2020 Amendments to Delaware’s General Corporation Law and Alternative Entity Statutes
In its last 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 signed these bills into law on July 16, 2020. The amendments largely become effective upon enactment, with certain exceptions.
The amendments include a number of substantive, technical and clarifying changes. Most notably, they include changes to the DGCL regarding exculpatory provisions, emergency powers, indemnification, holding company mergers and public benefit corporations. After several consecutive years of substantial and voluminous revision, there were fewer notable revisions to the alternative entity statutes this year. Details regarding the various amendments are as follows.
Amendments to the DGCL
Exculpatory Provisions (DGCL Section 102(b)(7)). Section 102(b)(7) of the DGCL authorizes a corporation to include in its certificate of incorporation an exculpatory provision that eliminates or limits the liability of directors for monetary damages for certain breaches of duty. An amendment was made to Section 102(b)(7) to clarify that an exculpatory provision has the effect of eliminating or limiting liability for monetary damages with respect to any act or omission of a director occurring while the exculpatory provision is in effect. Unless the provision provides otherwise at the time of such act or omission, any future amendment, repeal or elimination of that provision will not revoke the elimination or limitation of liability.
Emergency Powers (DGCL Section 110). Courtesy of COVID-19, Section 110 of the DGCL was amended retroactive to January 1, 2020 to clarify the types of events that give rise to the availability of emergency powers (now specifically including an epidemic, pandemic or declaration of national emergency), to specify that emergency bylaws may be adopted by a majority of the directors present if a quorum cannot readily be convened, and to confirm certain of the specific powers relating to stockholders’ meetings and dividends that may be exercised during an emergency condition. As revised, a board of directors may take any action that it determines to be practical and necessary to address the circumstances of the emergency, including postponing stockholder meetings to a later date, notifying stockholders of delays in the meeting date or changes in the meeting location solely by publicly filing a document with the United States Securities and Exchange Committee, and changing the record and payment dates of certain pending dividends. The amendments to Section 110 are not intended to limit or eliminate the availability of any powers or emergency actions that are not specifically enumerated.
Indemnification (DGCL Sections 145(c) and 145(f)). Section 145(c) of the DGCL provides current and former directors and officers a right to indemnification if they are successful (on the merits or otherwise) in defending claims brought against them by reason of their conduct as directors and/or officers. Amended Section 145(c) defines the group of officers who are entitled to this statutory right of indemnification as the officers who are deemed under Section 3114(b) of title 10 of the Delaware Code to have consented to the jurisdiction of the Delaware courts in suits against them for breach of their duties as officers. Under the current language of Section 3114(b) of title 10, the word “officer” means an officer of the corporation who: (1) is or was the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful; (2) is or was identified in the corporation’s public filings with the United States Securities and Exchange Commission because such person is or was one of the most highly compensated executive officers of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful; or (3) has, by written agreement with the corporation, consented to be identified as an officer for purposes of Section 3114(b) of title 10. The amendment does not define who qualifies as an officer under Section 145(c) for purposes of a right to indemnification for an act or omission occurring on or before December 31, 2020 and does not define who qualifies as an officer for purposes of the other subsections of Section 145.
Section 145(c) of the DGCL was also amended to add a new subsection (2) that permits (but does not require) a corporation to indemnify other persons who are not current or former directors or officers if they are successful in defense of a proceeding referenced in subsections (a) and (b) of Section 145. A corporation may rely on Section 145(f) to make this permissive indemnification a mandatory right for these other persons, such as pursuant to a provision in the certificate of incorporation, the bylaws, an agreement, or vote of stockholders or disinterested directors. This amendment to Section 145(c) is consistent with case law holding that a corporation lawfully may agree to provide indemnification to a person who is not a director or officer solely based on that person’s successful defense of a claim covered by Section 145(a) or (b), without an inquiry into whether such person has met the conduct requirements of Section 145(a) or (b).
Section 145(f) prohibits the elimination or impairment of a right to indemnification or to advancement by amendment to the certificate of incorporation or the bylaws after the occurrence of the act or omission that is the subject of the civil, criminal, administrative, or investigative action, suit or proceeding for which indemnification is sought, unless the provision in effect at the time of the act or omission explicitly authorizes such elimination or impairment after such act or omission has occurred.
Holding Company Mergers (DGCL Section 251(g)(7)). Section 251(g)(7) of the DGCL was amended to eliminate the requirement, in connection with a merger pursuant to such section, that the organizational documents of the surviving entity contain provisions identical to the certificate of incorporation of the constituent corporation immediately prior to the merger. These changes are effective only with respect to a merger or consolidation consummated pursuant to an agreement entered into on or after enactment into law of such section.
Public Benefit Corporations (DGCL Sections 363, 365 and 367). Amendments to Section 363 of the DGCL lower from two-thirds to a majority the stockholder vote required for (1) amendments to a certificate of incorporation that converts a conventional corporation into a public benefit corporation or convert a public benefit corporation into a conventional corporation and (2) mergers that convert shares of conventional corporations into shares of public benefit corporations or shares of public benefit corporations into shares of conventional corporations. Those amendments also eliminate appraisal rights for (1) amendments to a certificate of incorporation that converts a conventional corporation into a public benefit corporation and (2) mergers that convert shares of conventional corporations into shares of public benefit corporations. The amendments to Section 363(b)(2) are effective with respect to a merger or consolidation consummated pursuant to an agreement entered into on or after their enactment into law.
Amendments to Section 365(c)(1) of the DGCL clarify that, for the purposes of Section 365(b), a director will not be interested with respect to a balancing decision due to the director’s interest in stock of the corporation, except to the extent that such ownership would create a conflict of interest if the corporation were not a public benefit corporation, and provide that any failure to satisfy the balancing requirement shall not constitute an act or omission not in good faith for the purposes of Section 102(b)(7) or Section 145, unless the certificate of incorporation otherwise provides.
Amendments to Section 367 of the DGCL clarify that any lawsuit to enforce the balancing requirement to which public benefit corporations are subject must be brought by plaintiffs owning at least 2% of the corporation’s outstanding shares or, in the case of certain listed companies, shares with a value of at least $2,000,000 if such number is lower.
Other Amendments. Several other revisions were made, including modifications to the provisions of the DGCL relating to electronic execution of documents.
Amendments to the DLLCA
Appraisal Rights (DLLCA Section 18-201). Section 18-201 of the DLLCA was amended to confirm that no appraisal rights are available with respect to a limited liability company interest or another interest in a limited liability company, including in connection with certain enumerated transactions, unless otherwise provided in certain enumerated documents.
Other Amendments. Several other clarifying, confirming and technical changes were made to the DLLCA.
Amendments to DRULPA
Appraisal Rights (DRULPA Section 17-212). Section 17-212 of DRULPA was amended to confirm that no appraisal rights are available with respect to a partnership interest or another interest in a limited partnership, including in connection with certain enumerated transactions, unless otherwise provided in certain enumerated documents.
Other Amendments. Several other clarifying, confirming and technical changes were made to DRULPA.
Amendments to DRUPA
Appraisal Rights (DRUPA Section 15-120). Section 15-120 of DRUPA was amended to confirm that no appraisal rights are available with respect to a partnership interest or another interest in a partnership, including in connection with certain enumerated transactions, unless otherwise provided in certain enumerated documents.
Other Amendments. Several other clarifying, confirming and technical changes were made to the DRUPA.