You might be interested in this recent Alert from the Delaware firm, Morris Nichols Arsht & Tunnell (including a more expansive article), which addresses amendments to the Delaware General Corporation Law just proposed by the Council of the Corporation Law Section of the Delaware State Bar Association. It’s worth emphasizing that the proposed amendments have not yet been submitted to the Delaware General Assembly for its consideration and approval, so they are not yet effective. As the Alert indicates, the proposed new amendments are designed to address the effects of recent Delaware cases highlighting “that the legal requirements identified in the cases were not necessarily in line with market practice. The Amendments are designed to bring existing law in line with such practice.”
In particular, the Alert focuses on these aspects of the proposed amendments:
- The proposed amendments address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, in which the Delaware Chancery Court asked “[w]hat happens when the seemingly irresistible force of market practice meets the traditionally immovable object of statutory law? A court must uphold the law, so the statute prevails.” The immovable statutory object that the court upheld was Section 141(a) of the DGCL, which is now proposed to be moved by these amendments. As discussed in the Alert, in Moelis, the court held facially invalid under Section 141(a) certain largely governance-related provisions in an agreement between a company and its founding stockholder “providing that stockholder consent rights over a broad range of corporate actions, as well as rights regarding the composition of the corporation’s board of directors and board committees.” The proposed amendments “add a new subsection (18) to Section 122 of the DGCL to provide that, whether or not set forth in a certificate of incorporation, a corporation has the power to enter into contracts with current or prospective stockholders that contain the consent rights and other provisions addressed in Moelis.” The Alert discusses related issues, including required consideration, fiduciary duties, remedies and “overdelegation.”
- The Alert also discusses proposed amendments that address Delaware caselaw calling into question whether, in the event of a busted deal, parties could provide the target the ability to seek damages for “lost stockholder premium arising from pre-closing breaches by the acquiror, either by defining the target’s damages to include lost stockholder premium or by allowing the target to pursue such damages as agent on behalf of its stockholders.” As discussed in the Alert, the proposed amendments would amend “Section 261 of the DGCL to clarify that parties to a merger agreement may contract for penalties or consequences for a breach of the merger agreement that occurs prior to the effective time, or for any other failure to consummate, or cause the consummation, of the merger.” That would include “damages based on lost stockholder premium.” In addition, the proposed amendments would “clarify the ability of corporations to appoint a stockholder representative to enforce stockholder rights post-closing (such as is typically done in private company transactions).”
- As discussed in the Alert, the proposed amendments also address another Delaware case in which allegations in a complaint that a merger was not duly authorized survived a motion to dismiss. In particular, the complaint alleged that the merger agreement was not properly approved because, in light of the omission of the amount of consideration and the disclosure schedules as well as the “delegation to a committee to finalize the permitted amount of pre-closing dividends,” the version of the agreement approved by the board was not “an essentially complete” version. In addition, there were allegations that the notice of stockholder meeting omitted the surviving company charter and therefore did not satisfy statutory requirements. As described in the Alert, the proposed amendments “would add a new Section 147 to the DGCL providing that, whenever the DGCL requires a board to approve or take other action with respect to any agreement, instrument or document, that agreement, instrument or document may be in either final form or substantially final form.” The proposed amendment would also permit timely ratification. The proposed amendments would also “add a new Section 268(b) to the DGCL providing that, unless otherwise expressly provided by the relevant agreement, disclosure letters and schedules with respect to representations, warranties, covenants, or conditions contained in the agreement are not deemed part of the agreement for purposes of the DGCL.” The Alert observes that these changes should allow boards “more latitude to delegate to outside counsel the authority to finalize documents after material terms are agreed.” The Alert discusses, among other things, the meaning of “substantially final form,” ratification, actions to be taken “regarding the surviving corporation charter by a constituent corporation whose stockholders do not receive stock in the surviving corporation,” and clarifications regarding notices to stockholders.
The Alert indicates that, if approved, the amendments “would apply to all contracts made by a corporation, all agreements, instruments or documents approved by the board of directors and all agreements of merger entered into by a corporation, whether or not made, approved or entered into before the effective date of the Amendments.” The Alert discusses the implications for agreements approved prior to the effective date.
