The Corporation Section of the Delaware State Bar Association has proposed a number of amendments to the Delaware General Corporation Law (the "GCL"). If the proposed amendments are approved by certain groups in the Delaware State Bar Association and the Delaware legislature, Governor Jack Markell could sign the amendments into law in July.
The following is a summary of the most significant of the proposed amendments to the GCL. These amendments make changes to (i) prohibit fee-shifting provisions in certificates of incorporation and bylaws, (ii) permit the selection of Delaware as the exclusive jurisdiction for internal corporate claims, and prohibit the selection of another state as the exclusive jurisdiction for such claims, (iii) alter the appraisal rights available to stockholders upon a merger, and (iv) clarify parts of the 2014 amendments concerning ratification of defective corporate acts.
Prohibition on Fee-Shifting
The proposed amendments regarding fee-shifting are a response to ATP Tour, Inc. v. Deutscher Tennis Board, 91 A.3d 554 (Del. 2014), in which the Delaware Supreme Court held that a fee-shifting provision in the bylaws of a non-stock corporation was facially valid. The fee-shifting bylaw provision at issue in ATP provided that any member of the non-stock corporation, who brought a claim against the corporation that did not substantially achieve the remedy sought, was liable for certain legal fees of the corporation.
The proposed amendments to GCL Sections 102(f) and 109(b) provide that neither a certificate of incorporation nor bylaws of a stock corporation may contain a provision which imposes liability on a stockholder for the attorney's fees or expenses of the corporation or any other party in connection with an "internal corporate claim." An "internal corporate claim" is defined as "claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery."
It is important to note that these amendments only apply to the certificate of incorporation and the bylaws and therefore, do prohibit fee shifting in other agreements with stockholders. In addition, these amendments do not apply the fee-shifting prohibition to non-stock corporations and are therefore consistent with the holding in ATP.
Forum Selection Provisions
Increasingly certificates of incorporation and bylaws are drafted with an eye toward minimizing the possibility of costly multi-forum litigation, and the proposed amendments clarify the relevant Delaware law regarding forum selection for intracorporate claims. The proposed forum selection amendments are contained in new Section 115, which states "[t]he certificates of incorporation and bylaws may require, consistent with applicable jurisdictional requirements, that any and all internal corporate claims shall be brought solely and exclusively in any or all of the courts" in the State of Delaware. Section 115 does not speak to the validity of form selection clauses allowing the selection of a forum in addition to Delaware for internal corporate claims, but it does effectively invalidate any forum selection clause which precludes Delaware as a forum for intracorporate claims.
It is also important to note that proposed Section 115 only applies to forum selection clauses contained in certificates of incorporate and bylaws and it, therefore, does not preclude non-Delaware forum selection in stockholder agreements or other writing signed by a stockholder.
The proposed amendments regarding appraisal rights are attempts to limit nuisance suits and appraisal arbitrage. In order to minimize certain undesirable appraisal actions, the proposed amendments would limit a stockholder's right to seek the Court of Chancery's appraisal of the shares in two ways. First, the proposed amendments specify certain conditions that will require an appraisal action involving a public company to be dismissed. Specifically, the Court of Chancery will dismiss an appraisal action unless (i) the number of shares entitled to appraisal exceeds 1 percent of the total outstanding shares for which appraisal could be sought, (ii) the value of the shares entitled to appraisal is at least $1 million worth of shares assessed at the deal price or (iii) the merger was a short-form, parent-subsidiary merger. The second proposed amendment allows the company surviving the merger to cut off the accrual of interest at the statutorily prescribed rate by paying the stockholders an amount chosen by the company. Interest would continue to accrue only on that portion of the stock price as determined by the court that is above what the company paid.
Ratification of Defective Corporate Act
The proposed amendments covering ratification of defective corporate acts are extensive and the details of such amendments are beyond the scope of this summary. As a general matter, the proposed amendments provide additional guidance about the procedures required to ratify certain defective corporate acts and the contents of a certificate of validation. For example, the amendments to Section 204 confirm that a single set of board resolutions may be used to ratify multiple defective corporate acts, but the quorum and voting requirements necessary for ratification are viewed separately for each defective act. The proposed amendments to Section 204 also specify what must be submitted to stockholders for their approval under certain circumstances. In addition, the proposed amendments provide guidance regarding how to remedy the situation where an initial board of directors was not named in the original certificate of incorporation.
In connection with certificates of validation, the proposed amendments provide clarity regarding the number of certificates of validation that must be filed depending on the circumstances surrounding the defective act and previous filings made with respect thereto. In addition, the proposed amendments detail the information that must be included in a certificate of validation, which again, depend on the circumstances involved with the defective act and the previous filings made with respect thereto.
In addition to the above-described legislative proposals, there are a number of other proposed amendments touching on the following topics: stock issuances, restatements of certificates of incorporation, the names of corporations and public benefit corporations.