Connolly Gallagher LLP in Wilmington, Delaware, and serve on the committees of the Delaware State Bar Association that consider and draft annual updates to Delaware’s General Corporation Law and alternative entity statutes. Mr. Conway’s practice focuses on structuring mergers, acquisitions and other transactions under Delaware law, and Mr. Gallagher’s practice focuses on litigation in the Delaware courts involving matters of Delaware law governing corporations, alternative entities and commercial matters.