2023 Amendments to Delaware’s General Corporation Law and Alternative Entity Statutes

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 these bills into law. The amendments become effective on August 1, 2023, with certain caveats relating to the corporate code amendments discussed below concerning appraisal rights (DGCL Section 262), conversions (DGCL Section 265) and domestications (DGCL Section 390).

Details regarding certain of the more substantive amendments are as follows. In addition, other clarifying, confirming and technical changes have been made to the statutes.

Amendments to the DGCL

Issuance of Stock; Lawful Consideration; Fully Paid Stock (DGCL Section 152); Consideration for Stock (DGCL Section 153); Rights and Options Respecting Stock (DGCL Section 157); and Corporation’s Powers Respecting Ownership, Voting, Etc., of its Own Stock; Rights of Stock Called for Redemption (DGCL Section 160). A suite of amendments was made to these sections in order to eliminate redundancies and to clarify, among other things, that treasury shares held by a Delaware corporation may be sold by the corporation for less than par value and that the consideration received by the corporation for the sale of treasury shares may include cash, any tangible or intangible property, any benefit to the corporation, or any combination thereof. Section 157(c), which governs the delegation by a board of directors of the power to approve the issuance of rights and options respecting the corporation’s stock, was amended to eliminate the requirement that the board of directors fix a maximum number of rights or options that may be authorized for issuance by a person or body under such a delegation. Amended Section 160(b) clarifies that treasury shares resulting from a stock redemption or repurchase may be resold unless the treasury shares are retired or are required by the certificate of incorporation to be retired, in which case they may not be resold.

Ratification of Defective Corporate Acts and Stock (DGCL Section 204). Section 204 of the DGCL provides a non-exclusive method by which certain corporate governance deficiencies can be ratified. Among other edits, the amendments dispense with the need for filing a certificate of validation in circumstances where the underlying defective corporate act required the filing of a certificate under another section of the DGCL and such a certificate has been filed and requires no change to give effect to the defective corporate act. The amendments also simplify the required contents of a certificate of validation, including eliminating the requirement that certificates of validation describe the underlying defective corporate acts and the nature of the failure of authorization relating to those acts.

Consent of Stockholders or Members in Lieu of Meeting (DGCL Section 228).Section 228 was amended to simplify the determination of the record date to be used for purposes of identifying the stockholders who are entitled to notice of stockholder action by consent. The changes also provide that a notice of action by consent must be provided to those persons (i) who were stockholders as of the record date for the action by consent, (ii) who would have been entitled to notice of the meeting if the action had been taken at a meeting and the record date for the notice of the meeting was the record date for the action by consent, and (iii) who have not consented to the action by consent.

Amendment of Certificate of Incorporation After Receipt of Payment for Stock; Nonstock Corporations (DGCL Section 242). Section 242, which governs amendments to the certificate of incorporation of a Delaware corporation, has been amended to address certain practical challenges faced by Delaware corporations in obtaining stockholder approval.

Section 242 has been amended to provide that no vote of stockholders is required for an amendment to the certificate of incorporation that subdivides the issued shares of a class of stock into a greater number of issued shares (i.e., a forward stock split), provided that such class is the only class of such corporation’s capital stock then outstanding (and is not divided into series). It also provides that no vote of stockholders is required, in connection with such subdivision, for such amendment to increase the authorized number of shares of such class, up to an amount proportionate to the subdivision.

Section 242 has also been amended to provide that a corporation listed on a national securities exchange can amend its certificate of incorporation to effect a reverse stock split without obtaining a class vote of the impacted class of stockholders if (i) the shares are listed on a national exchange immediately before the amendment becomes effective and the corporation meets the listing requirement of such exchange relating to the minimum number of holders immediately after the amendment becomes effective, (ii) at a meeting of stockholders at which a vote is taken for and against the proposed amendment, the votes cast for the amendment exceed the votes cast against the amendment, and (iii) where the amendment increases or decreases the number of shares of a class of stock that has not opted out of the class vote, the votes cast for the amendment by the holders of such class exceed the votes cast against the amendment by the holders of such class.

Whereas under the former provisions (which tied to a “majority of the outstanding shares”) an abstention would have the same effect as a vote against an amendment, under these new voting standards, abstentions would have no effect on whether the required approval is obtained.

Section 242(a)(3) was also amended to require that forward stock splits and reverse stock splits must apply to outstanding shares and shares held in treasury, i.e., all “issued” shares.

Appraisal Rights (DGCL Section 262). Section 262 of the DGCL is the source of stockholder appraisal rights. It has been amended to provide appraisal rights to stockholders in connection with a transfer, domestication, or continuance of the corporation in a foreign jurisdiction, while also eliminating appraisal rights in connection with a merger, consolidation, conversion, or domestication of an entity that has converted to a Delaware corporation under Section 265, if the merger, consolidation, conversion, or domestication is authorized under Section 265. Conforming changes to the other subsections of Section 262 provide that appraisal rights are available in a domestication in a similar manner as would apply in the case of a merger, consolidation, or conversion. Amended Section 262(k) clarifies that an appraisal demand may be withdrawn more than 60 days after the effective date of the transaction resulting in appraisal rights if the withdrawal is approved by the corporation, but the amendment does not change the existing rule that appraisal rights cease if a petition for appraisal is not timely filed under Section 262.

Conversion of Other Entities to a Domestic Corporation (DGCL Section 265); Conversion of a Domestic Corporation to Other Entities (DGCL Section 266); and Transfer, Domestication or Continuance of Domestic Corporations (DGCL Section 390). These sections have been amended to permit another entity or corporation to adopt a plan of conversion or a plan of domestication setting forth the terms and conditions of the conversion or domestication, including the manner of exchanging or converting the equity interests of the other entity or corporation to be converted or domesticated and any other details or provisions deemed desirable. A plan of conversion, adopted under amended Section 265, also may set forth corporate actions to be taken by the converted corporation in connection with the conversion, each of which must be approved in accordance with the requirements of all applicable law before effectiveness of the conversion. Once so approved, any such corporate action that is within the power of a Delaware corporation set forth in the plan of conversion shall be deemed authorized, adopted, and approved, as applicable, by the converted corporation and its board of directors, stockholders, or members, as applicable, and does not require any further action of the board of directors, stockholders, or members of the converted corporation. The amendments to Sections 265, 266, and 390 provide that the terms of a plan of conversion or plan of domestication may be made dependent upon facts ascertainable outside of such plan if the manner in which such facts operate upon the terms of the plan is clearly and expressly set forth in such plan.

Also, the amendments change the requirement for stockholder approval of the transfer, domestication, or continuance of a corporation in a foreign jurisdiction, from all of the outstanding shares of stock of the corporation to a majority of the outstanding shares of stock entitled to vote on a transfer, domestication, or continuance. The amendments also provide that, for any corporation incorporated before August 1, 2023, any provision contained in its certificate of incorporation or in a written agreement between or among the corporation and one or more stockholders in effect on or before August 1, 2023 that restricts, conditions, or prohibits consummation of a merger or consolidation is also deemed to apply to a transfer, domestication, or continuance, unless the certificate of incorporation or such agreement expressly provides otherwise with respect to a transfer, domestication, or continuance, or if the certificate of incorporation or such agreement does not so expressly provide, a conversion as contemplated by Section 266(k), in which case such express provision shall be deemed to apply to a transfer, domestication, or continuance as if it were a conversion.

Mortgage or Pledge of Assets (DGCL Section 272).Section 272(b) adds a safe harbor for selling, leasing or exchanging collateral assets that secure a mortgage or pledge without obtaining stockholder approval under DGCL Section 271. Amended Section 272(b)(1) clarifies this approval is not required if the secured party can sell the collateral without the corporation’s consent (including without the consent of its board of directors and stockholders) under the law governing the mortgage or pledge or other applicable law. If a secured party is entitled to sell the collateral in such circumstances, but wishes not to, Section 272(b)(2) permits the secured party and the board of directors to agree to an alternative transaction (e.g., a strict foreclosure or sale to a third party), without obtaining Section 271 stockholder approval, if the value of the assets is less than or equal to the amount of the liability or obligation being reduced or eliminated as a result of the transaction.

Amendments to the DLLCA

Merger and Consolidation (DLLCA Section 18-209). Currently, Section 18-209(f) of the DLLCA permits a duly approved agreement of merger or consolidation or plan of merger to effect any amendment to a limited liability company (“LLC”) agreement or effect the adoption of a new LLC agreement. This amendment to Section 18-209(f) confirms that an amendment to an LLC agreement or adoption of a new LLC agreement effected pursuant to Section 18-209(f) may be effected only with respect to the LLC agreement of the surviving or resulting LLC and not with respect to the LLC agreement of a constituent LLC that is not the surviving or resulting LLC.

Series of Members, Managers, Limited Liability Company Interests or Assets (DLLCA Section 18-215). Currently, Section 18-806 of the DLLCA permits revocation of dissolution of an LLC prior to the filing of a certificate of cancellation of the certificate of formation in the office of the Secretary of State; however, the DLLCA does not currently address revocation of termination of a protected series prior to the completion of the winding up of the protected series. This amendment adds a new Section 18-215(d) to permit revocation of termination of a protected series prior to the completion of the winding up of the protected series.

Division of a Limited Liability Company (DLLCA Section 18-217). Currently, among other requirements, a certificate of division must state the name and business address of the division contact and the name and address of the division company where the plan of division is on file. Because this information may change over time, this amendment permits or requires the filing of a certificate of amendment of certificate of division to amend the name or business address of the division contact or the name and address of the division company where the plan of division is on file. The requirement to update such information in a certificate of division ends after the expiration of a period of 6 years following the effective date of the division.

Section 18-217 was also amended to clarify that pursuant to a division, a dividing company is divided into distinct and independent division companies as such term is used in the DLLCA, and that a dividing company need not be a surviving company.

Registered Series of Members, Managers, Limited Liability Company Interests or Assets (DLLCA Section 18-218). Currently, Section 18-806 of the DLLCA permits revocation of dissolution of an LLC prior to the filing of a certificate of cancellation of the certificate of formation in the office of the Secretary of State; however, the DLLCA does not currently address revocation of dissolution of a registered series prior to the filing of a certificate of cancellation of the certificate of registered series in the office of the Secretary of State. This amendment adds a new Section 18-218(f) to permit revocation of dissolution of a registered series prior to the filing of a certificate of cancellation of the certificate of registered series in the office of the Secretary of State.

Irrevocability of Subscription (DLLCA Section 18-506). Section 18-506 was amended to clarify that a subscription for an LLC interest may be irrevocable if the subscription states it is irrevocable to the extent provided by the terms of the subscription.

Amendments to DRULPA

Execution (DRULPA Section 17-204). Section 17-204(a) of DRULPA to clarify that certificates required by DRULPA to be filed in the office of the Secretary of State be executed in the manner set forth in Section 17-204(a). Further, because Section 5 of this Act contains amendments that permit or require a certificate of amendment to a certificate of division to be filed in the office of the Secretary of State, this section also amends Section 17-204(a) of DRULPA to provide the manner in which a certificate of amendment to a certificate of division must be signed.

Series of Limited Partners, General Partners, Partnership Interests or Assets (DRULPA Section 17-218). Each protected or registered series of a Delaware limited partnership must have a general partner associated with it. If a partnership agreement fails to designate an initial general partner associated with such a series, DRULPA designates a general partner to be associated with such a series. If a partnership agreement fails to designate a general partner of the limited partnership generally, DRULPA designates a general partner of the limited partnership generally. These sections amend Section 17-218(b)(1) of DRULPA and Section 17-221(c)(1) of DRULPA to confirm that the rules for designating a general partner for a limited partnership that has protected or registered series apply only to the designation of an initial general partner and not to subsequent general partners.

Currently, Section 17-806 of DRULPA permits revocation of dissolution of a limited partnership prior to the filing of a certificate of cancellation of the certificate of limited partnership in the office of the Secretary of State; however, DRULPA does not currently address revocation of termination of a protected series prior to the completion of the winding up of the protected series. This amendment adds a new Section 17-218(d) to permit revocation of termination of a protected series prior to the completion of the winding up of the protected series.

Division of a Limited Partnership (DRULPA Section 17-220). Currently, among other requirements, a certificate of division must state the name and business address of the division contact and the name and address of the division partnership where the plan of division is on file. Because this information may change over time, this amendment permits or requires the filing of a certificate of amendment of certificate of division to amend the name or business address of the division contact or the name and address of the division partnership where the plan of division is on file. The requirement to update such information in a certificate of division ends after the expiration of a period of 6 years following the effective date of the division.

Registered Series of Limited Partners, General Partners, Partnership Interests or Assets (DRULPA Section 17-221). Currently, Section 17-806 of DRULPA permits revocation of dissolution of a limited partnership prior to the filing of a certificate of cancellation of the certificate of limited partnership in the office of the Secretary of State; however, DRULPA does not currently address revocation of dissolution of a registered series prior to the filing of a certificate of cancellation of the certificate of registered series in the office of the Secretary of State. This amendment adds a new Section 17-221(f) to permit revocation of dissolution of a registered series prior to the filing of a certificate of cancellation of the certificate of registered series in the office of the Secretary of State.

Other Amendments. Section 17-211 was amended in a manner parallel to the amendment discussed above to Section 18-209, and a new Section 17-506 was added which is parallel to new Section 18-506 discussed above.

Amendments to DRUPA

Section 15-902 of DRUPA was amended in a manner parallel to the amendment discussed above with respect to Section 18-209, and a new Section 15-208 was added to DRUPA which is parallel to new Section 18-506 discussed above.