Corporate & Securities Blog

Delaware Legislature Adopts Controversial DGCL Amendments

Senate Bill 313 is the latest development in a high-stakes battle for control between the boards of corporations and their stockholders, an issue that drew national attention after a series of rulings1 from high-profile cases were issued by the Delaware Court of Chancery. Those rulings have created uncertainty for Delaware corporations and their advisers because the court’s decisions were contrary to the customary practices that had developed over time in relation to stockholder agreements and processes for merger approvals.2

Last week, the Delaware state Senate and House of Representatives both overwhelmingly approved SB 313, which is currently awaiting Gov. John Carney’s signature. Behind the scenes, however, a contentious debate has played out between the corporate bar and certain opponents of any change to the existing provisions of the law.

Although SB 313 has broader implications for other corporate law issues,3 much of the criticism the bill has received involves the proposed new Section 122(18) of the Delaware General Corporation Law (DGCL), which grants corporations the broad powers to enter into contracts with one or more stockholders and to grant such stockholders approval powers outside of a corporation’s certificate of incorporation. Section 122(18) also provides a non-exclusive list of contract provisions by which a corporation may allocate certain decision-making authority. This amendment is a direct response to the Court of Chancery’s February ruling in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., which invalidated a provision in a stockholder agreement that granted a powerful stockholder extremely broad decision-making authority over certain matters that the DGCL traditionally reserved for a company board.

The Moelis decision was based on an extreme set of facts where virtually all decisions traditionally reserved to the board required the majority stockholder’s approval, which, in the court’s view, undermined the power of the board to manage the corporation as required by the DGCL. Critics of SB 313 argue that Section 122(18) of the DGCL was drafted hastily and that its expansive language will make it easier for boards to hand over their decision-making authority to powerful stockholders.4

By providing this alternate pathway through which the decision-making power of the board can be redistributed, such critics fear that Section 122(18) will ultimately be leveraged to the detriment of less powerful stockholders. In a letter sent to the Delaware Legislature by more than 50 law school professors, the authors allege that the proposed amendment to Section 122(18) would “allow corporate boards to unilaterally contract away their powers without any shareholder input,” and by exempting such contracts from Section 115 of the DGCL, the amendment would create a “separate class of internal corporate claims — including claims of breach of fiduciary duty — that could be arbitrated and decided under non-Delaware law.”

More broadly, concerns are being raised that by passing SB 313, lawmakers have sought to undermine Delaware courts, which have a longstanding reputation for taking a neutral and balanced approach to disputes involving stockholders and the delegation of decision-making power traditionally reserved for the board. In addition, critics argue that lawmakers overreached because they intervened before the Delaware Supreme Court had a chance to weigh in on the Court of Chancery’s decision in the Moelis case. Further, some critics have warned that the bill’s overreach may invite federal regulation by the U.S. Securities and Exchange Commission of Delaware corporate law issues.

On the other hand, proponents of SB 313 have argued that its passage is necessary for Delaware corporations to overcome the uncertainties created as a result of the recent decisions by the Court of Chancery. This sentiment was echoed by the chair of the Delaware State Bar Association’s Council of the Corporation Law Section in a statement made to senators just prior to the bill being voted on and also in a letter drafted by the New York City Bar Association’s Committee on Mergers, Acquisitions and Corporate Control Contests, which implored lawmakers to put an end to the “disruptive uncertainty that now hangs over Delaware-incorporated companies” and to restore the “clarity, predictability and practicality which has long been the hallmark of Delaware corporate law.”

With SB 313 being passed by Delaware lawmakers in both the Senate and House and expected to be signed into law by Carney in the coming days, it appears that the corporate bar has won for now. Hopefully, this victory will provide much-needed guidance for those who advise corporations on governance and transactional matters and avoid disruption to customary practices followed by those engaged in venture capital, private equity and M&A transactions.

 

1 See West Palm Beach Firefighters Pension v. Moelis & Co.; AP-fonden v. Activision Blizzard.

2 Read more about the amendments to the DGCL and background.

3 For example, among other changes, SB 313 would amend Section 147 of the DGCL to permit a company’s board of directors to approve any agreement, instrument or document requiring board approval under the DGCL, including merger agreements, provided that it is in its final or “substantially final” form.

4 In Moelis, the Court of Chancery held that the board’s powers cannot be constrained through stockholders’ agreements. Rather, the board’s powers can be constrained only through those channels that are expressly identified in the DGCL, such as through an amendment to a corporation’s certificate of incorporation.

 

Meet the Authors

Lori S. Smith

Lori Smith is chair of the emerging companies & venture capital practice and is an active participant in the firm’s health law and mergers and acquisitions groups. Lori has been a trusted adviser to foreign and domestic companies for over 30 years, ranging from startups to large corporations, including entrepreneurs and angel, venture capital, and private equity investors. She represents public and private companies in the negotiation of mergers and acquisitions, leveraged buyouts, equity and debt financings, private placements, strategic alliances, partnerships and joint ventures.

lsmith@stradley.com | 212.404.0637

Katherine M. Pfingsten

Katherine Pfingsten focuses her practice on corporate law, representing public and private companies in a range of matters, including mergers and acquisitions, entity formation and corporate governance issues.

kpfingsten@stradley.com | 215.564.8793

 

Evan Poulgrain

Evan Poulgrain concentrates his practice on corporate law, advising public and private and private companies in various corporate transactions, including mergers and acquisitions, divestitures, entity formation and corporate governance issues. Evan also has experience counseling financial services clients on various secured and unsecured commercial lending transactions, including leveraged acquisition finance and project financing.

epoulgrain@stradley.com | 215.564.8043

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