August 1, 2024
By: Catherine Edmunds
On August 1, 2024, amendments to the Delaware General Corporation Law (the DGCL) impacting stockholder rights are set to become effective. The amendments apply prospectively and retrospectively. They primarily have the impact of codifying prevailing market practice into law after three controversial case holdings: West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (“Moelis”), Crispo v. Musk (“Musk”) and Sunde AP-fonden v. Activision Blizzard(“Activision”) appeared to move the needle regarding stockholder agreements, transaction approval requirements and target corporation lost-premium damages away from common practice and interpretation. The amendments are summarized in Delaware Senate Bill 313 (“SB 313).
What is the Impact on Stockholder Agreements?
In Moelis the Delaware Court of Chancery held that stockholder agreements requiring pre-approval of corporate actions, as well as dictating the composition of the board of directors were an impermissible restraint on the board of directors’ authority under Section 141(a) of the DGCL.
This decision ran contrary to the prevailing opinion of Delaware legal practitioners and the typical use of such contracts in the wider venture capital community. Stockholder agreements have typically been used to (i) restrict or prohibit a corporation from taking certain specified actions, (ii) require the consent or approval of certain specified stakeholders for corporate action, and (iii) cause the corporation to refrain from taking certain actions without the consent or approval of certain stakeholders.
The overarching effect of the amendment to the DGCL is that it continues to allow these types of stockholder agreements that obligate the corporation to perform on such stockholder agreements in addition to the rights conferred to stockholders in a corporation’s certificate of incorporation.
What is the Impact on Requirements for Board and Stockholder Approval in the Mergers and Acquisitions Process?
The amendments also provided clarity on requirements of Board approval under DGCL to allow for M&A documents to be approved in “substantially final” form, rather than solely final form. This overturns the Delaware Court of Chancery decision in Activision, where the court had invalidated approval of a merger due to lack of essential completeness of merger documents in the Board and stockholder approval process. The amendment has the effect of streamlining approval to “substantially final” forms of documents and allows for further ratification if necessary. In the final rule, disclosure schedules are not considered to be part of the merger agreement that must be approved, and stockholders are not required to approve the as-amended certificate of incorporation of the surviving corporation unless the stockholders will receive stock in the surviving corporation as part of the deal. It further clarified notice requirements for stockholder approval, allowing documents which were annexed to or appended to notices to be considered delivered to stockholders as notice duly given. This codifies common Delaware legal practitioner practice.
The amendments regarding streamlined approval and ratification could be interpreted quite broadly and time will tell if they also apply to other documents in addition to M&A documents, including documents that must be filed with the state of Delaware, such as certificates of incorporation.
What is the Impact on Damages Provisions in Merger Agreements?
The amendments allow for enforcement of penalties or consequences in a merger agreement for a breach of the merger agreement and allow the target corporation to obtain an award of damages based on any lost premium payable to stockholders should the buyer wrongfully terminate a deal. The amendment addresses the Delaware Court of Chancery’s decision in Musk that held that when a buyer wrongfully terminates a deal, since the merger consideration is generally paid directly to stockholders (as opposed to the corporation), the target company has no right or expectation to receive any consideration and is therefore not entitled to pursue damages for loss of premium. This amendment aligns with the view of Delaware legal practitioners that target companies should be able to seek such damages if such damages are agreed to in a negotiated merger agreement. The result of this amendment is aligning the DGCL more closely with practitioners’ expectations.
The amendments also endorse the designation of a stockholder representative to enforce the rights of stockholders in a merger agreement and provide additional clarity on the role of a stockholder representative.
Since these Amendments Apply Retrospectively do Corporations Need to Take any Actions to Comply with the Amendments?
Corporations do not need to take any actions to comply with the amendments. They can reap the benefits of legislative action to attempt to align the court’s interpretations of the DGCL with legal practitioner and venture capital community expectations. Edmunds Legal will continue to monitor how the DGCL amendments are interpreted in Delaware courts and provide additional updates as needed.
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