Updating Your Corporate and M&A Documents for 2022 Amendments to the DGCL

The Delaware General Corporation Law (the “DGCL”) was recently revised resulting in several significant changes. These amendments became effective on August 1, 2022, or, in some cases, will be applicable only to transactions or other corporate actions entered into on or after August 1, 2022. These amendments could affect how you draft your corporate and M&A documents in the future.

Certificate of Incorporation and Related Filings

The DGCL amendments identified below may implicate provisions of a corporation’s certificate of incorporation and other certificates that are filed with the Delaware Secretary of State. To the extent that these changes involve a charter amendment, they would typically require board and stockholder approval, and a filing with the Delaware Secretary of State’s office. If a public corporation makes any changes to its certificate of incorporation based on the DGCL amendments, it should confirm that no corresponding changes need to be made to the relevant disclosures in its SEC filings (e.g., descriptions of exculpation and indemnification).

Exculpation of Senior Officers. Section 102(b)(7) previously allowed a corporation’s certificate of incorporation to include a provision eliminating or limiting directors’ personal liability for monetary damages arising from breaches of fiduciary duty, subject to certain limitations. The new amendment to Section 102(b)(7) also permits a degree of exculpation for senior officers. Amended Section 102(b)(7) permits a corporation to include a charter provision that exculpates certain officers for monetary damages for breach of fiduciary duties (subject to certain exceptions, including liability arising out of a breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law or transactions from which the officer derives an improper personal benefit) arising from a direct claim or class actions brought by stockholders but, unlike for directors, not in any action brought by or derivatively in the right of the corporation. The officers who may be exculpated are limited to the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, chief accounting officer, any “named executive officer” identified in the corporation’s public SEC filings and any other individual who has consented to service of process under Delaware’s long-arm statute. Despite these limitations, this incremental protection should be helpful for officers and in mitigating certain types of stockholder litigation. Boards considering a charter amendment to exculpate senior officers should think carefully about the market for officer insurance, stockholder sentiment, views of proxy advisors and other issues when deciding whether to pursue such exculpation.

Conversion Protective Provisions. The amendments to Section 266 lower the approval requirement for a conversion of a Delaware corporation to another entity from the unanimous approval of all of the outstanding stock (whether voting or non-voting) to only a majority of all of the outstanding stock entitled to vote on the conversion (other than for conversion to a partnership, which also requires approval by any stockholder that will be a general partner). The amended statute aligns the authorization of a conversion with that of other significant transactions such as a merger. A new Section 266(k) provides that provisions in the certificate of incorporation of a Delaware corporation incorporated before August 1, 2022 (and in voting agreements and other agreements in effect before August 1, 2022) restricting, conditioning or prohibiting a merger (e.g., a supermajority vote or a preferred holder class vote) will be deemed to also apply to conversions unless expressly provided otherwise. For greater certainty regarding applicability of protective provisions to conversions, it may be advisable to amend those documents to expressly provide for rights and authorizations related to a conversion. Note that the certificate of incorporation of corporations incorporated after August 1, 2022 (and voting and other agreements effective after August 1, 2022) will not benefit from the statutory deemed treatment and must specifically address conversions according to the parties’ intent.

Dissolution upon Expiration of Corporate Existence. Section 102(b)(5) already allowed a corporation’s certificate of incorporation to limit the duration of its corporate existence. The new amendment to Section 275 requires corporations with such charter provisions to file a certificate of dissolution within 90 days before the specified expiration date fixed by the certificate of incorporation. Corporations with expiration provisions should be aware of this additional filing requirement and prepare appropriate certificates of dissolution. Failure to file the certificate of dissolution before the specified expiration date will not affect the expiration, as provided in the certificate of incorporation, or the requirement to file the certificate of dissolution.

Certified Affirmations. Section 103 provides the manner in which certificates and other instruments must be executed and filed with the Delaware Secretary of State. The new amendment to Section 103(b)(2) clarifies that a person’s execution of an instrument constitutes the affirmation, under the penalty of perjury, that the instrument will be true at the time such instrument becomes effective (which may be different than the time such instrument is filed). This clarification is important to keep in mind when drafting and executing certificates, and particularly in the context of transactions involving multiple steps or filings, and provisions for future effectiveness.

Bylaws

The DGCL amendments that may impact bylaw provisions are less substantial and may only require board or stockholder approval (depending on the provisions of a corporation’s existing governing documents). If a public corporation makes any changes to its bylaws based on the DGCL amendments, it should confirm that no corresponding changes need to be made to relevant disclosures in its SEC filings (e.g., description of capital stock or organizational documents).

Stockholder List. Section 219 was amended to eliminate the requirement that a corporation make available its stockholder list during a stockholder meeting, though the corporation is still required to make the list available for inspection during the ten days before the meeting. If a corporation’s existing bylaws track the previous statutory requirement, in the absence of a bylaw amendment deleting this requirement, the corporation would still have to comply with the requirement to make a stockholder list available during stockholder meetings going forward. A corporation should consider whether to update its bylaws to reflect the updated statutory language.

Stockholder Meeting Notices. Section 222, which relates to the requirement to give notice of stockholder meetings, was amended to clarify the method of notice. Unique to virtual stockholder meetings, amended Section 222(c) provides that, unless the bylaws otherwise require, when a meeting is adjourned, including due to a technical failure to convene or continue the meeting by remote communication, notice need not be given if the time, date and place of the meeting (and the means of remote communication, as applicable) are announced at the meeting, displayed during the time scheduled for the meeting on the electronic network used for the virtual meeting or set forth in the notice of meeting. To address the possibility that technical failures may prevent the meeting from being convened, a corporation may include in its meeting notices a statement that provides an advance adjournment notice. To address the possibility that a meeting site will crash while a virtual meeting is underway, a corporation should consider coordinating with the virtual meeting host to post the adjournment procedures on the meeting site.

Captive Insurance. In February 2022, by separate legislation, Section 145(g) was amended to expressly allow a corporation to use a captive insurer, including for D&O insurance and for certain liabilities that cannot be exculpated or indemnified by the corporation, subject to certain guardrails intended to provide reasonable limitations and exceptions to those captive insurance policies. A corporation that is or is considering the use of a captive insurer might also consider updating the provisions of its bylaws dealing with indemnification and insurance to expressly reference the new statutory authorization of captive insurers.

Appraisal Rights Notices and Merger Agreements

The amendments implement broad changes to the appraisal provisions in Section 262. Three important and substantive changes are: (1) allowing beneficial owners to exercise appraisal rights directly in their own names instead of through the record owner (e.g., a broker or DTC), subject to specified procedures and requirements, (2) establishing appraisal rights for stockholders in a Delaware corporation in connection with the conversion of such entity to a foreign corporation or to any other entity (except if the market-out exception contained in Section 262(b) applies), and (3) eliminating appraisal rights in a merger, consolidation or conversion authorized by a plan of domestication under Section 388. For any merger agreements entered into on or after August 1, 2022, notices of appraisal rights will be required to reference the amended version of Section 262. These amendments also permit the corporation to include a reference to a publicly available electronic resource for information on Section 262 appraisal rights, including the website maintained on behalf of the State of Delaware on which those statutes are posted, instead of having to include a copy of the applicable appraisal statute in the appraisal rights notice.

Resolutions for Stock and Option Issuances

Sections 152 and 153 provide for the issuance of stock and sale of treasury shares, while Section 157 provides for the creation and issuance of rights and options respecting stock. The amendments harmonize the frameworks applicable to the authorization of issuances of stock, on the one hand, and rights and options, on the other hand, which may make the task of drafting issuance resolutions less prone to technical missteps and will provide corporations with greater flexibility in establishing their internal procedures for equity incentive programs. These amended sections allow the board to delegate to a person or entity the authority to issue stock, rights or options, provided that the board resolution fixes the maximum number of shares, rights or options (as applicable) that may be issued, and provides a time period for such issuances and the minimum amount of consideration for such issuances. The amendments also expressly allow any provision in issuance or delegation resolutions to be made dependent on facts ascertainable outside the resolutions, such as the occurrence of an event or determination or action by any person or entity. The amendments also permit the issuance of rights or options in book entry or electronic form, and prohibit any delegated person or entity from issuing stock, options, or rights to themselves.

Stockholder Consents

Section 228 permits stockholders to act by written consent and provides that a consent may be executed and placed in escrow (or similar arrangement) to be effective at a future date within 60 days. Amended Section 228(c) confirms that a person does not need to be a stockholder of record at the execution time of a consent that becomes effective in the future as long as that person is a stockholder of record as of the record date for determining stockholders entitled to consent to the action.

Plans of Domestication

Section 388, which permits the domestication of a non-US entity to a Delaware corporation, was amended to permit the domesticating entity to adopt a “plan of domestication” that, in addition to setting forth the terms of the domestication, may set forth the manner of exchanging or converting the equity interests of the non-US entity. Additionally, the plan may set forth corporate action to be taken by the domesticated corporation in connection with the domestication, in which corporate acts must be approved in accordance with the requirements of applicable non-US law before the domestication becomes effective. Once that plan of domestication is approved by the non-US entity, all such corporate actions will be deemed to have been authorized, adopted and approved by the domesticated corporation and its board, stockholders or members, as applicable, and will not require any further action of the board, stockholders or members of the domesticated corporation. This amendment provides transaction planners with additional flexibility in structuring transactions in which an entity domesticates to Delaware (e.g., foreign special purpose acquisition companies).

Annual Franchise Tax Reports

Amendments to Sections 502 and 503 clarify requirements for annual franchise tax reports. Amended Section 502(a)(3) prohibits the principal place of business address from being the address of the registered office unless the corporation maintains its principal place of business in Delaware and serves as its own registered agent. Amended Section 503 incorporates changes regarding the large corporate filer status, and the effectiveness of any re-designation thereof, including a new requirement that large corporate filers, which are subject to increased franchise tax rates, will need to notify the Delaware Secretary of State if they cease to qualify as large corporate filers. If the notice is not given, the corporation will continue to be taxed at the rate applicable to large corporate filers. Accordingly, the provision of such notice to the Delaware Secretary of State should be added to the closing checklists for going-private mergers involving public corporations.