Authority to Sell Treasury Shares (Sections 152, 153, 157, and 160(b))
The amendments to Sections 152, 153, and 157 of the DGCL build on amendments adopted in August 2022 that expanded a board’s ability to delegate authority to an individual or entity to issue stock or options in the corporation, and also harmonized the procedures to authorize rights and options to purchase stock with existing procedural requirements to issue stock.
The amendments to Sections 152 and 153 of the DGCL, which govern the approval and issuance of stock, clarify that treasury shares may be sold for less than the minimum consideration required to issue stock, which is typically par value. In addition, Section 153 was amended to provide that (i) the consideration received for treasury shares may be greater than, less than, or equal to the par value of the shares, and (ii) the consideration a corporation may receive for treasury shares may consist of cash, any tangible or intangible property, or any benefit to the corporation, harmonizing Section 153 with language already contained in Section 152.
The amendments to Section 157 of the DGCL further modernize the statute by providing that, in addition to granting board authority to a person or body, including a committee of the board, to issue rights and options, the board may also delegate authority to determine the terms upon which shares may be acquired by the corporation upon the exercise of rights or options. As a practical matter, the amendments expand the delegation of authority permitted under Section 157 to include vesting terms, acceleration, and other typical features of equity awards.
In connection with the amendments to Section 152, 153, and 157, Section 160(b) of the DGCL was amended to clarify that a corporation may resell treasury shares resulting from the corporation’s redemption or repurchase of treasury shares out of surplus, in accordance with Section 153, so long as the shares have not been retired, and the corporation’s certificate of incorporation does not require the shares to be retired.
Ratification of Defective Corporate Acts (Section 204)
Section 204(c)(2) of the DGCL was amended to clarify that the determination as to whether any shares of valid stock are outstanding and entitled to vote on the ratification must be made at the time the board adopts the resolutions approving the defective corporate act. Similarly, Section 204(d) was amended to fix the board’s adoption of the resolutions ratifying a defective corporate act as the time for determining which shares constitute valid stock and which shares constitute putative stock entitled to vote on the adoption of the ratification of a defective corporate act, in circumstances requiring a vote of the holders of valid stock.
Streamlining the process to ratify a defective corporate act, a corporation is now required to file a certificate of validation only in circumstances where any section of the DGCL would have required the filing of a certificate in connection with the defective corporate act and such certificate was either (i) never filed or (ii) was filed, but to give effect to the underlying corporate act, the certificate must be amended. When a certificate of validation must be filed, Section 204(e), as amended, simplifies the required contents, including by eliminating the need to describe the underlying defective corporate acts and the nature of the failure of authorization relating to those acts.
Record Date for Stockholders Entitled to Notice of Stockholder Action by Written Consent (Section 228(e))
Section 228(e) of the DGCL has been amended to conform the determination of the record date to be used for purposes of identifying the stockholders entitled to notice of stockholder action taken by written consent with Section 213(b) of the DGCL. As amended, Section 228(e) now provides that the persons entitled to receive notice of action by written consent are persons who (i) were stockholders as of the record date for the action by written consent, (ii) would have been entitled to notice of the meeting if the action had been taken at a meeting and the record date for the notice of the meeting was the record date for the action by written consent, and (iii) have not consented to the action by written consent. The amendments further modernize the statute by permitting the notice required under Section 228(e) to be disseminated through a notice of internet availability of proxy materials, in accordance with current SEC rules.
Forward and Reverse Stock Splits (Section 242)
Amendments to Section 242 of the DGCL, which governs the requirements to amend the certificate of incorporation of a Delaware corporation, were implemented to address, in part, recent issues encountered by public corporations in securing the stockholder vote required to approve a reverse or forward stock split.
New Section 242(d)(1) of the DGCL provides that no stockholder approval is necessary for an amendment to the corporation’s certificate of incorporation for a forward stock split, provided that such class is the only class of such corporation’s capital stock then outstanding and is not divided into series. Further, the amendment may increase the number of authorized shares of such class of stock up to an amount proportionate to the subdivision.
The amendments to Section 242(d)(2) of the DGCL modify the voting requirement to a majority of votes cast rather than a majority of the shares outstanding for reverse stock splits and for amendments to certificates of incorporation to increase or decrease to the number of shares of a class of stock. The new voting standard applies if, (i) the shares are listed on a national exchange immediately before the amendment becomes effective and the corporation meets the listing requirements relating to the minimum number of holders immediately after the amendment becomes effective, and (ii) if the amendment increases or decreases the number of shares of a class of stock that has not opted out of the class vote pursuant to Section 242(b)(2), the votes cast for the amendment by the holders of such class exceed the votes cast against the amendment by the holders of such class. Abstentions have no effect on whether the required approval is obtained.
Section 242(d) of the DGCL continues to permit a corporation to opt in to the required stockholder votes under Section 242(b). Thus, a corporation must affirmatively opt out of the new Section 242(d). A general recitation of the vote generally required under Section 242(b) in the certification of incorporation will not be sufficient to opt out of Section 242(d).
Appraisal Rights (Section 262)
Subject to the “market out” exception, Section 262 of the DGCL has been amended to provide appraisal rights to stockholders in connection with a transfer, domestication, or continuance of the corporation in a foreign jurisdiction pursuant to Section 390 of the DGCL. In addition, appraisal rights have been eliminated for an entity that has converted to a Delaware corporation in connection with a merger, consolidation, conversion, transfer, or domestication authorized in accordance with Section 265 for an entity that has converted or domesticated into a Delaware corporation.
Section 262(k) of the DGCL was also amended to permit the withdrawal of an appraisal demand either within sixty days after the effective date of the transaction, or thereafter, if the withdrawal is approved by the corporation.
Conversions, Transfers, Domestications, and Continuances (Sections 265, 266, and 390)
Section 265 of the DGCL as amended adds subsection (k), which, in connection with a conversion pursuant to Section 265, permits the converting entity to adopt a plan of conversion setting forth the terms and conditions of the conversion. Newly added Section 265(c)(4) also requires the converting entity’s approval before the effective date of the conversion for any corporate action included in the plan of conversion. Similarly, the newly added Section 265(l) clarifies that any corporate actions included in the plan of conversion will be deemed to be authorized, adopted, and approved, as applicable, by the converted Delaware corporation, and do not require further action by the converted corporation’s board or stockholders.
Section 266(b) of the DGCL, governing the conversion of a Delaware corporation to another entity, has been amended to provide that a plan of conversion may be adopted setting forth: (i) the terms and conditions of the conversion; (ii) the terms of the instrument governing the internal affairs of the entity included as an attachment to the plan of conversion; (iii) the manner of exchanging or converting the shares of the converting corporation; (iv) any other provisions deemed desirable; and (v) such other provisions or facts as required by the laws applicable to the entity into which the entity is being converted. Section 390(b) of the DGCL was also amended to add a similar requirement pursuant to a transfer, domestication, or continuance to be adopted in accordance with Section 390(j) of the DGCL.
Section 390(b) of the DGCL was also amended to modify the voting requirement to approve a transfer, domestication, or continuance from all of the outstanding shares of stock of the corporation (voting or non-voting) to a majority of the voting power of the outstanding shares of stock of the corporation entitled to vote on the transfer, domestication, or continuance.
Safe Harbor—Mortgage or Pledge of Assets (Section 272)
Section 271 requires stockholder approval of a sale, lease, or exchange of all or substantially all of a corporation’s assets, subject to certain exceptions, while Section 272 of the DGCL governs the mortgage or pledge of the corporation’s assets. In response to Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A.3d 323 (Del. 2022), new Section 272(b) of the DGCL provides a safe harbor clarifying that stockholder approval is not required under Section 271 with respect to the sale, lease, or exchange of property or assets securing a mortgage or pledged to a third party under certain circumstances. Importantly, the intent of the new Section 272(b) was not to preclude further development of the quantitative and qualitative analyses utilized by the Delaware courts to interpret Section 271.
Under Section 272(b), no stockholder approval is required if the secured party (i) exercises its rights to sell, exchange, or lease the property or assets without the corporation’s consent under applicable law, or (ii) in lieu of the secured party exercising its rights, the board of directors agrees to an alternative transaction and the value of the property or assets is less than or equal to the amount of the liability or obligation being reduced or eliminated as a result of the transaction (the “asset value test”). Section 272(b) provides further that the consideration paid to the corporation or its stockholders will not create a presumption that the value of such property or assets is greater than the total amount of such liability or obligation being reduced.
New Section 272(d) of the DGCL provides further that a corporation’s certificate of incorporation must expressly state that stockholder approval is required for a sale, lease, or exchange permitted by Section 272(b). Merely stating in the certificate of incorporation that stockholder approval is required for a sale, lease, or exchange of assets will not apply to such sale, lease, or exchange pursuant to Section 272(b). Section 272(d) only applies to certificate of incorporation provisions that first become effective after August 1, 2023.
Newly added Section 272(c) of the DGCL also provides that, following the consummation of a transaction, the transaction cannot be invalidated for failure to satisfy the asset value test above if the transferee provided appropriate value for the assets and acted in good faith.