2017 Updates to Delaware Corporate Statutes
On July 21, 2017, Delaware Governor John Carney signed into law the 2017 amendments to the General Corporation Law and the Alternative Entity Statutes. The amendments will be effective on August 1, 2017 (other than the amendments relating to stockholder action by written consent, which will be effective only for actions taken having a record date on or after August 1, 2017).
General Corporation Law
The “Blockchain” Amendments
Sections 219 and 224 of the General Corporation Law have been amended to permit the use of blockchain technology in connection with stock ledgers and other corporate records. This comes on the heels of former Governor Jack Markell’s promotion of the Delaware Blockchain Initiative, which sought to encourage the adoption of blockchain technology.
Sections 219 and 224 will now permit (but not require) the use of distributed ledger shares, allowing a corporation’s shares to be recorded and transferred on a decentralized electronic network rather than on a centrally-located stock ledger. Importantly, however, Section 224 would require that such records be kept in such a way as to be capable of being converted into a clearly legible paper form within a reasonable time period. With respect to a stock ledger, such records must be kept in such a manner that they (i) can be used to prepare the lists of stockholders specified in Sections 219 (stockholder meetings) and 220 (inspection of books and records); (ii) are capable of recording the information required by Sections 156 (partly paid shares), 159 (collateral transfers), 217(a) (voting rights of fiduciaries) and 218 (voting trusts and other voting agreements); and (iii) record transfers of stock as governed by Article 8 of the Delaware Uniform Commercial Code.
Section 203(b) Opt-Out
Section 203(b), which sets forth restrictions on business combinations with an interested stockholder, was amended to clarify when a corporation’s opt-out becomes effective. A corporation may opt out of Section 203(b) by expressly stating so in its original certificate of incorporation or a subsequent amendment to its certificate of incorporation or bylaws approved by its stockholders. Pursuant to the amendments to Section 203(b), rather than such opt-out becoming effective at the time of its adoption by the stockholders, the effective date now depends on the type of corporation. For a corporation that has never had a class of voting stock listed on a national securities exchange or held of record by more than 2,000 stockholders, the opt-out will be effective upon the filing of the certificate of amendment with the Secretary of State of the State of Delaware or the adoption of the amendment to the bylaws, as applicable. For all other corporations, the opt-out amendment becomes effective 12 months after such action.
Stockholder Written Consents
Section 228 (action by written consent of the stockholders or members) was amended to eliminate the requirement that written consents of stockholders and members be individually dated. This amendment addresses concerns of the statutory validity of written consents that are not individually dated, as raised by the decision of the Delaware Court of Chancery in H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129 (Del. Ch. 2003) (denying motion for partial summary judgment based on a finding that although a written consent was only dated with a single pre-printed “as of” date, rather than individually dated by the signing stockholder, compliance with formalities aside there was no question as to technical compliance with Section 228(c) of the DGCL because there was no dispute as to when the stockholder had actually signed the written consent).
As amended, Section 228 also clarifies that written consents with future effective dates must be effective within 60 days of the delivery of the first consent to the corporation (as opposed to the previous iteration of Section 228(c), which measured the 60 days from “the earliest dated consent delivered”). The amendment also deletes surplus language that specified where consents had to be delivered.
The Merger Amendments
A number of highly-technical amendments were made to the General Corporation Law relating to mergers and consolidations.
First, Sections 254 (mergers or consolidations of corporations and joint-stock associations), 263 (mergers or consolidations of corporations and partnerships), 264 (mergers or consolidations of corporations and limited liability companies) were amended to expressly permit mergers where the non-Delaware entity was organized under the laws of a non-U.S. jurisdiction.
Second, the General Corporation Law was amended to provide that mergers or consolidations between Delaware corporations and other entities are permitted, unless the laws of the jurisdiction under which the foreign entity was organized prohibit such merger or consolidation. Prior to these amendments, different sections of the General Corporation Law used different terms, e.g., some sections required that the foreign jurisdiction permit such merger or consolidation, while other sections required that the foreign jurisdiction not forbid such action. The use of the term prohibit is intended to maintain maximum flexibility and ensure consistency throughout the statute.
Third, Section 251 (mergers or consolidations of domestic corporations) was amended to clarify the treatment of fractional interests in a merger or consolidation and the distinction between the surviving corporation of a merger and the resulting corporation of a consolidation.
Fourth, Sections 252 (mergers or consolidations of domestic corporations and foreign corporations), 253 (mergers of parent corporations and subsidiaries), 254 (mergers or consolidations of stock and nonstock corporations) and 267 (mergers of non-corporate parent entities and corporate subsidiaries) were amended to use the term foreign corporation – in order to provide consistency throughout the statute.
Fifth, Sections 255 (mergers or consolidations of domestic nonstock corporations), 256 (mergers or consolidations of domestic and foreign nonstock corporations), 257 (mergers or consolidations of and nonstock corporations) were amended to clarify the manner in which membership interests in nonstock corporations were treated.
Sections 374 and 502 were amended in an effort to make the Delaware annual reporting process more efficient. The amendment to Section 374 streamlines the annual reporting requirements for corporations formed in another jurisdiction and qualifying to do business in Delaware by conforming such requirements to the annual reporting requirements for Delaware corporations, while the amendment to Section 502 clarifies the information that must be disclosed in annual reports filed with the Secretary of State of the State of Delaware by Delaware corporations.
Alternative Entity Statutes
Senate Bills 70, 71 and 72 make a number of changes to Delaware law governing the formation, management and operation of foreign and domestic partnerships, limited partnerships, limited liability partnerships and limited liability companies. Alongside a number of more technical, cleanup amendments, the notable changes are as follows.
Delegation of Managerial Authority
In the 2016 case Obeid v. Hogan, C.A. No. 11900-VCL (Del. Ch. 2016), the Court of Chancery analyzed the ability of a member or manager of a Delaware LLC to delegate its managerial authority to a third party. In light of the discussion of the default rules in that case, the Delaware Limited Liability Act (the “LLC Act”), the Delaware Revised Uniform Partnership Act and the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) are all being amended. The amendments clarify that partners, general partners, members and managers have broad discretion to delegate all or any part of their rights, powers and duties to manage and control their entity’s business affairs.
Requirements for Formation
It is important to comply with the exact requirements of the LP and LLC Acts in forming these entities, to ensure that the benefits of these corporate forms can be enjoyed by the entities in question. Section 17-201 of the LP Act and Section 18-201 of the LLC Act set forth the requirements for certificates of limited partnership of LPs and certificates of formation of LLCs, and require “substantial compliance” with their terms before the entity is considered formed.
Senate Bills 71 and 72 amend these provisions of the LP and LLC Acts as they relate to the requirements for a Delaware registered office and Delaware registered agent for service of process. Specifically, as amended the LP and LLC Acts will clarify that “substantial compliance” with these requirements has been reached so long as the name of the registered agent and location of the registered office is included, even if the certificates in question do not contain language expressly delegating these functions to the individual and location listed.
Control of a Delaware Limited Partnership
As currently in effect, Section 17-303(a) of the LP Act makes clear that limited partners of a Delaware limited partnership are not “liable for the obligations” of the limited partnership unless (i) the limited partner is also a general partner, or (ii) the limited partner “participates in the control of the business.” Section 17-303(b) of the LP Act then goes forward to list a number of activities that a limited partner can engage in without being deemed to have participated in the control of the limited partnership, thereby triggering personal liability for the entity’s debts.
Senate Bill 71 amends the LP Act by confirming that a limited partner may hold any type of interest in a general partner without being deemed to have participated in the control of the limited partnership’s business.
Distinctions Between Domestic and Foreign Limited Liability Companies
A number of the changes to the LP Act and the LLC Act are intended to clarify and confirm the distinctions between domestic and foreign limited liability companies. The changes largely are intended to clarify, rather than change, the substance of any such distinctions.