Despite Legal and Other Challenges, Amendments to Delaware’s Corporate Statute Remain Compelling

Delaware recently enacted significant amendments (the 2022 Amendments) to the General Corporation Law of the State of Delaware (the DGCL), enhancing Delaware’s corporate governance regime for directors and officers, while also expanding stockholder rights. However, one of the most significant changes to the DGCL—the authorization of exculpatory charter provisions for officers—has been the subject of litigation in recent cases involving public companies with dual classes of common stock. In addition, the major proxy advisory firms have begun issuing policy guidelines, signaling that management will need to make a strong case for the adoption of the proposals by stockholders to garner institutional stockholder support in some cases. Nevertheless, there are several reasons for public companies to remain optimistic about officer exculpation and the other changes to the DGCL effected by the 2022 Amendments. Beyond authorizing exculpatory charter provisions for officers, the 2022 Amendments have important implications for stock issuances and option grants, stockholder meetings, appraisal rights, and the conversion or domestication of Delaware corporations to other entities.

Exculpatory Provisions for Officers

Section 102(b)(7) of the DGCL (Section 102(b)(7)) now permits Delaware corporations to include exculpatory provisions in their certificates of incorporation to limit or eliminate the personal liability of executive officers of the corporation for monetary damages for breaches of the fiduciary duty of care in direct but not derivative proceedings. Under the 2022 Amendments, a Section 102(b)(7) provision may exculpate as an “officer” any person who (i) is the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer, and officers performing similar functions; (ii) is or was identified in the corporation’s public filings with the United States Securities and Exchange Commission as one of the corporation’s most highly compensated executive officers; or (iii) has consented to service of process in Delaware by written agreement. Like directors, officers may not be exculpated for breaches of the duty of loyalty; actions or omissions in bad faith; knowing violations of law; and in connection with transactions from which any such officer derived an improper personal benefit. However, unlike directors, officers may not be exculpated for monetary damages incurred in derivative proceedings.

The amendments to Section 102(b)(7) respond to an increase in litigation asserting violations of the fiduciary duty of care against an officer of a corporation as a means to avoid a dismissal of the complaint at the motion to dismiss stage by reason of the application of a Section 102(b)(7) exculpatory provision to the corporation’s director defendants.

Because exculpatory provisions for officers must be included in a corporation’s certificate of incorporation, board and stockholder approval will be required to expand Section 102(b)(7) coverage to officers. Many public companies have protected their director exculpatory provisions with supermajority provisions, raising issues for counsel as to whether a supermajority vote is necessary to revise the provisions to cover officers. However, in many cases, a Section 102(b)(7) exculpatory charter provision covering officers can be added to a certificate of incorporation with a simple majority vote.

While many issuers have already successfully adopted amendments to their certificates of incorporation that add exculpatory provisions for officers with the support of the proxy advisory firms, recent policy guidelines issued by Institutional Shareholder Services (ISS) and Glass Lewis signal that management will need to provide a compelling rationale for the adoption of such provisions to their stockholders to garner institutional investor support in the future. The ISS and Glass Lewis guidance states that management proposals to adopt officer exculpation provisions will be reviewed on a case-by-case basis by such firms, with ISS suggesting that it would focus on whether the proposals purport to eliminate monetary liability for breaches of fiduciary duty other than the fiduciary duty of care. Glass Lewis’s guidelines take a more negative stance, stating that the firm would generally recommend voting against officer exculpation proposals. It remains to be seen how these policy guidelines will impact exculpatory officer provisions submitted for stockholder action during proxy season in the spring. Key institutional investors, such as BlackRock and State Street Global Advisors, have not yet adopted voting policies specifically addressing exculpation proposals.

Public companies with dual classes of common stock also need to be careful about the votes sought from stockholders to implement such proposals given claims by stockholders holding a class of non-voting common stock that the implementation of the proposals requires a class vote under Section 242(b)(2) of the DGCL (Section 242(b)(2)). Section 242(b)(2) affords stockholders of a class with a separate class vote on charter amendments that alter or change “the powers, preferences, or special rights of the shares of such class so as to affect them adversely” even if such stockholders hold non-voting stock. Stockholders holding non-voting, public company stock are taking the position in various lawsuits that the elimination of their ability to bring direct actions for breach of fiduciary duty against officers alters or changes “the powers, preferences, or special rights of the shares of such class so as to affect them adversely” and therefore their approval is required to implement officer exculpation. While existing case law provides strong arguments that the position taken by the plaintiffs in the actions is without merit, public companies with multiple classes of common stock should consider either waiting to adopt Section 102(b)(7) provisions until after the litigation has been resolved or subjecting the approval of any such proposals to a separate class vote of each outstanding class of common stock.

Stock, Options, and Other Rights to Purchase Stock

Sections 152, 153, and 157 of the DGCL have been amended to harmonize the rules governing the board’s ability to delegate to persons or bodies other than a board committee (such as officers or a sales or placement agent) the authority to issue stock under Section 152 of the DGCL and to make grants of rights or options to purchase stock under Section 157 of the DGCL.

Specifically, the 2022 Amendments to Section 157 of the DGCL expand the board’s power to delegate the authority to issue options or other rights to purchase stock using the framework that applies to the delegation of issuance of stock under Section 152 of the DGCL.

With respect to grants of rights or options to purchase stock, the board resolutions must establish (i) the maximum number of rights or options that may be granted, and the maximum number of shares issuable upon exercise thereof, (ii) a time period during which such rights or options, and during which the shares issuable upon exercise thereof, may be issued, and (iii) a minimum amount of consideration (if any) for which such rights or options may be issued and a minimum amount of consideration for the shares issuable upon exercise thereof. Assuming the board sets these broad parameters, the board may delegate to any person or body the authority to determine the precise timing of the grants, the exercise price, and the number of options or rights to be granted, as well as the other terms of the grants, such as the vesting schedule or expiration date. Under the prior version of Section 157 of the DGCL, the board could not delegate to any officer the authority to determine any of the terms of the grants other than the total number of options or rights to be awarded to officers and employees other than such officer subject to a cap set by the board.

In addition, the consideration paid for options or rights to purchase stock may be set by reference to a formula provided in the board resolution, such as by reference to the trading price of the company’s stock. Amended Section 157 of the DGCL also eliminates the requirement that the terms of a right or option be set forth or incorporated by reference in a written instrument, paving the way for electronic forms of rights and options.

The DGCL limitations on a corporation’s ability to delegate the power to grant rights and options to officers and others do not apply to board committees. Properly empowered board committees may exercise the full power and authority of the board to make grants of rights and options to purchase stock. It was common practice prior to the 2022 Amendments for the board to constitute the chief executive officer as a one-person board committee (provided such person was also a director) for the purposes of making grants under equity compensation plans. Given the complexity of the new delegation rules under amended Section 157 of the DGCL, many corporations are continuing the practice of delegating the authority to make grants of equity awards to a one-person board committee.

Stockholder Meetings and Notices

The 2022 Amendments effect a number of changes that facilitate stockholder meetings, including by eliminating some impediments to virtual meetings. During the pandemic, many public corporations held their meetings virtually but found it difficult to comply with Section 219 of the DGCL, which required that the stockholder list be available on the virtual meeting platform or at the corporation’s principal place of business for a period of at least ten days prior to the meeting, as well as during the whole time of the meeting. The 2022 Amendments eliminate the requirement that a corporation make the list of stockholders available for inspection during the stockholders’ meeting.

The 2022 Amendments also clarify that a notice of a meeting of stockholders may be given in any manner permitted by Section 232 of the DGCL, which specifies that notice of a meeting may be given by electronic transmission, including by e-mail, and generally deems such notice to be given when directed to a stockholder’s electronic mail address. Other amendments to Section 222 of the DGCL facilitate the adjournment of a meeting due to a technical failure such as a crash of the virtual meeting platform. In such event, the meeting may be adjourned to another time and virtual space not only by oral announcement during the meeting but also by virtual display on the meeting platform or in advance, as specified in the original meeting notice.

Appraisal Rights

The 2022 Amendments to the DGCL modify Section 262 of the DGCL in a number of important respects. Under the 2022 Amendments, (1) beneficial owners may demand appraisal rights in their own names without having to cause the record owner (i.e., Cede & Co., in most cases) to demand appraisal rights on their behalf, (2) stockholders will now be able to exercise appraisal rights in connection with the conversion of the corporation to another entity or a foreign corporation unless the market-out exception applies (which generally denies appraisal rights for holders of public company stock in certain all-stock mergers), and (3) domestications under Section 388 of the DGCL no longer give rise to appraisal rights. The decision to make appraisal rights available in connection with the conversion of Delaware corporations to other entities was made in tandem with amendments to reduce the voting threshold necessary to effect such a conversion from unanimous to majority stockholder approval.

Corporations may now include in a notice of appraisal rights information directing stockholders to a publicly available electronic copy of Section 262 of the DGCL, including the website maintained on behalf of the State of Delaware, in lieu of including a copy of Section 262 of the DGCL. The revisions are intended to help reduce the unintentional inclusion of outdated versions of the appraisal statute in notices of appraisal rights. If a corporation mistakenly includes an outdated copy of Section 262 of the DGCL in a notice of appraisal rights, stockholders have the right to bring a breach of fiduciary duty claim against the corporation’s directors and are generally entitled to quasi-appraisal rights as a remedy for breach of such fiduciary duty. The 2022 Amendments will help to eliminate these risks.

SPACs

In response to the increased popularity of special purpose acquisition companies (SPACs) as a vehicle to take a private company public through a business combination with a public shell company, amendments have been made to the dissolution provisions of the DGCL. A SPAC typically includes in its certificates of incorporation a provision authorized by Section 102(b)(5) of the DGCL, limiting the corporation’s existence to a specific period during which the SPAC seeks to effect an initial business combination. However, prior to the 2022 Amendments, the DGCL did not require a SPAC to file any document with the secretary of state of the State of Delaware confirming that its existence had ceased. Under new Section 275(f) of the DGCL, the SPAC must file a certificate of dissolution with the secretary of state within ninety days of the date on which the corporation’s existence ceased. However, a SPAC’s failure to file a certificate of dissolution does not operate to extend the corporation’s existence.