2019 Delaware General Corporate Law Amendments
On June 19, 2019, Delaware Governor John Carney signed into law the 2019 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, 2019. Set forth below is a brief summary of the most important of these amendments.
General Corporation Law
Document Forms, Including Electronic Signatures and Delivery
The General Corporation Law now includes a Section 116, which creates a “safe harbor,” permitting electronic documentation, delivery and signature for the wide variety of transactions.
First, Section 116(a) provides that, except as otherwise expressly provided in Section 116(b), any act or transaction contemplated or governed by the General Corporation Law, or the certificate of incorporation or bylaws of a corporation, may be provided for in a “document.” Specifically, the term “document” is defined to include any handwritten, typed, printed or similar instruments, and copies of those instruments, and an electronic transmission. Effectively, the amendment deems an electronic transmission equivalent to that of a written document. Section 116(a) also allows for the use of an “electronic signature” on transaction documents, with “electronic signature” being broadly defined to include an electronic symbol or process that is attached to, or logically associated with, a document and executed or adopted by a person with an intent to authenticate or adopt the document. This amendment allows for increased efficiency in document signature collection, due to its implied acceptability of popular electronic signature platforms such as DocuSign.
Second, Section 116(a) provides that, unless otherwise agreed between the sender and recipient, an electronic transmission will be deemed delivered to a person for the purpose of the General Corporation Law when the document enters an information processing system that the recipient has designated for the purposes of receiving electronic transmissions of the type delivered, so long as the electronic transmission is in a form capable of being processed by that system and such recipient is able to retrieve the electronic system. The particular system designated for the purposes of receiving electronic transmissions by the recipient is determined either from the text of the documents, the text of the organizational documents of the corporation, or the surrounding circumstances including the parties’ conduct.
Third, Section 116(b) excludes certain actions and documents from the safe harbor of Section 116(a) – primarily, documents that are governed by other provisions of the General Corporation Law that already address electronic signature or transmission.
Fourth, Section 116(c) addresses the U.S. Federal Electronic Signatures in Global and National Commerce Act (the “E-Sign Act”), and clarifies that to the extent not preempted by the E-Sign Act, the General Corporation Law governs the documentation of actions, and the signature and delivery of documents.
In connection with the addition of Section 116 to the General Corporation Law, certain amendments have been made to Section 212. Section 212(c) has been amended to provide that a stockholder may execute a “document” (as defined above) authorizing another person or persons to act as proxy for such stockholder, effectively allowing a proxy to be delivered in conformity with Section 116(a). This amendment language is incorporated into Section 212(d), updating any reference of a proxy being granted via a “writing.”
Additionally, Section 251(b) and Section 255(b) have been amended to permit any authorized person to execute agreements of merger or agreements of consolidation. However, agreements filed with the Delaware Secretary of State must be executed by a person, and in a manner, authorized by Section 103.
The amendments to Section 232 of the General Corporation Law, dealing with the form and manner of notices to stockholders, set forth new statutory defaults for stockholder notice and validate stockholder notice by electronic mail.
First, Section 232(a) has been amended to provide that, without limiting the manner in which notices may otherwise be effectively given, corporations may give notices to stockholders by (i) U.S. mail, postage prepaid, (ii) courier service, or (iii) electronic mail. Specifically, notice is considered delivered to a stockholder (i) if by U.S. mail, when deposited in the U.S. mail, postage prepaid, (ii) if by courier services, at the earlier of the time it is received or left at the stockholder’s address, and (iii) if given by electronic mail, at the time it is directed to the stockholder’s electronic mail address.
Second, Section 232(c) has been amended to provide three additional means of notice via electronic transmission: (i) facsimile telecommunication, in which case notice is deemed given when directed to a number at which the stockholder has consented to receive notice, (ii) posting on an electronic network (with separate notice of the posting), in which case notice is deemed given upon the later of the posting and the giving of the separate notice to the stockholder of the posting, and (iii) “other forms” of electronic transmission, in which case notice is deemed given when directed to the stockholder.
Third, the General Corporation Law was amended to add new Section 232(f), which includes provisions for transmittal affidavits that serve as prima facie evidence that notice has been given to stockholders.
Fourth, Section 230(b)(1) has been amended, creating a “returned mail exception.” This amendment eliminates the requirement that a corporation must give notice to any stockholder to whom notice of two consecutive annual meetings, and within the period between such two consecutive meetings, all notices of meetings or notices of action taken by written consent, have been returned undeliverable. However, if a corporation has an electronic mail address for such stockholder, and electronic notice is not prohibited under newly amended Section 232, the corporation will not be relieved of the notice requirement under the “returned mail exception.”
Finally, Section 160(d) (regarding the status of shares called for redemption), Section 163 (requiring notice to be given with respect to partly paid shares), Section 251 (regarding merger or consolidation of Delaware nonstock corporations), Section 266 (conversion of Delaware corporations to other entities), Section 275 (dissolution) and Section 390 (transfer, domestication or continuance of Delaware corporations) have been amended to clarify that notices may be given in the forms set forth in amended Section 232 (discussed above).
The amendments to Section 262 of the General Corporation Law (relating to appraisal rights) are effective with respect to a merger or consolidation consummated pursuant to an agreement of merger or consolidation entered into or after August 1, 2019.
First, the amendments to Section 262(d) permit a corporation to deliver notice of appraisal rights by the means specified in the newly amended Section 232, namely, U.S. mail, courier, or electronic mail. Additionally, if expressly designated, the amendments to Section 262(d) permit stockholders to deliver demands for appraisal by electronic transmission.
Second, the amendments to Section 262(e) clarify that the specified information required to be disclosed pursuant to Section 262(e), regarding the statement of the number of shares and holders entitled to appraisal, may be given in any manner permitted by Section 232(a).
The amendments to Section 228(d) of the General Corporation Law broaden the situations in which stockholder consents may be delivered electronically. These amendments allow for the delivery of stockholder consents by electronic transmission, and clarify when consents by electronic transmission will be deemed received. Notably, the amendments expressly provide that a consent may be deemed delivered and received even if no person is aware of its receipt. These amendments effectively remove the prior language of Section 228(d), which required stockholder consents delivered by electronic transmission to be reduced to paper form and delivered to the corporation.
The amendments to Section 141(f) of the General Corporation Law clarify the effective time of actions taken by directors consent in lieu of a meetings.
Section 141(f) has been amended to state that the filing of a consent with the minutes of a corporation is not a condition precedent to the effectiveness an action taken by directors consent in lieu of a meeting. This amendment removes the implication that such actions do not become effective until filed in a relevant minute book. Specifically, the additional sentence clarifies that after an action is taken, the consent or consents relating to the action shall be filed with the minutes of the proceedings of the board of directors, or the relevant committee, in the same paper or electronic form as the minutes are maintained.
The amendments to Section 108 of the General Corporation Law, in accordance with the other amendments discussed in this summary, provide for the notice of an initial organizational meeting by electronic transmission. First, Section 108(b) has been amended to state that notice of an initial organizational meeting may be given in writing or by electronic transmission. Second, Section 108(b) has been amended to permit waivers of such notice to be given in writing and by electronic transmission, as opposed to requiring these waivers to be in writing. Finally, Section 108(c) has been amended to allow a consent of incorporator to become effective in the future, as a consent of directors may become effective in the future.
Alternative Entity Statutes
Document Forms, Including Electronic Signatures and Delivery
As was the case with the General Corporation Law, the LLC Act and the LP Act have been amended to include certain additional provisions related to electronic forms of documents and the consummation of certain transactions via electronic or digital means. The LLC Act and the LP Act have been explicitly amended to include the statement that electronic transmission is deemed to be the equivalent of a written document and an “electronic signature” (defined to mean an electronic symbol or process that is attached to, or logically associated with, a document and executed or adopted by a person with an intent to authenticate or adopt the document) may be used wherever a signature is required. Unless otherwise agreed to in the LLC agreement or LP agreement or between the sender and the recipient, an electronic transmission is delivered when it enters an information processing system so long as the transmission can be processed by such system and the recipient can receive such a transmission.
The new electronic signature provisions do not apply to documents filed with the Delaware Secretary of State, certificates of partnership interest or limited liability company interest or requirements to maintain a registered office and registered agent or service of process.
Contractual Appraisal Rights in Certain Transactions
The LLC Act and the LP Act have been amended to provide that contractual appraisal rights may be made available in connection with any merger or consolidation in which a registered series is a constituent party, any division of an LLC or an LP, any conversion of a protected series to a registered series of an LLC or an LP or any conversion of a registered series to a protected series of the LLC or the LP.
Division of a Limited Partnership
The LP Act was amended to add Section 17-220, which allows a Delaware LP to divide into two or more Delaware LPs, with the dividing LP either continuing or terminating its existence following the division. A division will be carried out by the dividing LP 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 LP among the “division partnerships” (the term used in the LP Act to refer collectively to any surviving partnership and the resulting partnerships following the division), the name of each division partnership, 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 partnership and a certificate of limited partnership for each resulting partnership.
Following the effectiveness of the certificate of division, each division partnership shall be liable as a separate and distinct LP 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 partnership 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 partnerships, then all division partnerships will be jointly and severally liable for such unallocated debts and/or liabilities following the division.
This amendment follows the 2018 amendments to the LLC Act, which permitted the division of LLCs.
Creation of Registered Series
The amendments to the LP Act, including a new Section 17-221, permit the creation of an additional type of series, known as a “registered series.” Section 17-218, the section which previously addressed series, has been revised to provide that a series formed under 17-218(b) will be known as a “protected series.”
Section 17-221(d) provides that a registered series is formed by filing a certificate of registered series with the Delaware Secretary of State, and the applicable LP’s certificate of limited partnership 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 LP and the name of the registered series. The name of the registered series must begin with the name of the applicable LP 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. Unlike a registered series, a protected series does not need to be registered with the Delaware Secretary of State.
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 LP, 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 $75 per registered series.
This amendment follows the 2018 amendments to the LLC Act, which provided for the creation of registered series of LLCs.
Statutory Public Benefit Limited Partnerships
A new subchapter XII was added to the LP Act providing for the formation of statutory public benefit LPs, which are for-profit LPs that, like public benefit corporations and public benefit LLCs, are intended to produce a public benefit and to operate in a responsible and sustainable manner. Under subchapter XII, a statutory public benefit LP shall be managed in a manner that balances the partners’ pecuniary interests, the best interests of those materially affected by the LP’s conduct, and the public benefit set forth in the LP’s certificate of limited partnership. An LP opts into becoming a statutory public benefit LP 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 partners in their capacities as partners) 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 LPs, including, among others, requiring that periodic statements be sent to members regarding the statutory public benefit LP’s promotion of the public benefit set forth in its certificate of limited partnership, and allows for derivative suits to be filed to enforce the requirements imposed upon statutory public benefit LPs.
For more information about Delaware’s corporate laws, please contact the authors or the attorneys at the firm with whom you are regularly in contact.