About the Section of Corporation Law

With a membership of nearly 500 Delaware attorneys, judges and academics, the Section of Corporation Law promotes the objectives of the Delaware State Bar Association within the fields of law governing corporations and alternative business entities. Responsibility for leading the Section rests with the Section’s Council and officers. The Council and the Section’s Alternative Entities Subcommittee are responsible for formulating and recommending to the Delaware General Assembly, after approval by the DSBA, amendments to the Delaware General Corporation Law, the Delaware Limited Liability Company Act, the Delaware Revised Uniform Limited Partnership Act and the Delaware Revised Uniform Partnership Act. The Section also fulfills an important education function, sponsoring one or more continuing legal education programs per year.

Click here to view the Section of Corporation Law’s 2013 Annual Report.

Leadership

Chair
Norman M. Monhait
Rosenthal, Monhait & Goddess, P.A.

Vice-Chair
John F. Grossbauer
Potter Anderson & Corroon LLP

Secretary
Bruce E. Jameson
Prickett, Jones & Elliott, P.A.

Chair, LLC and Partnership Law Committee
James G. Leyden, Jr.
Richards, Layton & Finger, P. A.

Technology Liaison
J. Clayton Athey
Prickett, Jones & Elliott, P.A.

Council

Frederick H. Alexander (Immediate Past Chair)
Morris, Nichols Arsht & Tunnell LLP

Donald A. Bussard (Past Chair)
Richards, Layton & Finger, P.A.

P. Clarkson Collins, Jr.
Morris James LLP

Henry E. Gallagher
Connolly Gallagher LLP

Richard J. Geisenberger (Ex OfficioMember)
Assistant Secretary of State, Delaware

Stuart M. Grant
Grant & Eisenhofer P.A.

John F. Grossbauer
Potter Anderson & Corroon LLP

Ellisa Opstbaum Habbart
The Delaware Counsel Group, LLP

Lawrence A. Hamermesh (Past Chair)
Widener University School of Law

Richard D. Heins
Ashby & Geddes, P.A.

Kurt M. Heyman
Proctor Heyman LLP

Bruce E. Jameson
Prickett, Jones & Elliott, P.A.

David A. Jenkins
Smith, Katzenstein & Furlow LLP

Andrew M. Johnston, III
Morris, Nichols Arsht & Tunnell LLP

Allison L. Land
Skadden, Arps, Slate, Meagher & Flom LLP

Lewis H. Lazarus
Morris James LLP

David C. McBride (Past Chair)
Young Conaway Stargatt & Taylor, LLP

Norman M. Monhait
Rosenthal, Monhait & Goddess, P.A.

Mark A. Morton
Potter Anderson & Corroon LLP

Samuel A. Nolen
Richards, Layton & Finger, P.A.

Matthew J. O’Toole
Stevens & Lee P.C.

Bruce L. Silverstein
Young Conaway Stargatt & Taylor, LLP

Edward P. Welch (Past Chair)
Skadden, Arps, Slate, Meagher & Flom LLP

2013 AMENDMENTS TO THE DELAWARE GENERAL CORPORATION LAW AND ALTERNATIVE ENTITY STATUTES

Delaware’s Legislature and Governor have approved amendments to Delaware business entity laws that the Corporation Law Section proposed.  The amendments include provisions permitting the formation of specialized public benefit corporations, a new Section 251(h) that allows corporations to opt into a streamlined two-step merger process, a new Section 204 that authorizes the ratification of certain defective corporate acts, and a new Section 205 that confers jurisdiction on the Delaware Court of Chancery to hear matters relating to the cure of defective corporate acts.  The amendments also include provisions intended to deter the establishment of so-called “shelf” corporations, as well as a number of conforming revisions to other provisions of the Delaware General Corporation Law.  Certain of the amendments became effective August 1, 2013, with the remainder, largely those related to the ratification mechanisms, to become effective on April 1, 2014.  Following is a summary of the legislation.

AMENDMENTS TO THE DGCL

Ratification; Sections 204 and 205.  These amendments create procedures that will enable corporations to validate prior actions that, due to arguable defects in the original authorization, could be challenged as void or voidable under pre-existing case law.  Section 204 is a self-help mechanism.  Section 205 gives the Court of Chancery jurisdiction to hear and determine the validity of a prior corporate action or an effort to ratify the action pursuant to Section 204.

Two concepts fundamental to the application of these sections are “defective corporate act,” which is the act that the parties seek to validate, and “failure of authorization,” which is the defect in the original approval of the act the parties seek to validate.  The term “defective corporate act” is intended to include all types of corporate acts and transactions, including elections or appointments of directors, that were within the power of the corporation under the DGCL.  The concept of the corporation’s power under the DGCL, as used in these sections, refers to the general powers that any Delaware corporation is authorized to exercise.  The “defective” component is the “failure of authorization,” which is generally defined as non-compliance with the DGCL, the corporation’s certificate of incorporation or bylaws, or any plan or other agreement to which the corporation is a party, where the failure to comply with such provisions, documents or instruments would render such act void or voidable.

The term “defective corporate act” includes an “overissue” of stock and other defects in stock issuances that could cause stock to be treated as void or voidable.  Section 204 thereby provides a means of cure, as contemplated by Section 8-210 of the Delaware Uniform Commercial Code, for stock issued in excess of the number of shares the corporation is authorized to issue.  Section 204 also provides a means to give effect to the provisions of Section 8-202(b) of the Delaware Uniform Commercial Code, which provides that stock in the hands of a purchaser for value without notice of the defect is generally valid in the hands of such purchaser even if issued with a defect going to its validity.  Section 204 also provides a means of determining which shares constitute the “overissued” shares in various circumstances.

Ratification of a defective corporate act or an overissuance under Section 204 requires (i) approval by the board of directors and (ii) approval by the stockholders if a vote of stockholders would have been required to authorize the prior act either at the time the prior act occurred or at the time of the ratification.  If stockholder approval is required, notice must be given to (i) all current holders of the corporation’s valid stock and “putative stock,” whether voting or non-voting, and (ii) the holders of valid stock and “putative stock,” whether voting or non-voting, as of the date of the defective corporate act to be ratified, unless such holders cannot be determined from the corporation’s records after reasonable inquiry.  “Putative stock” is defined to include the shares of any class or series of capital stock of the corporation as well as shares issued upon the exercise of options, rights, warrants, or other securities convertible into shares that were created or issued pursuant to a defective corporate act that, were it not for the invalid authorization, would constitute valid stock, or that cannot be determined by the board of directors to be valid stock.  If the invalidity of the authorization has been caused by the failure to comply with the provisions of Section 203, then stockholder approval, by the vote required by Section 203(a)(3), is required to ratify the defective corporate act regardless of whether such vote would otherwise be required (for example, because an interested stockholder has been such for three years prior to the ratification vote).

Once the applicable board and stockholder approvals are obtained, if the act would have required a filing under Section 103 of the DGCL, the corporation must file a certificate of validation with the Delaware Secretary of State.  In addition, the corporation must provide notice of any ratification effected by the board of directors without stockholder approval to (i) all current holders of valid and putative stock, whether voting or non-voting, and (ii) all holders of valid stock and putative stock, whether voting or non-voting, as of the date of the defective corporate act to be ratified, unless such holders cannot be determined from corporate records after reasonable inquiry.

A defective corporate act that is ratified in accordance with Section 204 will be fully effective, and the effectiveness of the ratification will relate back to the date the act was originally taken, unless the board of directors provides otherwise in the resolution ratifying the act or the Delaware Court of Chancery otherwise determines for good cause shown in a proceeding challenging the ratification brought in accordance with Section 205.

Section 205 confers jurisdiction on the Court of Chancery to hear and determine the validity of any ratification effected pursuant to Section 204 and the validity of any corporate act or transaction and any stock or rights or options to acquire stock, and to modify or waive any of the procedures in Section 204.  Section 205 gives corporations (upon application by specified interested parties) the ability to seek a determination of the validity of acts that are not susceptible to cure under Section 204, and also gives various parties the right to challenge the validity of ratifications under Section 204 as well as the right to challenge defective corporate acts.  Any action under Section 205 seeking to invalidate a ratified act or seeking to impose conditions or qualifications on its validity must be commenced within 120 days of the date that notice of the ratification is provided to the stockholders (in the case of a ratification not requiring stockholder vote) or the date of the stockholders’ meeting to vote upon the ratification, if any.

The procedures in Sections 204 and 205 are not intended to preempt or restrict other traditionally valid means of ratifying any corporate act, including defective corporate acts, that would otherwise be voidable but not void.  Accordingly, there is no obligation to follow the procedures set forth in Section 204 to ratify voidable actions.  The general doctrine of ratification, as discussed in Delaware cases such as Klig v. Deloitte LLP, 36 A.3d 785 (Del. Ch. 2011) and Kalageorgi v. Victor Kamkin, Inc., 750 A.2d 531 (Del. Ch. 1999), aff’d, 748 A.2d 913 (Del. 2000) (unpublished table decision), still exists.  Additionally, the doctrine of stockholder ratification discussed in Gantler v. Stephens, 965 A.2d 695 (Del. 2009) – that a fully informed vote of stockholders to approve director action that does not legally require stockholder approval to become effective – is still an effective method of ratification.  The amendments do not modify any fiduciary duties that would apply to the decision to ratify a defective corporate act or an overissuance, which will remain subject to traditional equitable review.

Simplified Two-Step Acquisitions; Section 251(h).  New Section 251(h) provides target corporations with the ability to execute a back-end merger without the need for a stockholder meeting, so long as the parties to the merger agreement comply with the terms of the new statute.  Section 251(h) specifies that, unless otherwise expressly required by a target’s certificate of incorporation, a merger agreement involving a publicly held Delaware corporation (defined as corporations whose stock is listed on a national securities exchange or held of record by more than 2,000 holders) may permit the acquiring company to effect a back-end merger without the need for a stockholder meeting.  The definitive merger agreement associated with the transaction must state that the contemplated merger is governed by Section 251(h), and the back-end merger is required to be completed “as soon as practicable” following the consummation of the first-step tender or exchange offer.  In addition, Section 251(h) requires that the buyer initiate and consummate the tender or exchange offer contemplated by the merger agreement for all the shares of the target corporation that would be entitled to vote to approve or reject the proposed transaction absent the procedure authorized under Section 251(h).  Third, following the consummation of the tender or exchange offer, the buyer must own the percentage of target stock required by the DGCL to adopt the merger agreement, or any higher threshold required by the target’s certificate of incorporation or by the merger agreement.  Fourth, at the time the target’s board of directors approves the merger agreement, no other party to the merger agreement may be an “interested stockholder” of the target corporation as defined in Section 203(c) of the DGCL.  Finally, the entity making the tender offer is required to merge with or into the target corporation in accordance with the terms of the definitive merger agreement and must pay the same consideration in the back end merger as offered in the tender offer.  Appraisal rights are available in a merger effected under 251(h) regardless of whether they would otherwise have been available under Section 262 of the DGCL, and Section 262 has been amended to so provide.

251(h) does not change the fiduciary duties of directors in connection with such mergers or the level of judicial scrutiny that would apply to the decision to enter into such a merger agreement, each of which would be determined based on the common law of fiduciary duty, including the duty of loyalty.

Public Benefit Corporations; Sections 361-368.  The legislation adds a new subchapter XV to the DGCL to enable Delaware corporations to be incorporated as or, subject to certain restrictions, to become, “public benefit corporations.”  Such corporations would remain subject to all other applicable provisions of the DGCL, except as modified or supplanted by the new subchapter.

Each public benefit corporation is required, in its certificate of incorporation, to identify itself as a public benefit corporation and to state the public benefit or benefits it intends to promote.  The proposed legislation generally defines “public benefits” as positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature.

A public benefit corporation must be managed in a manner that balances the stockholder’s pecuniary interests, the interests of those materially affected by the corporation’s conduct, and one or more of the public benefits identified in its certificate of incorporation.  Directors do not have any duty to any person solely on account of any interest in the public benefit.  Where directors perform the balancing of interests described above, they are deemed to have satisfied their fiduciary duties to stockholders and the corporation if their decision is both informed and disinterested and not such that no person or ordinary, sound judgment would approve.

The new subchapter mandates periodic statements to stockholders regarding the corporation’s promotion and attainment of its public benefits.  Stockholders holding at least 2% of the corporation’s outstanding shares (or, in the case of listed companies, the lesser of 2% of the outstanding shares or shares having at least $2 million in market value) are able to maintain a derivative lawsuit to enforce specified requirements in the subchapter.

A 66 2/3% vote of each class of the public benefit corporation’s outstanding stock is required to adopt amendments to a public benefit corporation’s certificate of incorporation or to effect mergers or consolidations if the effect would be to abandon their public benefit purpose.  For a corporation that is not a public benefit corporation to amend its certificate of incorporation to become a public benefit corporation or to effect a merger or consolidation that would result in its stockholders receiving shares in a public benefit corporation, a 90% vote of each class of the corporation’s outstanding stock is required.  Stockholders of a corporation that is not a public benefit corporation that, by virtue of an amendment to the corporation’s certificate of incorporation or any merger or consolidation, receive equity interests in a public benefit corporation are entitled to appraisal rights.  The legislation also makes corresponding changes to the appraisal provisions in Section 262.

Restrictions on Shelf Corporations; Sections 114(a), 312(b) and 502(a).  The legislation revises three sections of the DGCL to deter the practice of forming “shelf” corporations that have no stockholders or directors and take no substantive action with respect to the management of the corporation, and exist for the sole purpose of creating an “aged corporation” that will eventually be acquired or revived several years in the future.  Specifically, Section 502 of the DGCL as amended states that the annual report of a corporation, other than its initial report, must be signed by a director or officer, and states that the renewal or revival of a Delaware corporation must be approved by the corporation’s board of directors or by its stockholders.  Section 312(b), as amended, clarifies that the requirement for a certificate of renewal or revival to be filed with the authorization of a corporation’s board of directors as specified in Subsection 312(d) represents a statutory condition under the DGCL.

Formula for Stock Issuance Consideration; Section 152.  Language was added to Section 152 of the DGCL to clarify that a board of directors may determine the price or prices at which the corporation‘s stock is issued by approving a formula by which such price is determined.

 

 

AMENDMENTS TO THE DELAWARE LIMITED LIABILITY COMPANY ACT (DLLCA), THE DELAWARE REVISED UNIFORM PARTNERSHIP ACT (DRUPA) and THE DELAWARE REVISED UNIFORM LIMITED PARTNERSHIP ACT (DRULPA) (COLLECTIVELY “THE ACTS”)

Default Fiduciary Duties Applicable to Delaware LLCs.  In Gatz Properties, LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012), the Delaware Supreme Court invited the Delaware legislature to clearly answer the question as to whether default fiduciary duties apply to Delaware LLCs.  In response to the invitation in Gatz, DLLCA has been amended to confirm that in some circumstances default fiduciary duties apply to Delaware LLCs.  The synopsis accompanying the amendments to DLLCA provides, as an example, that a manager of a manager-managed limited liability company would ordinarily have fiduciary duties even in the absence of a provision in the limited liability company agreement establishing such duties.  DLLCA continues to provide that fiduciary duties may be expanded, restricted or eliminated by provisions in a limited liability company agreement.

Charging Order Exclusive Remedy for Judgment Creditor.  The Acts have been amended to confirm that a charging order is the exclusive remedy which a judgment creditor of a member, a partner or a member’s or partner’s assignee, as applicable, of a Delaware Alternative Entity may pursue to satisfy a judgment out of the judgment debtor’s interests in a Delaware Alternative Entity.  The amendments specifically provide that attachment, garnishment, foreclosure and other legal and equitable remedies are not available to a judgment creditor of a member, partner or assignee.

Confirmation of Applicability of DLLCA Provisions to Single-Member and Multi-Member Delaware LLCs.  DLLCA has been amended to confirm that the provisions of DLLCA (including the provision regarding a charging order) apply whether a Delaware LLC has one member or more than one member.

Domestications, Transfers Continuances, Conversions and Mergers Involving Delaware Alternative Entities.  The Acts have been amended to confirm that in connection with a domestication, transfer, continuance or conversion of an entity, rights or securities of, or interests in, an entity that is domesticating or converting to a Delaware Alternative Entity and rights or securities of, or interests in, a Delaware Alternative Entity that is transferring to or domesticating or continuing in another jurisdiction or converting to a different type of entity or another jurisdiction may remain outstanding in connection with such domestication, transfer, continuance or conversion.  In connection with a merger involving a Delaware Alternative Entity, the amendments to the Acts confirm that the rights or securities of or interests in a constituent party that is the surviving entity in a merger may remain outstanding in connection with the merger.

2011 Alternative Entity Legislation

The Delaware General Assembly also enacted a series of bills to update Delaware’s alternative entity statutes. Each of the following bills was signed into law by the Governor on July 7, 2011 and became effective on August 1, 2011:

  • Senate Bill No. 74 – 2011 Amendments to the Delaware Revised Uniform Partnership Act, 6 Del. C. §15-101 et seq.
  • Senate Bill No. 76 – 2011 Amendments to the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq.
  • Senate Bill No. 95 – 2011 Amendments to the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. § 17-101 et seq.
  • Senate Bill No. 47 – 2013 Amendments to the Delaware General Corporation Law

2013 House Bills

Upcoming Events of Interest

ABA 2014 Annual Meeting
Sheraton Hotel, Boston MA
August 7-12, 2014

 

ABA Business Law Section Annual Meeting
September 11 – 13, 2014
Chicago, IL
Hyatt Regency Chicago

ABA Business Law Section Fall Meeting
November 21 – 22, 2014
Washington, DC
The Ritz-Carlton Washington

Links

Delaware Department of State

Membership and Contact Information

Janice Myrick – DSBA Office