The Delaware General Assembly recently passed several bills which could have a substantial impact on financing transactions involving Delaware entities. Some of the noteworthy bills are amendments to the Delaware General Corporation Law (the "DGCL"), Delaware's alternative entity statutes and Delaware's statute of limitations for claims based on contract. These amendments: (i) allow consents on behalf of entities to be executed and placed in escrow by persons who are not yet authorized to consent on behalf of such entities, and (ii) authorize parties to a written contract to extend the statute of limitations for causes of action arising out of such contract for up to 20 years. The amendments discussed herein will become effective on August 1, 2014.
Consents with Future Effective Times
One of the bills passed by the Delaware General Assembly amends Section 141(f) of the DGCL. Its purpose is to codify what was a common practice in financing transactions until the AGR Halifax case, in which the Court of Chancery ruled that future effective board consents were invalid. In response to the AGR Halifax decision, the amendment allows any person, whether or not then a director, to provide a written consent effective at a future time (including conditionally upon the happening of a future event) which future time cannot be more than 60 days from the time at which the consent was provided. These written consents shall become effective at the time specified therein so long as the authorizing person is a director at the effective time. Mergers, acquisitions and other similar transactions are often structured such that written consents authorizing the transaction are required prior to closing from persons who will only become board members at closing. Prior to this amendment, it was not clear whether or how this type of pre-approval was to be accomplished, and as a result, attorneys resorted to convoluted and complicated logistical processes to obtain the necessary consents in the proper sequence. This amendment is of particular importance because it provides clarity and simplifies financing transactions involving mergers, acquisitions and other similar transactions and expressly permits and provides guidelines for a person to approve a financing transaction before he or she becomes a board member.
A similar amendment was made to Section 228(c), which addresses stockholder consents. The amendment clarifies that a person can execute a stockholder consent which will be placed in escrow to become effective at some later time (which later time cannot be more than 60 days after the consent was executed) even if that person is not a stockholder when the consent was executed. The amendment further states that the later effective date would be considered the date the consent was signed. Like the amendment to 141(f) of the DCGL, this amendment both clarifies and simplifies the procedures for obtaining consents in mergers, acquisitions or similar transactions where obtaining consents prior to closing is preferred or required.
Similar amendments addressing future effective consents have been enacted the Delaware Limited Liability Company Act, Revised Uniform Limited Partnership Act, Revised Uniform Partnership Act and Statutory Trust Acts. Each of these amendments would allow the relevant entity managers, members, general partners, partners, trustees or beneficial owners, as applicable, to execute future effective consents.
Extended Statute of Limitations
The amendment to Title 10, Section 8106 of the Delaware Code allows parties to a written contract involving at least $100,000 to set a contractual statute of limitations of up to 20 years from the accruing of the cause of action. The current statute of limitations in Delaware for most causes of action arising out of contract is 3 years. However, Delaware's seal statute allows parties to extend the statute of limitations for contracts executed under seal for up to 20 years. In response to increased use of seal instruments solely for the purpose of extending the statute of limitations, this amendment seeks to eliminate the formalistic process of executing documents under seal.
This amendment is particularly important in financing transactions, which typically include a host of representations and warranties made by the borrower (or sellers in asset purchases). These representations and warranties range from factual statements regarding title to and physical condition of property to legalistic statements regarding power and authority and the lack of fraud. Lenders require these representations and warranties to protect themselves in the event that a factual or legal issue present at closing could be used in the future to invalidate or unwind the transaction. Lenders want the representations and warranties contained in their financing documents to extend as long as possible after the closing date, and it is not uncommon to see provisions in financing documents which indicate that certain representations and warranties shall survive indefinitely. These indefinite survival provisions are almost certainly unenforceable under the current statute of limitations in Delaware for breach of contract, which is 3 years for most contracts. However, the amendment allows parties to contracts involving at least $100,000 to extend the statute of limitations to up to 20 years from the date of closing (when the action for breach of contract typically accrues), thereby enhancing the contractual protections available to lenders.
Other Proposed Amendments
The amendments regarding future effective consents and extended statute of limitations are only a few of the newly-passed Delaware bills affecting commercial transactions enacted this year. The General Assembly passed a number of other amendments to the DGCL and Delaware's alternative entity statutes. These amendments include: (i) amending the conditions necessary for avoiding back-end stockholder consent in two-step mergers under the DGCL, (ii) exempting from stockholder approval certain amendments to certificates of incorporation, (iii) providing additional means by which the dissolution of some Delaware alternative entities may be revoked, and (iv) adding requirements for certain Delaware alternative entities to maintain records of the names and addresses of the principals of such entities.
Summaries and discussions of these additional amendments will be available in the coming weeks.
Chris Messa is a partner in the Corporate/Business Entity Counseling practice group of Berger Harris with significant expertise in Articles 8 and 9 of the Delaware Uniform Commercial Code. His practice focuses primarily on rendering advice and legal opinions relating to commercial transactions, including securitizations, structured finance, asset sale and purchase, cross-border transactions and secured transactions. Chris has extensive experience counseling clients with respect to the formation and operation of Delaware corporations, trusts, partnerships and limited liability companies.