The Council of the Corporation Law Section of the Delaware State Bar Association has provided recommendations to the Delaware General Assembly for a number of changes to the Delaware General Corporation Law, some of them significant, such as an amendment authorizing charter provisions that would eliminate the personal liability of specified officers for breaches of the duty of care—basically, an extension of DGCL Section 102(b)(7). Typically, the Delaware legislature follows the Council’s recommendations. If adopted and signed into law, the amendments would become effective on August 1, 2022, and generally would apply to actions taken on or after August 1. Several of the recommended changes are discussed below.
Officer exculpation. As you probably remember, DGCL Section 102(b)(7) permits companies to include a provision in their charters limiting or eliminating the personal liability of directors for monetary damages for breaches of fiduciary duty, excluding the duty of loyalty, acts or omissions not in good faith or involving intentional misconduct or knowing violation of law, transactions in which the director derived an improper personal benefit, and unlawful dividends, stock purchases or redemptions. In effect, the provision primarily provides protection for directors for breaches of the duty of care. Probably the most significant change proposed by the Council for 2022 is the extension of this exculpatory provision to include certain corporate officers. The term “officers” under the proposed amendment refers to persons who, at the time of the act or omission as to which liability is asserted, are deemed to have consented to service of process under DGCL Section 3114(b) (including residents of Delaware), meaning (1) the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer or chief accounting officer of the corporation; (2) a person identified in the company’s public filings with the SEC as one of the most highly compensated executive officers; or (3) a person who has, by written agreement with the corporation, consented to be identified as an officer for purposes of Section 3114(b).
The exculpatory provision for officers would have the same exclusions as the provision for directors with one significant addition: exculpation would not be permitted for any action by or in the right of the corporation, i.e., derivative claims. Accordingly, the proposed amendments would afford protection for claims for breach of the duty of care brought directly against officers by stockholders, but claims in which officers are alleged to have breached the duty of care could still be made by the board in the name of the corporation and by stockholders on a derivative basis. Why is this change being proposed? According to a memo from the Delaware firm, Richards, Layton & Finger, the amendments were proposed largely “in response to the perverse outcome in which claims for breach of the duty of disclosure against directors were being dismissed, while the same claims against the officers were allowed to proceed.” RLF observes that “the amendments recognize the basic structure of the Delaware corporation—that directors are principally responsible for oversight of the corporation and the long-term best interests of stockholders, while officers are responsible for management of the corporation’s day-to-day affairs. Given that basic design, directors must have the ability to rely on officers—and should have the opportunity to pursue claims for breach of the duty of care against officers who fall short of their obligations.” With regard to derivative litigation, because stockholders must first make a demand on the board (unless futile), the board “will in most cases retain the ability to determine whether to pursue claims for breach of the duty of care against officers.” If the proposed amendment becomes law, companies will be able to take advantage of the new provision only if they amend their charters to include the new language.
Authorization of stock and options. Proposed amendments to DGCL Sections 152, 153 and 157 would change the way stock and options and rights to acquire stock may be authorized. Specifically, the proposed amendments would allow the board or an authorized board committee to delegate to another person or body its authority to issue stock, rights or options, at the times and for the consideration as the person or body may determine, in a resolution that fixes the following: (i) the maximum number of shares of stock, rights or options (including the maximum number of shares issuable upon exercise of the rights or options), that the person or body may issue or sell, (ii) a time period during which the issuances and exercises may occur, and (iii) the minimum amount of consideration for which the shares, rights or options may be issued (including a minimum amount of consideration for the shares issuable on exercise of the rights or options). The resolution cannot permit the person or body to issue stock, rights or options to the person or body. Any provision in a resolution may be made dependent on facts ascertainable outside the resolution, such as the occurrence of an event, but in that case, the terms contemplated by (i),(ii) and (iii) may not be made dependent on a determination or action by such person or body.
Virtual meeting issues. Section 219 of the DGCL requires companies to make available, for ten days prior to a stockholders’ meeting and at the time and place of the meeting, a list of stockholders entitled to vote, including, in the case of a virtual meeting, on a reasonably accessible electronic network. But do stockholders really need to look at the list during the meeting? This Section is proposed to be amended to require availability of the list ten days ending on the day before the meeting date either at the company’s principal place of business or on an electronic network. The list would no longer be required to be available at the place of the meeting.
The Council is also recommending that Section 222 be amended to address notices of adjournment of virtual meetings, including adjournments taken to address a technical failure to convene or continue a meeting using remote communication. Under the proposal, unless the bylaws provide otherwise, if the meeting is adjourned, notice need not be given of the adjourned meeting if the time and place, if any, of the adjourned meeting, and the means of remote communications, if any, are (i) announced at the meeting (ii) displayed, during the time scheduled for the meeting, on the same electronic network used to enable stockholders and proxy holders to participate in the meeting by means of remote communication or (iii) as set forth in the notice of meeting. The proposed amendment seems to contemplate that, if a technical failure might prevent or crash a virtual meeting, companies may want to include adjournment information in the original meeting notice or, in the event of a crash, on the meeting site.
The Council is also recommending amendments related to conversions of entities to Delaware corporations and conversions of Delaware corporations to other entities, domestication of non-U.S. entities to Delaware corporations, appraisal rights (including demands for appraisal by beneficial owners), stockholder consents, dissolutions, signing of instruments, principal place of business address in the annual franchise tax report and status as large corporate filers.