Delaware Governor Signs Controversial “Market-Practice” Amendments to General Corporation Law

On July 17, 2024, Governor Carney signed into law SB 313, which amends the Delaware General Corporation Law ("DGCL") to reinstate market practices that would have been impacted by a series of Court of Chancery decisions from late 2023 and early 2024. In particular, the amendments conform Delaware law to match current practice by, among other things: (1) permitting boards of directors to approve merger agreements in only "substantially final form," as opposed to only final or essentially final form; (2) allowing parties to agree in a merger agreement that a party breaching the agreement pay any penalties or suffer any consequences set forth in the agreement (including payment for a lost premium) and to the appointment of a representative to act on behalf of all stockholders; and (3) legally authorizing corporations to enter into governance agreements with stockholders in return for "minimum consideration" as determined by the board.

SB 313 becomes effective on August 1, 2024, and will apply to agreements and transactions both going forward and those in place prior to that date, provided the agreement is not subject to a civil action pending on or before that date.

Background

The legislative synopsis for SB 313 describes how it was drafted in response to three recent decisions from the Court of Chancery. First, in Crispo v. Musk,¹ the Court of Chancery questioned current market practices providing for contractual damages due to a party's "failure to perform or consummate [a] merger or consolidation."² Second, in AP-Fonden v. Activision Blizzard, Inc.,³ the Court of Chancery addressed "competing interpretations" of the DGCL, and held boards of directors were required to approve merger agreements in essentially final form and imposed strict requirements on both providing notice of the merger agreement to stockholders and when the board of directors must approve the certificate of incorporation of the surviving corporation and the disclosure schedules associated with the merger agreement.⁴ Third, in West Palm Beach Firefighters' Pension Fund v. Moelis & Co.,⁵ the Court of Chancery "observed that 'the expansive use of stockholder agreements suggests that greater statutory guidance may be beneficial,'"⁶ and rejected a series of provisions in a governance agreement that the Court held unduly constrained the statutory authority and discretion of the board of directors pursuant to Section 141(a) of the DGCL.

The decisions in Crispo, Activision, and Moelis were controversial among corporate practitioners. As stated during the legislative process, the decisions had the potential of disrupting established market practice and, in the case of Activision and Moelis, calling into question long-standing agreements. In response, the Council of the Corporation Law Section of the Delaware State Bar Association proposed amendments to the DGCL to address these concerns. Following further refinement, and over objection from a number of academics, some practitioners, and certain members of the Court of Chancery, SB 313 was passed by the Delaware Senate on June 13, 2024, passed the Delaware House on June 20, and was signed into law by Governor Carney on July 17.

The Amendments

As set forth below, the amendments provided by SB 313 enable greater flexibility to corporations and their boards of directors in approving merger agreements, negotiating the remedies for a breach of a merger agreement and who can seek recovery for such breach, and entering into governance agreements with particular stockholders.

Approval of Merger Agreements, Instruments, or Other Documents

• New § 147: Provides that when the DGCL requires the board to approve any agreement (e.g., merger agreements), instrument, or other document, the board may approve it in "substantially final form." The board also may ratify its prior approval of any document that is required to be, or referenced in a certificate, filed with the Secretary of State (e.g., again, a merger agreement), thus avoiding any later uncertainty over whether the document was approved in substantially final form. The ratification of a merger agreement would need to occur before the certificate of merger becomes effective.
• New § 232(g): Clarifies that any document enclosed with, or annexed or appended to, a notice will be deemed part of the notice (e.g., appending a merger agreement to a proxy statement accompanying a notice of a stockholder meeting, as is customary, will be deemed to satisfy the notice requirement).
• New § 268(a): Provides, among other things, that when stockholders do not receive stock in the surviving corporation as part of the merger consideration (e.g., cash-out mergers), the board of directors is not required to approve the surviving corporation's certificate of incorporation (though the constituent corporation may contract to do so).
• New § 268(b): Provides that disclosure schedules and similar documents are not deemed part of the merger agreement and therefore do not require submission to, or approval by, the board of directors or stockholders, unless the merger agreement expressly provides otherwise.
  • By excluding disclosure schedules from the merger agreement that must be approved by a board of directors, Section 268(b) would permit the board to delegate the approval of the disclosure schedules to the officers or agents of the corporation.

Penalties / Consequences for Breached Merger Agreements and Stockholder Representatives

• New § 261(a): Permits the parties to a merger agreement to agree in the merger agreement:
  • that a party to the agreement who fails to perform its obligations may have to pay such penalties or consequences as set forth in the agreement (including payment of any loss of premium due to the failure to consummate the merger);
  • that if a corporation is entitled to receive payment of any penalty, the corporation would be entitled to retain the amount of any payment it receives and need not distribute the payment to stockholders;
  • to the appointment of one or more persons to serve as representative(s) of the stockholders (including those whose shares will be cancelled, converted or exchanged in the merger), and such representatives shall have the authority to enforce the rights of all stockholders pursuant to the merger agreement (including the right to receive payment and enter into settlement agreements);
  • that any appointment of a stockholder representative may be irrevocable as of and after the adoption of the agreement;
  • that the appointment of a stockholder representative may be amended after the merger or consolidation becomes effectives only with the consent or approval of persons specified in the agreement; and
  • the stockholder representative may only represent the stockholders as it relates to the enforcement of their rights under the merger agreement, but not as to their appraisal rights or claims for breach of fiduciary duty (although stockholders may agree to a broader mandate in a separate agreement).

Governance Agreements

• New § 122(18): Provides that, notwithstanding Section 141(a), a corporation may enter into governance agreements with stockholders: (1) restricting the corporation from taking action under circumstances specified in the contract, (2) requiring specific approvals before taking corporate action, and (3) covenanting that the corporation or one or more persons or bodies (including the board of directors) will take, or refrain from taking, specific actions.
  • In addition, new § 122(18):
    • Requires the corporation to receive minimum consideration, as determined by the board, before entering into a governance agreement;
    • Provides that a corporation can enter into a governance agreement without an authorizing provision in the certificate of incorporation;
    • Allows a governance agreement to provide for a forum for resolving disputes other than Delaware;
    • Allows for remedies against the corporation for breach of a governance agreement;
    • Does not permit a corporation to enter into a governance agreement imposing remedies or other consequences against the directors personally or binding directors as parties to the governance agreement;
    • Still requires board or stockholder approvals for corporate actions that would otherwise be required by the DGCL, notwithstanding the approval or consent rights the contracting stockholder may have (e.g., while the board of directors would still need to approve a merger agreement, the failure to approve a merger agreement required by a governance agreement could give rise to a breach of contract claim, subject to equitable principles);
    • Ensures that, notwithstanding the above, a governance agreement provision is unenforceable if it would be contrary to the certificate of incorporation or the laws of Delaware if the provision were included in the certificate; and,
    • Does not eliminate any fiduciary duties directors, officers, or stockholders may owe to the corporation or its stockholders, including when entering into the governance agreement or deciding whether to cause the corporation to comply with its terms.
• Amended § 122(5): Confirms that a corporation cannot delegate board-level functions pursuant to Section 141(a) to an officer or agent.

Takeaways

The DGCL is regarded as an enabling statute that favors private ordering. With limited exceptions, and subject to equitable review by the Delaware Courts, an animating principal of the DGCL is that companies and their stockholders retain the freedom to determine the governance parameters of their respective entities and to structure transactions to fit practical and commercial realities. While SB 313 was drafted in furtherance of that tradition, certain questions remain as to how it will be applied by the Courts and what the market's reaction will be.

Among other considerations, companies and their boards of directors and advisors will need to monitor for and consider:

• The standards of review and conduct that Delaware Courts will apply to the adoption of governance agreements.
• Whether large institutional stockholders or proxy advisory firms will favor amending certificates of incorporation to prohibit governance agreements.
• How practitioners will draft both governance agreements to ensure the recitals reflect the consideration being received by the corporation and the board resolutions reflecting the board's approval of that consideration.
• How parties will draft remedy provisions in merger agreements, including whether punitive damages or liquidated damages will become a fixture of such provisions.
• How parties will draft anti-reliance provisions and disclosure schedules to avoid making disclosure schedules an express part of the merger agreement.
• Whether boards of directors will, as a matter of course (and as required by counterparties), ratify their prior approval of a merger agreement and other documents required under the DGCL to avoid any question as to whether the agreement or other document was in substantially final form when it was approved.

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