The 2023 amendments to the Delaware General Corporation Law (the “DGCL”), the Delaware Revised Uniform Partnership Act (the “DRUPA”), the Delaware Revised Uniform Limited Partnership Act (the “DRULPA”), and the Delaware Limited Liability Company Act (the “DLLCA” and, together with the DRUPA and the DRULPA, the alternative entity statutes) went into effect on August 1, 2023. Below is a brief description of some of the more notable 2023 amendments. (No amendments were made to the Delaware Statutory Trust Act in 2023.)
Amendments to the DGCL
Disposition of Treasury Stock (Sections 152, 153, and 160(b) of the DGCL)
The amendments to Sections 152 and 153 of the DGCL, which govern the issuance of stock, and Section 157, which governs the rights and options respecting stock, address uncertainty arising from certain of the amendments made in 2022 to the DGCL. When a corporation issues shares of common stock, then subsequently redeems (or otherwise reacquires) such shares without retiring them, such shares are called treasury shares, which are considered issued but not outstanding. In 2022, Section 153 of the DGCL was amended to allow a board or committee to dispose of treasury shares using the same procedures applicable to the initial issuance of stock under Section 152 of the DGCL. However, under Section 152 of the DGCL, the consideration exchanged for shares having par value must meet or exceed the par value of such shares, and the 2022 amendment did not address whether this minimum-consideration requirement applies to the disposition of treasury stock.
The amended Section 152 clarifies that any minimum consideration for issued shares must meet the minimum required (if any) under Section 153 of the DGCL. The amended Section 153, in turn, confirms that the minimum-consideration requirement set forth in Section 152 does not apply to consideration received for shares of treasury stock. Indeed, in consideration for treasury stock, a corporation may receive any combination of cash, any tangible or intangible property, or any other benefit to the corporation, and the value of such consideration may be greater than, less than, or equal to the par value of the treasury shares.
Relatedly, the amended Section 160(b) of the DGCL clarifies that unless a corporation’s certificate of incorporation requires such treasury shares to be retired, any treasury shares resulting from a corporation’s redemption or repurchase of its issued shares may be subsequently resold under Section 153 of the DGCL.
Delegates’ Authority to Issue Rights or Options to Acquire Stock (Section 157(c) of the DGCL)
The amended Section 157 of the DGCL clarifies that subsection (c) is the exclusive means to delegate to a person or body the authority to issue rights or options to acquire shares of stock. This amendment strikes references in subsection (b) to eliminate redundancy and further enhance clarity.
The newly amended Section 157(c) also (i) removes the prior requirement that the board of directors (or committee) fix a maximum number of rights or options that may be authorized for issuance by a delegate; (ii) allows the board resolutions authorizing the delegation to fix the terms upon which shares may be acquired from, and issued by, the corporation upon the exercise of rights or options; and (iii) allows the board resolution authorizing the delegation to establish two separate time periods: (x) one time period within which the delegates may issue rights or options, and (y) another time period within which the shares issuable upon the exercise of such rights or options may be issued.
Ratification of Defective Corporate Acts (Section 204 of the DGCL)
The amended Section 204(e) of the DGCL sets forth new and improved statutory procedures for the ratification of corporate acts that, absent a ratification, would be considered void or voidable for lack of proper authorization. Prior to this amendment, if an underlying defective corporate act was or should have been accompanied by the filing of a certificate with the Delaware Secretary of State, the corporation would have to file a certificate of validation when it passed the ratification. This was the case even if a certificate was filed and was otherwise accurate, despite the ratification.
To enhance the efficiency and practicality of ratifications of defective corporate acts, the amended Section 204(e) requires a filing of a certificate of validation only (i) if the underlying defective corporate act required the filing of a certificate in the first instance under another section of the DGCL and (ii) such certificate (x) was never filed or (y) was filed but now must be amended to give effect to the underlying corporate act. And, where a certificate of validation must be filed, the amended Section 204(e) of the DGCL reduces the amount of information required when describing the underlying defective corporate act itself and the nature of the failed authorization thereof.
Sections 204(c) and (d) clarify that when determining whether there are any valid shares of stock outstanding and, therefore, any holders entitled to vote on the ratification of the defective corporate act, the date relevant to this determination is the date on which the board adopts the resolutions that ratify the underlying defective corporate act.
The amended Section 204(g) of the DGCL, which allows ratification notices to be included in notices issued pursuant to Section 228(e), adds clarifying language to accommodate the modification in the amended Section 228(e).
Stockholder Notice (Section 228(e) of the DGCL)
The amended Section 228(e) of the DGCL simplifies the determination of the record date used for identifying stockholders entitled to receive notice of action taken by consent of the stockholders. Prior to this 2023 amendment, the DGCL required that “prompt” notice be given to nonconsenting stockholders, if any, who were otherwise entitled to notice of the meeting at which the action was taken, if one had taken place, and the notice record date had been the date that the requisite number of consents were first delivered to the corporation.
Now, under the amended Section 228(e), a notice of action by consent of stockholders shall will be issued to those persons who (i) were stockholders as of the record date for the action by consent, (ii) would have been entitled to notice of the meeting if the action had been taken at a meeting and the record date for the notice of the meeting is the same date for the action by consent, and (iii) did not consent to the action by consent. The amended Section 228(e) further provides that, for corporations entitled to use internet-availability notices under the Securities Exchange Act, such internet-availability notices would satisfy the notice requirement under Section 228(e).
Stock Splits and Related Amendments to Certificates of Incorporation (Section 242 of the DGCL)
The amended Section 242 of the DGCL, which sets forth the general procedures a corporation must follow to amend its certificate of incorporation, includes several key revisions, namely a new subsection (d) that introduces circumstances in which a stockholder vote otherwise required by subsection (b) may be reduced or eliminated.
Prior to this amendment, under subsection (b)(1), with the exception of a few limited circumstances, a corporation was required to secure the affirmative vote of a majority of the holders of outstanding stock and of a majority of each class entitled to a class vote. Such limited circumstances included those amendments to effect a name change; those amendments to delete provisions that named the incorporator, the initial directors, or initial subscribers for stock; or those amendments to delete provisions contained in any amendment to effect a change, exchange, reclassification subdivision, combination, or cancellation of stock that has already become effective. Because the new Section 242(d) governs the limited circumstances in which an amendment to a corporation’s certificate of incorporation does not require a stockholder vote, this carve-out has been deleted from Section 242(b)(1) and is more fully addressed in new Section 242(d)(1), which introduces additional circumstances in which no stockholder vote is required to amend a certificate of incorporation.
In addition to the limited circumstances listed above in which a stockholder vote is not required to amend a corporation’s certificate of incorporation, new Section 242(d)(1) also negates a required stockholder vote, unless otherwise required by a corporation’s certificate of incorporation, for (i) an amendment to effect a forward stock split (i.e., subdividing the issued shares of a class of stock into a greater number of issued shares), provided that such class is the only class of the corporation’s capital stock then outstanding and is not divided into series, and (ii) an amendment arising from such forward stock split to increase the authorized number of shares of such class up to an amount proportionate to the subdivision.
The new Section 242(d)(2) provides that a corporation may amend its certificate of incorporation to effect a reverse split (i.e., reclassify by combining the issued shares of a class into a lesser number of issued shares) or to increase or decrease the number of authorized shares of a class (in a manner not involving a forward stock split) without requiring the vote or votes required by Section 242(b): (i) if (x) the shares implicated by the stock split are listed on a national securities exchange immediately before this amendment’s effective date and (y) the corporation meets all listing requirements concerning the minimum number of holders immediately after this amendment’s effective date; (ii) if at a meeting of the stockholders concerning the proposed amendment, the votes for the proposed amendment exceed the votes against the proposed amendment; and (iii) if the amendment increases or decreases the number of shares of a class of stock that has not opted out of the class vote pursuant to the last sentence of Section 242(b)(2), then the votes for the proposed amendment by the holders of such class exceed the votes cast against the amendment by the holders of such class. The voting standards introduced by the new Section 242(d)(2) discard abstentions from the approval calculations. Additionally, the new Section 242(d) of the DGCL does not eliminate the requisite stockholder vote to change the par value of a class of stock, whether or not in connection with any subdivision or combination.
The carve-outs provided by the new Section 242(d) are defaults, but a corporation may “opt in” to the stockholder voting thresholds otherwise required under subsection (b) in connection with any forward or reverse stock splits contemplated by subsection (d). To “opt in” to subsection (b)’s voting threshold, the certificate of incorporation must (i) expressly state the stockholder vote otherwise required under Section 242(b) is required to adopt any amendment to the certificate of incorporation specified in Section 242(d) or (ii) expressly “opt out” of the provisions of Section 242(d). A general recitation in the certificate of incorporation of the vote generally required under subsection (b) without a specific reference to the amendments specified in subsection (d) will not suffice.
Relatedly, the amended Section 242(a)(3) now requires that reclassifications effected via a forward or reverse stock split must reclassify all “issued” shares (i.e., all outstanding shares and all shares held as treasury).
Powers of Corporations Surviving or Resulting from Conversions or Domestications (Section 260 of the DGCL)
The amended Section 260 of the DGCL confirms the authority of a corporation, following a merger, consolidation, conversion, or domestication, to issue bonds and obligations and to issue or cancel shares, rights, securities, or interests.
Appraisal Rights in Transfers, Domestications, and Continuances (Section 262 of the DGCL)
The amended Section 262 of the DGCL entitles stockholders to seek judicial appraisal of the fair value of their stock in connection with a transfer, domestication, or continuance of a corporation in a foreign jurisdiction, unless such appraisal rights are denied under the “market out” exception set forth in Section 262(b). The amended Section 262 also eliminates appraisal rights in connection with a merger, consolidation, conversion, or domestication of an entity that has converted to a Delaware corporation under Section 265 of the DGCL if the merger, consolidation, or domestication is authorized under Section 265, as amended by this amendment. Other conforming changes were made to other subsections of Section 262 of the DGCL to provide that appraisal rights are available in a domestication in a manner similar to those available in a merger, consolidation, or conversion.
The amended Section 262(k) of the DGCL clarifies that an appraisal demand may be withdrawn more than 60 days after the effective date of the transaction underlying the appraisal rights if the withdrawal is approved by the corporation. The amendment does not change the existing rule that appraisal rights cease if a petition for appraisal is not filed under Section 262(e).
Conversions, Transfers, Continuances, and Domestications (Sections 265, 266 and 390 of the DGCL)
Sections 265, 266, and 390 of the DGCL were amended in several key aspects. First, the amended Section 265 adds a new subsection, (k), that authorizes an entity converting pursuant to Section 265 to adopt a plan of conversion setting forth the terms and conditions of the conversion. Though not required, if adopted, the plan of conversion should state (i) the terms and conditions of the conversion; (ii) that the converted corporation’s certificate of incorporation is attached to the plan of conversion; (iii) the manner (if any) of exchanging or converting stock, rights, securities of, or interest in the converting entity; (iv) any corporate action related to the conversion to be taken by the converted corporation; and (v) any other details or provisions deemed desirable or otherwise required to be included in a plan of conversion under the law governing the converting entity. The new Section 265(c)(4) requires that any corporate action included in the plan of conversion adopted pursuant to the new Section 265(k) must also be approved by the converting entity according to the law applicable to the converting entity before the effective date of the conversion.
Second, the new Section 265(l) provides that any corporate actions included in the plan of conversion and approved under the new Section 265(k) would not require any further vote by the converted corporation’s board, stockholders, or members, thereby streamlining the conversion process by eliminating the need for the converted corporation to approve corporate acts immediately on conversion. In circumstances in which a certificate must be filed in connection with the corporate action under any other section of the DGCL, that certificate must state that no action by the board, stockholders, or members is required under Section 265(l).
Third, the amended Section 266 of the DGCL, concerning the conversion of a Delaware corporation to another entity, adds a new subsection (l) that mirrors new Section 265(k) (plan of conversion requirements). Under the amended Section 266(b), if a plan of conversion is adopted, it must be approved under Section 266, and under the new Section 266(c)(7), such plan of conversion must be approved concomitantly with the resolution approving the conversion.
Fourth, consistent with the amended Sections 265 and 266, the amended Section 390 adds a new subsection, (j), which permits a corporation to adopt a plan of transfer, domestication, or continuance under the requirements of Section 390. Under the amended Section 390(b), such plan must be approved at the same time as the resolution approving the transfer, domestication, or continuance. The amended Section 390(b) also modifies the voting threshold needed to approve a transfer, domestication, or continuance from unanimity to a majority of the holders of the outstanding shares of the stock of the corporation entitled to vote thereon.
Fifth and finally, the new Section 390(k) provides that for those corporations incorporated before the effective date of this amendment, any provision contained in the certificate of incorporation (or voting trust agreement or other written agreement between the corporation and any stockholder in effect on or before the effective date of this amendment) that restricts, conditions, or prohibits a merger, consolidation, or conversion will also apply to a transfer, domestication, or continuance, unless the certificate of incorporation expressly provides otherwise.
Safe Harbor for Dispositions of Mortgaged or Pledged Assets (Section 272 of the DGCL)
Section 272 has been amended to establish a narrow “insolvency exception” to the stockholder approval required under Section 271 of the DGCL when a corporation positions itself to sell all or substantially all of its assets. More pointedly, the new Section 272(b) creates a safe harbor for the sale, lease, or exchange of property or assets that secure a mortgage or pledge to a secured party without stockholder consent if either of the following applies: (i) the secured party can sell the collateral without the corporation’s consent or (ii) if a secured party is entitled to sell the collateral but wishes not to, the board authorizes an alternative transaction (e.g., a strict foreclosure or sale to a third party) without obtaining stockholder consent, so long as the value of the assets sold, leased, or exchanged is less than or equal to the amount of the liability or obligation being reduced or eliminated thereby.
This amendment does not purport to abrogate the Supreme Court’s ruling in Stream TV, create a general insolvency exception to Section 271, or preclude further case law developments on which transactions constitute a “sale, lease or exchange” for purposes of Section 271 or the quantitative and qualitative analyses used by Delaware courts to interpret Section 271. Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A.3d 323, 337 (Del. 2022) (settling a long-standing debate as to whether there is a common law insolvency exception to Section 271, noting that “a common law insolvency exception, if one ever existed in Delaware, did not survive the enactment of Section 271” and, therefore, “there is no Delaware common law ‘board only’ insolvency exception under Section 271”).
The new Section 272(c) of the DGCL provides that after a transaction described in the new Section 272(b) is completed, that transaction cannot be invalidated for failure to meet the asset-value requirements set forth therein so long as the transferee receiving the assets provided value therefor and acted in good faith (as defined in Section 1-201(b)(20) of Title 6 of the Delaware Code). Such a transaction may, however, be enjoined before its consummation, and the party challenging the transaction may seek monetary damages. Further, the new Section 272(c) does not modify any fiduciary duties of directors, officers, or, as applicable, stockholders in connection with a sale, lease, or exchange, or the level of judicial scrutiny that will apply to the decision to enter into a sale, lease, or exchange. The new Section 272(c) also does not eliminate defenses otherwise available, including based on Sections 141(e) or 102(b)(7) of the DGCL.
Finally, Section 272’s narrow “insolvency exception” applies even if the corporation’s certificate of incorporation expressly requires stockholder approval for sales of all or substantially all of the corporation’s assets. The exception will not apply only if the certificate of incorporation explicitly contemplates the sale of secured property or assets described in the new Section 272(b).
Amendments to the Alternative Entity Statutes
Subscription Agreements May Specify That Subscription Is Irrevocable (Section 17-506 of the DRULPA, Section 18-506 of the DLLCA, and Section 15-208 of the DRUPA)
A new Section 17-221(f) of the DRULPA, Section 18-506 of the DLLCA, and Section 15-208 of the DRUPA were added to clarify that a subscription agreement may provide that such subscription to a partnership or limited liability company interest may be irrevocable to the extent provided by the terms of the subscription agreement.
Execution of Certificates Required under the DRULPA and DLLCA (Section 17-204(a) of the DRULPA, and Sections 18-204(a) and 18-205(a) of the DLLCA)
Section 17-204 of the DRULPA was amended to clarify that the Section 17-204(a) requirements for executing certificates apply to all certificates required under the DRULPA. The amendments include a new subsection 17-204(a)(14)a that provides default rules as to who may execute a certificate of amendment of a certificate of division on behalf of a divided partnership.
Section 18-204(a) of the DLLCA was also amended to extend the execution requirements of certificates under Section 18-204(a) to all certificates required to be filed under the DLLCA. Additionally, Section 18-205(a) of the DLLCA was amended to clarify that if a person fails or refuses to execute any certificate required to be filed pursuant to the DLLCA, a person adversely affected by such refusal or failure may petition the Court of Chancery to direct the execution of such certificate.
Limitations on Amendments to Operating Agreements via Merger (Section 17-211(g) of the DRULPA, Section 18-209(f) of the DLLCA, and Section 15-902(g) of the DRUPA)
Section 17-211 of the DRULPA, Section 18-209(f) of the DLLCA, and Section 15-902(g) of the DRUPA were amended to clarify that an agreement of merger or consolidation, or a plan of merger, may effect any amendment to the partnership agreement or limited liability company agreement, as applicable, or effect the adoption of a new partnership agreement or limited liability company agreement, in either case, for a limited partnership or limited liability company if it is the surviving or resulting limited partnership or limited liability company in the consolidation or merger. The amendment clarified that the plan of merger or consolidation, or the plan of merger, cannot effect an amendment to a partnership or limited liability company agreement of a non-surviving partnership or non-surviving limited liability company.
Revocation of Dissolution for Protected and Registered Series (Sections 17-218(d) and 17-221(f) of the DRULPA, and Sections 18-215(d) and 18-218(f) of the DLLCA)
The amendments include a new Section 17-218(d) of the DRULPA and a new Section 18-215(d) of the DLLCA to permit the revocation of the termination of a protected series before the completion of the winding up of the protected series. The amendments also include a new Section 17-221(f) of the DRULPA and a new Section 18-218(f) of the DLLCA to allow for the revocation of dissolution of a registered series prior to the filing of the certificate of cancellation of the certificate of registered series. The DRULPA and DLLCA already permit the revocation of the dissolution of a limited partnership or limited liability company prior to the filing of the certificate of cancellation of the certificate of limited partnership or formation, as applicable. These amendments extend the same principle to registered and protected series of limited partnerships and limited liability companies.
Required Amendments to Certificates of Division (Sections 17-220(h), 17-220(l)(1), and 17-220(l)(9) of the DRULPA, and Sections 18-217(h), 18-217(l)(1), and 18-217(l)(9) of the DLLCA)
For any certificate of division, the DRULPA and DLLCA require that the certificate states the name and business address of the division contact, and the name and address of the division partnership or company where the plan of division is on file. Because this information may change over time, Section 17-220(h) of the DRULPA and Section 18-217(h) of the DLLCA were amended such that an amendment to the certificate of division is both permitted and required to be filed to reflect changes to such names or addresses. The requirement to update such information expires following the expiration of a period of six years starting as of the effective date of the division. Related amendments were made to Sections 17-220(h) and 17-220(l)(1) of the DRULPA and Sections 18-217(l)(1) and 18-217(l)(9) of the DLLCA to clarify that a dividing partnership or a dividing company divides into “division partnerships” or “division companies,” terms that are already used in the DRULPA and DLLCA, and that a dividing partnership or company does not need to be a surviving partnership or company.
Certificate of Amendment to Certificate of Division Allowed if at Least One Dividing Entity Is in Good Standing (Section 17-1109(j) of the DRULPA and Section 18-1107(k) of the DLLCA)
Section 17-1109(j) of the DRULPA and Section 18-1107(k) of the DLLCA were amended to clarify that a certificate of amendment of a certificate of division should be accepted for filing by the Office of the Secretary of State of the State of Delaware so long as at least one division partnership or company is in good standing at the time of filing.
Default Rules Designating General Partners to Series Only Apply to Initial General Partner (Sections 17-218(b)(1) and 17-221(c)(1) of the DRULPA)
The DRULPA requires that for any registered or protected series of a limited partnership, at least one general partner is associated with it. The default rules provide that if a general partner is not designated for such series in the limited partnership agreement, the DRULPA designates the general partner. Similarly, if a limited partnership agreement fails to designate a general partner for the partnership, the DRULPA designates a general partner for the partnership. Sections 17-218(b)(1) and 17-221(c)(1) were amended to make clear that the rules for designating a general partner for a limited partnership that has registered or protected series only apply to the initial general partner and not to subsequent general partners.
Clarifying Amendments to the DRUPA (Sections 15-101 and 15-1003(b))
Section 15-101 of the DRUPA was amended to add a definition for “foreign partnership,” a term that was already used in the DRUPA, and to correct a typographical error. Section 15-1003(b), which requires the filing of an annual report, was also amended to make the annual report requirement applicable to foreign limited liability partnerships.