April 21, 2020

Conversion, Domestication, Transfer, and Continuation of Entities under the DGCL

Nathan P. Emeritz, Jason B. Schoenberg

Recent developments in the global markets, including changes in tax and regulatory regimes, have motivated businesses to seek new jurisdictions for incorporation by entities in their corporate structure.* Although such a change may be accomplished by merger of the relevant entity with another entity located in the desired destination where applicable law permits, many recent migrations and transformations have taken advantage of the conversion provisions of sections 265 and 266 of the Delaware General Corporation Law (DGCL) and the transfer, domestication, and continuation provisions of sections 388 and 390 of the DGCL. Unlike a merger, which recognizes the existence of at least two constituent entities, a company proceeding through a conversion, transfer, domestication, or continuation is recognized as a single entity that retains its corporate personality while migrating and/or transforming into a seemingly different entity. Given that those technical processes have been used less frequently than merger provisions, a moment with those sections of the DGCL—before considering their utility in a corporate reorganization or flip transaction—may be in order.

Origins and Development of Domestication and Conversion under the DGCL

The concept of domestication was explored in the context of modern corporate statutes around World War II.[1] Section 388 was not adopted until 1984, however, when entities formed outside of the United States were allowed to transfer or domesticate as Delaware corporations.[2] Eleven years later, section 390 was adopted to allow Delaware corporations to similarly transfer and domesticate as corporations in a non-U.S. jurisdiction.[3] Sections 388 and 390 have since been amended periodically to provide greater flexibility and, in their current forms, allow Delaware corporations to transfer and domesticate as any entity type in a non-U.S. jurisdiction (and vice versa). Those statutes also allow the original entity, which has transferred to a new jurisdiction of incorporation, to continue a dual existence in the original jurisdiction while being considered a single entity with the entity that has incorporated in the new jurisdiction.

The expanding scope of the domestication statutes has also come to overlap with significant aspects of the conversion statutes. Sections 265 and 266, arising from less bellicose beginnings, were adopted in 1999 to allow Delaware entities other than corporations (e.g., limited liability companies, limited partnerships, or business trusts) to convert into Delaware corporations (and vice versa). Given the similarities in function, the drafting of the conversion statutes closely tracked the drafting of the domestication statutes. When the domestication statutes were significantly expanded in 2005 to allow a Delaware corporation to domesticate as a non-U.S. entity other than a corporation, the conversion statutes were similarly expanded to allow a Delaware corporation to convert into an entity other than a corporation of a jurisdiction outside of Delaware (and vice versa).

As a result of their historical development, the conversion and domestication statutes now overlap significantly. Below is a chart comparing key aspects of those statutes and the merger statutes.

Comparison of DGCL Provisions[4]

  Merger
Conversion
Domestication
Other entity may be any type of entity (e.g., LLC, LP)?
Yes
Yes
Yes
Unanimous stockholder approval if initially Delaware corporation?
No
Yes
Yes
Other entity may be incorporated in USA?
Yes
Yes
No
Other entity may be incorporated outside USA?
Yes
Yes
Yes
Existence may continue in both Delaware and other jurisdiction?
No
No
Yes
Date of original entity formation retained?
Maybe[5]
Yes
Yes
Single corporate personality recognized?[6]
No
Yes
Yes
Contracts remain unaffected?
Maybe[7]
Yes
Yes
Appraisal rights if initially Delaware corporation?
Maybe[8]
No
No

Practical Considerations

Through time and practice, the conversion and domestication provisions of the DGCL have evolved from their narrower original purposes. The current versions are broader and more flexible, but consideration of the entities, stakeholders, and objectives involved in a particular transaction, as well as limitations under the DGCL and other applicable laws, is also important. For instance, we have noticed a recent increase in the use of these statutory mechanics to “flip” an entity into another jurisdiction. Of course, mergers also permit such a possibility and do not carry the requirement of unanimous stockholder approval as do the conversion and domestication statutes, but other sources of applicable law may provide for different and potentially less attractive treatment when effecting a merger.

The benefits of conversion and domestication may be limited, however, to jurisdictions that have statutes authorizing such transactions. For instance, although jurisdictions outside of Delaware may be likely to have such authorizing statutes, only a subset of them may also authorize an entity to continue a dual existence there and in Delaware. Indeed, issues around a Delaware corporation with continuing existence in another jurisdiction, such as the governing law applicable to internal affairs, require careful consideration, especially if there is a broad base of stockholders.

Finally, it is worth noting that the Delaware General Assembly has adopted analogous provisions in the statutes governing entities other than corporations, such as the Limited Partnership Act[9] and the Limited Liability Company Act.[10] Given the similarities between those statutes and the analogous provisions of the DGCL, similar issues may arise when dealing with those alternative entities.

* Nate Emeritz is of counsel, and Jason Schoenberg is an associate, at Wilson Sonsini Goodrich & Rosati, P.C. in Wilmington, DE. The views expressed herein are those of the authors and do not necessarily reflect the views of the firm or its clients.

[1] See, e.g., Max Meyer & Harry Torczyner, Corporations in Exile, 43 Columbia. L. Rev. 364 (1943).

[2] This article does not comment on whether a particular jurisdiction permits corporate actions under the DGCL, such as merger, conversion, or domestication, involving an entity in that other jurisdiction.

[3] Perhaps reflecting its incubation during wartime, section 388 was not introduced alongside a reciprocal provision allowing a Delaware corporation to domesticate outside of the United States. Rather, section 389 was concurrently adopted with section 388 to allow a non-U.S. entity to move its domicile to Delaware on a temporary basis in the event of an emergency such as war, rioting, or nationalization of assets.

[4] This chart pertains to mergers, conversions, and domestications solely from the standpoint of the applicable DGCL provisions; however, implementation is also subject to the law of any other jurisdiction, entities’ governing documents, and applicable contractual terms.

[5] A surviving company maintains its original entity formation date following a merger, but any other constituent entity does not survive the merger.

[6] The sections of the DGCL applicable to conversions and domestications provide that entities involved in such an action (e.g., a Delaware corporation and another entity) shall be “deemed to be the same entity.” The DGCL sections applicable to mergers, on the other hand, contemplate at least two separate entities; one of those constituent entities may survive while the other ceases to exist, or both constituent entities may cease to exist and an additional, new entity may survive the merger, but in any event more than one “corporate personality” is recognized under the DGCL.

[7] The sections of the DGCL applicable to conversions and domestications provide that those actions “shall not be deemed to affect” the obligations or liabilities of a converting or domesticating entity. The statute applicable to mergers, however, provides that the surviving entity in a merger will “possess[] all the rights” and be “subject to all the restrictions, disabilities and duties” of each constituent entity, such that contracts of the surviving entity would remain intact after a merger, but contracts of a disappearing entity in the merger would be affected by operation of the DGCL. Of course, a complete analysis of the impact that a merger, conversion, or domestication may have on the related entities’ commercial contracts does not end with the effect of the DGCL as described in the chart above, but must also include a careful review of those contracts for provisions that may have been drafted to be triggered by the transaction.

[8] Section 262 of the DGCL provides appraisal rights for dissenting stockholders of a Delaware corporation in many, but not all, mergers. Thus, the availability of appraisal rights depends on the structure of the merger. Stockholders of a Delaware corporation do not have appraisal rights in a conversion or domestication, presumably because unanimous stockholder approval is required under the applicable DGCL provisions.

[9] See, e.g., 6 Del. C. § 17-215–17-217, 17-219.

[10] See, e.g., 6 Del. C. § 18-212–18-214, 18-216.

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Nathan P. Emeritz

Of Counsel, Wilson Sonsini Goodrich & Rosati

Nate Emeritz is Of Counsel in the Delaware office of Wilson Sonsini Goodrich & Rosati. His practice focuses on providing Delaware corporate law advice with respect to fiduciary duties and statutory requirements through the various steps and matters that occur during a company’s life cycle, including with regard to mergers and acquisitions, corporate governance, corporate formation, stock issuances and preferred stock investments, advancement and indemnification, dissolution and liquidation, and other various statutory matters. He frequently has represented private and public company boards of directors and special committees in negotiating and drafting various corporate transactions and internal investigations and has provided corporate advice in the context of litigation regarding such actions.

Jason B. Schoenberg

Associate, Wilson Sonsini Goodrich & Rosati

Jason Schoenberg is an associate in the Wilmington office of Wilson Sonsini Goodrich & Rosati. His practice focuses on providing Delaware corporate law advice to Delaware companies in matters ranging from routine corporate governance questions to counseling boards of directors and independent committees on M&A transactions, financings, proxy contests, corporate litigation, and related matters. He frequently has represented private and public company boards of directors and special committees in negotiating and drafting various corporate transactions and also provides corporate advice in the litigation context to defend such actions.