2018 Delaware General Corporate Law Amendments
On July 23, 2018, Delaware Governor John Carney signed into law the 2018 amendments to the General Corporation Law of the State of Delaware, the Delaware Limited Liability Company Act and the Delaware Revised Uniform Partnership Act.
The amendments will be effective on August 1, 2018 (other than amendments relating to the creation of a new type of Delaware LLC series known as a “registered series,” which will take effect on August 1, 2019). Set forth below is a brief summary of the most important of these amendments.
General Corporation Law
“Market Out” Exception for Intermediate-Form Mergers
The amendments to Section 262 of the General Corporation Law, effective only with respect to a merger or consolidation consummated pursuant to an agreement entered into on or after August 1, 2018, include both the “market out” exception applicability and technical changes to the appraisal statement requirements.
First, Section 262 has been amended to ensure that – with respect to the availability of appraisal rights – tender offers followed by an intermediate-form merger will receive the same basic treatment as long-form mergers (which require a vote of stockholders). This fixes the illogical result under the prior statutory language which permitted appraisal rights for intermediate-form mergers even if the market out exception would apply to the analogous long-form merger, which requires stockholder approval. Under the new language, for an intermediate-form merger, appraisal rights will not be available for shares of the target that were listed on a national securities exchange or held of record by more than 2,000 holders immediately prior to the execution of the merger agreement, so long as such holders are not required to accept for their shares anything except: (i) stock of the surviving corporation, (ii) stock of any other corporation that at the effective time of the merger will be listed on a national security exchange or held of record by more than 2,000 holders, (iii) cash in lieu of fractional shares or fractional depository receipts in respect of the foregoing or (iv) any combination of (i)-(iii).
Second, Section 262(e) has been amended to clarify that when an appraisal statement relates to an intermediate-form merger, because no shares are voted for the adoption of the agreement of merger, it must set forth the relevant shares not tendered, rather than the shares not voted.
Ratification of Defective Corporate Acts
The amendments to Section 204 of the General Corporation Law (relating to defective corporate acts) are effective only with respect to defective corporate acts ratified or to be ratified pursuant to resolutions adopted by a board of directors on or after August 1, 2018. The amendments to Section 204 clarify the requirements for ratification of defective corporate acts in certain specific circumstances.
First, the amendments clarify that Section 204 may still be used where there is no valid outstanding stock of the corporation, even if the ratification of the underlying defective corporate act would otherwise require stockholder approval under Section 204(c).
Second, the notice requirements under Section 204 are now clear where the stockholders at the time of the defective corporate act are different from the stockholders as of the record date used for determining the stockholders entitled to vote on the defective corporate act. Specifically, when a stockholder vote is being sought for the ratification of defective corporate acts at a prior meeting of the stockholders, the notice that is required to be given to holders of valid or putative stock as of the time of the defective corporate act may be given to the holders of valid stock or putative stock as of the record date for the defective corporate act if such defective corporate act involved the establishment of a record date.
Third, in reaction to Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. June 6, 2017), which arguably narrowed Section 204, Section 204(h)(1) was amended to clarify that any act or transaction within the corporation’s power under the General Corporation Law may be ratified under Section 204. Under these amendments, it has been made clear that an act is not outside the power of a corporation solely because it was not approved in accordance with the provisions of the General Corporation Law or the corporation’s certificate of incorporation or bylaws. A court still has the power, however, to decline to validate a defective corporate act if the failure of authorization that rendered such act void or voidable involved a deliberate withholding of any consent or approval required under the General Corporation Law, the certificate of incorporation or bylaws.
Fourth, Section 204(h)(2) has been amended to clarify that any act that is alleged to be defective due to deficiencies in the disclosure documents pursuant to which the vote or consent of stockholders was sought may be cured through ratification pursuant to Section 204.
Finally, nonstock corporations now have the ability to utilize Sections 204 and 205 to ratify potentially defective corporate actions under Section 114.
Alternative Entity Statutes
Division of a Limited Liability Company
The LLC Act was amended to add Section 18-217, which allows a Delaware LLC to divide into two or more LLCs, with the dividing LLC either continuing or terminating its existence following the division. A division will be carried out by the dividing LLC adopting a “plan of division” which sets forth the terms and conditions of the division. Such plan must include, among other things, the allocation of assets, property, rights, series, debts, liabilities and duties of the dividing LLC among the “division LLCs” (the term used in the LLC Act to refer collectively to any surviving LLC and the resulting LLC(s) following the division), the name of each division LLC, and the name and business address of the person or company which shall have custody of a copy of the plan of division following the division. A division will require filing with the Delaware Secretary of State a certificate of division by any division LLC and a certificate of formation for each resulting LLC.
Following the effectiveness of the certificate of division, each division LLC shall be liable as a separate and distinct LLC for the debts, liabilities and duties allocated to it pursuant to the plan of division. However, if the plan of division is determined by a court of competent jurisdiction to constitute a fraudulent transfer under applicable law, then each division LLC will be jointly and severally liable on account of such fraudulent transfer, notwithstanding the allocations made in the plan of division. Further, if the plan of division does not allocate certain debts and/or liabilities of the dividing LLC, then all division LLCs will be jointly and severally liable for such unallocated debts and/or liabilities following the division.
With regard to LLCs that pre-date the effectiveness of Section 18-217, in the event that any such LLC desires to implement a division and is a party to any written contract, indenture or other agreement entered into prior to August 1, 2018, that restricts, conditions or prohibits the consummation of a merger or consolidation by the dividing LLC with or into another party, or the transfer of assets by the dividing LLC to another party, then such restriction, condition or prohibition shall be deemed to apply to a division as if it were a merger, consolidation or transfer of assets, as applicable.
Creation of Registered Series
The amendments to the LLC Act, including a new Section 18-218, permit the creation of an additional type of series, known as a “registered series.” Section 18-215, the section which previously addressed series, has been revised to provide that a series formed under 18-215(b) will be known as a “protected series,” and the amendments provide that a “series” can now refer to a designated series of members, managers, LLC interests or assets that is (i) a protected series, (ii) a registered series or (iii) neither a protected series nor a registered series. A protected series refers to a series that has statutory protection from the liabilities of the LLC of which it is a part and from the liabilities of any other series within such LLC, and a series which is neither a registered series nor a protected series refers to a series that is created by contract for the purpose of providing separate rights, powers or duties within an LLC.
Section 18-218 provides that a registered series is formed by filing a certificate of registered series with the Delaware Secretary of State, and the applicable LLC’s certificate of formation must include a notice of the limitation on liabilities of a registered series. The certificate of registered series must set forth the name of the applicable LLC and the name of the registered series. The name of the registered series must begin with the name of the applicable LLC and must sufficiently distinguish itself from the name of any other entity or registered series formed or qualified to do business in the State of Delaware.
Registered series have the same rights and powers and the same inter-series limitation on liability as protected series, however, registered series are distinct from protected series in that they qualify as registered organizations under the Uniform Commercial Code. This attribute is intended to facilitate the use of registered series in secured lending transactions. Additionally, registered series have the ability to merge or consolidate with other registered series of the same LLC, and the Delaware Secretary of State can issue certificates of good standing and certificates of existence with respect to registered series. Registered series will incur an annual franchise tax of $100 per registered series, with a maximum, aggregate annual franchise tax liability of $5,000 per LLC.
In order to allow the Delaware Secretary of State time to prepare the filings and certificates necessary for the implementation of registered series, the amendments to the LLC Act creating registered series and protected series will be effective on August 1, 2019.
Blockchain and Distributed Ledger Technology
Multiple sections of the LLC Act and the LP Act have been amended to provide specific statutory authority for Delaware LLCs and LPs to use networks of electronic databases, such as distributed ledgers or a blockchain, for the creation and maintenance of company records and certain “electronic transmissions.” The amendments come one year after the General Corporation Law was amended to permit the use of blockchain technology in connection with stock ledgers and other corporate records, and reflect Delaware’s continued efforts to adopt the developing technologies.
Statutory Public Benefit Limited Liability Companies
A new subchapter XII was added to the LLC Act providing for the formation of statutory public benefit LLCs, which are for-profit LLCs that, like public benefit corporations, are intended to produce a public benefit and to operate in a responsible and sustainable manner. Under subchapter XII, a statutory public benefit LLC shall be managed in a manner that balances the members’ pecuniary interests, the best interests of those materially affected by the LLC’s conduct, and the public benefit set forth in the LLC’s certificate of formation. An LLC opts into becoming a statutory public benefit LLC by identifying itself as such and stating a public benefit (or multiple public benefits) in its certificate of formation. A public benefit is defined as “a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than members in their capacities as members) including, but not limited to, effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.” Subchapter XII imposes certain requirements upon statutory public benefit LLCs, including, among others, requiring that periodic statements be sent to members regarding the statutory public benefit LLC’s promotion of the public benefit set forth in its certificate of formation, and allows for derivative suits to be filed to enforce the requirements imposed upon statutory public benefit LLCs.
For more information about Delaware’s corporate laws, please contact the author or the attorneys at the firm with whom you are regularly in contact.