Governor John C. Carney, Jr. signed amendments to the Delaware General Corporation Law (the "DGCL") into law in July 2020.
The following is a summary of the most important amendments impacting the regulation and operation of Delaware corporations. These amendments modify statutory provisions covering (i) the timing of exculpatory provisions under Section 102(b)(7), (ii) the adoption and effect of emergency bylaws under Section 110, (iii) a corporation’s indemnification of officers and other persons under Section 145, (iv) mergers under Section 251(g) and (v) the voting requirements and appraisal rights for public benefit corporations under Sections 363, 365 and 367.
Exculpatory Provision under Section 102(b)(7)
Under Section 102(b)(7) of the DGCL, a corporation’s certificate of incorporation may include a provision eliminating or limiting the personal liability of a director of a corporation or its stockholders for monetary damages for breaches of fiduciary duties as a director, subject to certain restrictions. Provisions added to a certificate of incorporation pursuant to Section 102(b)(7) are known as “exculpatory provisions.” The 2020 amendments to the DGCL clarify the timing of exculpatory provision. Specifically, the 2020 amendments explain 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 exculpatory provision explicitly provides otherwise at the time of such act or omission, any subsequent amendment, repeal or elimination of the exculpatory provision will not retroactively affect any prior exculpation.
Emergency Bylaws under Section 110
Section 110 of the DGCL authorizes the board of directors of any corporation to adopt emergency bylaws under specific circumstances, including (i) any emergency resulting from an attack on the United States or on a locality in which a corporation conducts its business or customarily holds meetings, (ii) any nuclear or atomic disaster, (iii) the existence of a catastrophe or (iv) other similar emergency conditions. The purpose of emergency bylaws is to moderate corporate governance temporarily so that a corporation’s board of directors can continue to function during an emergency. For example, emergency bylaws may relax quorum requirements for board action.
In light of the COVID-19 pandemic, the 2020 amendments to the DGCL seek to clarify and expand various portions of Section 110. First, the 2020 amendments specify that a “catastrophe” includes epidemics, pandemics, and declarations of a national emergency by the United States. Second, the 2020 amendments indicate that emergencies do not have to prevent a quorum of the board of directors from convening for action. Section 110(a) previously required an emergency to prevent a board of directors from convening before a corporation’s emergency bylaws could be operational. Third, the 2020 amendments allow a majority of the directors present at a meeting to adopt emergency bylaws if a quorum cannot be readily convened.
The 2020 amendments to the DGCL also add Section 110(i), which is a new provision that discusses stockholder meetings and dividends during any emergency condition. Section 110(i) begins by authorizing a quorum of the board of directors, or a majority of the directors present if a quorum cannot be readily convened, to take any action that it determines to be practical and necessary to address a stockholder meeting affected by the emergency condition. Although the directors may take any action necessary, Section 110(i) specifically notes that directors may postpone a stockholders meeting to a later time and date (with the record date for determining the stockholders entitled to notice of, and to vote at, such meeting applying to the postponed meeting). Section 110(i) also notes that corporations subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, may notify stockholders of any postponement or change of place of the meeting (or a change to hold the meeting solely by means of remote recommunication) by publicly filing a document with the Securities and Exchange Commission. Section 110(i) further provides that no person shall be liable, and no stockholders meeting shall be postponed or voided, for failure to make a stocklist available if it was not practicable to allow inspection during the emergency condition.
During any emergency condition, Section 110(i) also authorizes a quorum of the board of directors, or a majority of the directors present if a quorum cannot be readily convened, to delay the record date and payment date for dividends that have been declared but not reached their record date. Moreover, delaying dividends during any emergency condition is only subject to two conditions. First, the payment date as so changed cannot be more than sixty days after the record date as so changed. And second, a corporation must promptly give notice of any dividend changes to stockholders before the original record date. Corporations subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, may provide notice by publicly filing a document with the Securities and Exchange Commission.
Indemnification of Directors and Officers under Section 145
As preliminary background, Section 145(a) of the DGCL vests a corporation with permissive authority to indemnify any director, officer, employee or agent of the corporation against expenses, judgments, fines and amounts paid in settlement arising from any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation). Section 145(b) of the DGCL vests a corporation with permissive authority to indemnify any director, officer, employee or agent against expenses actually and reasonably incurred in any action brought by or in the right of the corporation. In order to enjoy the indemnification provided by Section 145(a) or 145(b), a director, officer, employee or agent must have acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation.
The 2020 amendments to the DGCL primarily address Section 145(c), which imposes mandatory indemnification under specific circumstances. The 2020 amendments add a second provision to Section 145(c), causing the former Section 145(c) to become Section 145(c)(1). Thus, the new Section 145(c)(1) obligates a corporation to indemnify its present and former directors and officers against expenses if they are successful (on the merits or otherwise) in defending claims brought against them by reason of their conduct as directors and officers. Unlike Sections 145(a) and 145(b), Section 145(c)(1) does not require a determination as to whether the indemnitee acted in good faith and in a manner the indemnitee reasonably believed to be in or not opposed to the best interests of the corporation. The 2020 amendments to the DGCL further specify which officers are entitled to mandatory indemnification under Section 145(c)(1). For indemnification with respect to any act or omission occurring after December 31, 2020, an “officer” is any person who at the time of such act or omission is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to Section 3114(b) of title 10 of the Delaware Code. Section 3114(b) does not apply to Delaware residents, so the new Section 145(c)(1) treats Delaware residents as if they were non-residents to ensure all officers remain entitled to indemnification per Section 3114(b).
In addition, the 2020 amendments to the DGCL add Section 145(c)(2), which is a new provision that permits a corporation to indemnify other persons who are not present or former directors or officers if they are successful (on the merits or otherwise) in defending claims brought against them by reason of their affiliation with the corporation. Unlike Section 145(c)(1), the new Section 145(c)(2) does not require a corporation to indemnify such other persons. A corporation, however, may turn Section 145(c)(2)’s permissive indemnification into mandatory authority through its governing documents. The new Section 145(c)(2) is consistent with case law holding that a corporation may lawfully agree to indemnify other persons based on their successful defense of a claim covered by Sections 145(a) or 145(b), regardless of whether those persons acted in good faith and in a manner the persons reasonably believed to be in or not opposed to the best interests of the corporation.
Section 145(f) of the DGCL – known as the “No Termination Provision” – prohibits a corporation from amending its certificate of incorporation or bylaws to eliminate or impair a right to indemnification or advancement of expenses after the occurrence of the act or omission that is the subject of the action, suit or proceeding for which indemnification or advance of expenses is sought. Section 145(f), however, does allow a corporation to eliminate or impair a right to indemnification or advance of expenses if the corporation’s certificate of incorporation or bylaws explicitly authorize such elimination or impairment after such action or omission has occurred. The 2020 amendments to the DGCL clarify that a corporation may not eliminate or impair a right to indemnification or advancement of expenses by repealing or eliminating its certificate of incorporation or bylaws. Although the scope of Section 145(f) was intended to be broader, the provision’s prior wording expressly restricted amendments of the certificate of incorporation or bylaws that would eliminate or impair a right to indemnification or advancement of expenses.
Mergers under Section 251(g)
Under Section 251(c) of the DGCL, merger agreements must be submitted to the stockholders of each constituent corporation for approval. Section 251(c)’s stockholder vote requirement, however, is subject to several exceptions. Unless a constituent corporation’s certificate of incorporation expressly requires a stockholder vote, Section 251(g) provides that no stockholder vote of a constituent corporation is necessary to authorize a merger with or into a single direct or indirect wholly-owned subsidiary of that constituent corporation if certain conditions are satisfied (see Section 251(g)(1)-(8)).
The 2020 amendments to the DGCL notably address Section 251(g)(7), which is one of the conditions for effecting a merger under Section 251(g). Previously, Section 251(g)(7) required the organizational documents of the surviving entity immediately following the effective time of the merger to contain provisions identical to the constituent corporation’s certificate of incorporation. The 2020 amendments eliminate this requirement altogether and, instead, specify the types of provisions that the surviving entity’s organizational documents must contain. The 2020 amendments will apply to Section 251(g) mergers that are consummated pursuant to an agreement entered into on or after the amendments are enacted into law.
Public Benefit Corporations under Sections 363, 365 and 367
The 2020 amendments to the DGCL address several aspects of the subchapter governing public benefit corporations. A public benefit corporation is a for-profit corporation that is intended to produce a public benefit or public benefits and to operate in a responsible and sustainable manner. Public benefit corporations, therefore, are managed in a way that balances (i) the stockholders’ pecuniary interest, (ii) the best interests of those materially affected by a corporation’s conduct, and (iii) the public benefit or public benefits identified in a corporation’s certificate of incorporation.
To begin, the 2020 amendments eliminate Sections 363(a), 363(b) and 363(c) of the DGCL. Section 363(a) currently requires a public benefit corporation to obtain approval from two-thirds of the outstanding stock entitled to vote before (i) amending its certificate of incorporation to become a public benefit corporation, or (ii) merging or consolidating with or into another entity if, as a result of the merger or consolidation, the corporation’s share would become, or be converted into or exchanged for, the right to receive shares (or other equity interests) in a public benefit corporation or similar entity. Section 363(b) provides dissenting shareholders with appraisal rights, subject to the “market out” exception, for (i) amendments to a certificate of incorporation that convert a conventional corporation into a public benefit corporation and (ii) mergers that convert shares of conventional corporations into shares of public benefit corporations. Lastly, Section 363(c) requires a public benefit corporation to obtain approval from two-thirds of the outstanding stock entitled to vote before (i) amending its certificate of incorporation to delete or amend a provision relating to the corporation’s status as a public benefit corporation, or (ii) merging or consolidating with another entity if such merger or consolidation would cause the public benefit corporation’s stockholders to receive shares or other equity interests in an entity other than a public benefit corporation.
By deleting the supermajority voting requirements of Sections 363(a) and 363(c), the 2020 amendments impose majority voting for any action currently covered by the two provisions. Majority voting is the default rule for amending a corporation’s certificate of incorporation under Section 242(b) of the DGCL. Similarly, majority voting is the default rule for approving a merger under Section 251(c) of the DGCL. The 2020 amendments, therefore, make it easier for a corporation to become a public benefit corporation, and vice versa, by reducing the voting threshold. In addition, the 2020 amendments of 363(b) eliminate statutory appraisal rights for (i) amendments to a certificate of incorporation that convert a conventional corporation into a public benefit corporation and (ii) mergers that convert shares of conventional corporations into shares of public benefit corporations. Mergers that include a public benefit corporation may still be subject to appraisal rights under Section 262 of the DGCL. It is important to note, however, that the 2020 amendments correspondingly revised Section 262 of the DGCL to repeal specific references to appraisal under Section 363(b). The 2020 amendments to Section 363(b)(2) shall be effective with respect to a merger or consolidation consummated pursuant to an agreement entered into, or, with respect to a merger consummated pursuant to Section 253, resolutions of the board of directors adopted, on or after their enactment into law.
Next, the 2020 amendments address the duties of directors under Section 365 of the DGCL. As noted, the board of directors must manage or direct the business and affairs of a public benefit corporation in a manner that balances (i) the stockholders’ pecuniary interest, (ii) the best interests of those materially affected by a corporation’s conduct and (iii) the public benefit or public benefits identified in a corporation’s certificate of incorporation. This balancing of interests is known as the board of directors’ “balancing requirement.” Section 365(b) further states that a director satisfies such director’s fiduciary duties to the stockholders and the corporation if such director fulfills the “balancing requirement” in an informed and disinterested manner, such that no person of ordinary, sound judgment would disapprove. For the purposes of Section 365(b) of the DGCL, the 2020 amendments to Section 365(c) clarify that a director is not interested with respect to a balancing decision due to the director’s interest in stock of a corporation, except to the extent that such ownership would create a conflict of interest if the corporation were not a public benefit corporation. In the absence of a conflict of interest, the 2020 amendments to Section 365(c) also provide that any failure to satisfy the balancing requirement shall not constitute an act or omission not in good faith, or a breach of the duty of loyalty, for the purposes of Section 102(b)(7) or Section 145 (unless a corporation’s certificate of incorporation states otherwise). Thus, the 2020 amendments to Section 365(c) impose a default rule exculpating the directors of public benefit corporations from breaching the fiduciary duties of loyalty and good faith when fulfilling the “balancing requirement,” subject to provisions in the certificate of incorporation providing otherwise.
Lastly, the 2020 amendments clarify who may bring an action against a public benefit corporation to enforce the “balancing requirement.” Section 367 of the DGCL currently contemplates derivative suits, but the 2020 amendments expand the scope of Section 367 to any action brought to enforce the “balancing requirement.” Plaintiffs, therefore, may bring any action to enforce the “balancing requirement” if they own at least 2% of a corporation’s outstanding stock or, in the case of certain public companies, if they own the lesser of (i) 2% of a corporation’s outstanding stock or (ii) stock of a corporation with a market value of at least $2,000,000.