On July 27, 2022, Delaware Governor John Carney signed into law the 2022 amendments to the General Corporation Law of the State of Delaware (the “DGCL”), the Delaware Limited Liability Company Act (the “LLC Act”), the Delaware Revised Uniform Limited Partnership Act (the “LP Act”), and the Delaware Revised Uniform Partnership Act (the “Partnership Act”). The LLC Act, the LP Act and the Partnership Act are sometimes referred to as the “Alternative Entity Statutes.”
There were no amendments to the Delaware Statutory Trust Act.
Each of the amendments will become effective on August 1, 2022.
What You Need to Know:
Amongst other changes, these amendments:
- Extend personal liability protections to corporate officers;
- Expand appraisal rights for beneficial owners; and
- Ease the domestication process for foreign entities seeking to become incorporated in Delaware.
Set forth below is a brief summary of the amendments.
GENERAL CORPORATION LAW
Personal Liability of Corporate Officers
The most significant change to the DGCL is the extension of Section 102(b)(7)’s exculpation of personal liability to corporate officers. Previously, Section 102(b)(7) authorized the exculpation of personal liability for corporate directors only. This discrepancy between director and officer liability often created issues in litigation involving individuals serving as both corporate directors and officers. In such instances, an individual could be exempt from liability in his or her director capacity yet still liable in his or her capacity as an officer.
The newly revised Section 102(b)(7) remedies this discrepancy by authorizing corporations to adopt exculpatory provisions in their certificates of incorporation that limit or eliminate the personal liability of officers, as well as directors. As with director liability, corporations may only limit an officer’s liability for breaches of the duty of care. Specifically, officers may only be exempted from claims for breach of duty of care brought directly by stockholders. Officers remain liable for breach of fiduciary duty claims brought directly by the corporation or derivatively by stockholders, as well as for breaches of the duty of loyalty and for intentional acts or omissions.
Exculpation of liability under Section 102(b)(7) is available only for senior officers authorized to receive service of process under Delaware law. These officers include the president, CEO, CFO, COO, chief legal officer, controller, treasurer, chief accounting officer, and others named as executives in SEC filings.
Authority to Issue Stock and Options
The 2022 amendments also grant corporate directors the ability to delegate their stock and option issuing authority to an individual or entity. These amendments build upon prior amendments allowing officers the power to allocate options, but left the responsibility to set the terms of the rights or options to the board. This distinction created opportunities for corporations to improperly issue stocks, options and rights. The 2022 amendments are intended to clarify the process and eliminate opportunities for boards and officers to make these mistakes.
Importantly, individuals or entities who are delegated such authority are not permitted to issue stocks, options or rights to themselves. To delegate this authority, the board of directors must adopt a resolution detailing the specifics of the issuance, including the number of shares, options or rights to be issued and amount of consideration.
Access to Stockholder List
Additionally, the 2022 amendments eliminate the requirement for corporations to provide stockholder lists at all stockholder meetings. Now under Section 219(a), corporations are only required to provide the stockholder list during the 10-day period prior to the stockholder meeting, not at the meeting itself.
An important addition in the 2022 amendments is the expansion of appraisal rights to beneficial owners. Previously, beneficial owners of corporate stock could only assert appraisal rights if the record owner of their stock demanded appraisal on their behalf. Now, under Section 262(d)(3), beneficial owners may assert appraisal rights on their own so long as they maintain their beneficial ownership from the time of the demand through the effective date of the merger, consolidation, or conversion at issue. Additionally, beneficial owners must provide documents evidencing their ownership in order to properly assert appraisal rights.
In addition to appraisal rights for beneficial owners, the newly enacted Section 262(b) allows appraisal rights for conversions of corporations. Previously, stockholders who voted against a proposed transaction could assert appraisal rights for mergers and consolidations only. Now, dissenting stockholders may seek appraisal for conversions as well, provided that such stockholders are not precluded from seeking appraisal under the “market out” exception.
Stockholder Approval of Conversions
The 2022 DGCL amendments also change the approval requirements for conversions of corporations. Previously, a corporate conversion required unanimous approval from stockholders, whereas a corporate merger required a majority vote of stockholders only. The newly amended Section 266(b) equalizes these voting thresholds by requiring a majority vote of stockholders entitled to vote to approve a corporate conversion. In the case of conversion into a partnership, approval from each stockholder who will become a general partner is needed.
Domestication of Foreign Entities
Lastly, the 2022 DGCL amendments also ease the process for converting a non-U.S. entity into a Delaware corporation. The newly revised Section 388 now allows foreign entities to develop and adopt a “plan of domestication” detailing the terms of the domestication as well as corporate actions to be taken in connection with the domestication. Such actions include amending the certificate of incorporation, issuing stock, and completing mergers with other entities. To be effective, the plan of domestication must be approved by the foreign entity in accordance with applicable foreign law as well as in accordance with Delaware law. Once the plan is approved under applicable foreign law, it is deemed authorized under Delaware law. No further action by the newly domesticated corporation with regard to the plan of domestication is needed.
ALTERNATIVE ENTITY STATUTES
Governing Documents of Alternative Entities
The Alternative Entity Statutes were each amended to clarify that a limited liability company agreement, limited partnership agreement, or partnership agreement can include or incorporate multiple documents, such as additional schedules, supplements or other items. The amendments to the LLC Act and LP Act also clarify that any registered series or protected series of a limited liability company or limited partnership is bound by the limited liability company agreement or partnership agreement of the entity, as applicable, regardless of whether the series executed the agreement.
Signatures on Ownership Certificates
Each of the Alternative Entity Statutes was amended to confirm that a signature on a certificate evidencing a limited liability company, limited partnership, or partnership interest may be a manual, facsimile, or electronic signature.
Effectiveness of Statements and Certificates
With regard to timing of the effectiveness of statements and certificates made by an entity, the Alternative Entity Statutes were each amended to clarify that execution of a statement or certificate by a person authorized by the entity constitutes an oath or affirmation that, to the best of such person’s knowledge and belief, the facts stated therein will be true at the time such statement or certificate becomes effective, rather than at the time the statement or certificate is executed.
Approval of Conversions and Domestications
The LLC Act, LP Act and Partnership Act were each amended to provide that in the case of a conversion or domestication of an entity to a Delaware limited liability company, limited partnership or partnership, the approval of such conversion or domestication and approval of the limited liability company agreement, limited partnership agreement or partnership agreement of the converted or domesticated Delaware entity must occur prior to the effectiveness of the certificate of conversion or domestication.
For more information about Delaware’s corporate and alternative entity laws, please contact the authors or the attorneys at the Firm with whom you are regularly in contact.