In June, the Delaware General Assembly adopted several amendments to the Delaware General Corporation Law (DGCL), articulated in Delaware Senate Bill 313 (SB 313). The amendments were signed into law by Governor John Carney on July 17, 2024, and will take effect on August 1, 2024. These amendments will apply retroactively to all contracts and agreements made by a Delaware corporation as well as all contracts, agreements, and documents approved by the board of directors of a Delaware corporation.

The adopted amendments were intended to overturn three recent decisions of Delaware’s Court of Chancery: West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., Crispo v. Musk, and Sjunde AP-Fonden v. Activision Blizzard, Inc.

The Moelis Decision

In Moelis, the Delaware Court of Chancery held that provisions contained in a stockholders’ agreement which require stockholder pre-approval of corporate actions and the composition of the board of directors and its committees are facially invalid as an impermissible constraint on the board of directors’ authority. The Chancery Courts’ decision was perceived as running contrary to standard market practice, as it called into question the enforceability of stockholder agreements commonly entered into. In response, the Delaware General Assembly created a new default rule under Subsection 122(18) explicitly authorizing a corporation to enter into contractual agreements with its stockholders as long as the agreement does not violate the company’s charter and would not violate Delaware law if included in the charter. Such agreements may, among other things, restrict or prohibit future specified corporate actions, require specific approval of designated corporate actions, or covenant specified future actions of the corporation or certain persons or bodies.
    
A corporation may restrict the default authorization by expressly stating in its certificate of incorporation that the corporation lacks the authority to enter such contractual arrangements which would normally be authorized by Subsection 122(18). While the language of Subsection 122(18) only provides statutory guidance for contractual arrangements with a corporation’s stockholders or beneficial owners, Section 1 of the Synopsis to SB 313 clarifies that agreements entered into by the corporation with parties who are not stockholders or beneficial owners may still include the types of provisions addressed in Subsection 122(18).

The Crispo Decision

In Crispo, the Chancery Court identified significant challenges for target companies who seek to recover lost merger premiums in failed deals. Following a lawsuit involving a Twitter Inc. stockholder and Elon Musk, the Court of Chancery analyzed whether a stockholder has standing to pursue a claim for breach of a merger agreement, under a provision that permitted recovery of a lost merger premium in the event of a buyer breach. Deciding that the stockholder lacked standing, the court also noted that a contract for lost-premium provision which allows for the recovery of such damages by the target company is likely unenforceable. In response, new Subsection 261(a)(1) provides for parties to a merger or acquisition agreement the statutory authorization to include penalties or other consequences for a breach of its provisions prior to the effective time listed in the agreement. These consequences may include an obligation to pay the loss of any premium or other economic entitlements the stockholders of the nonbreaching party would have received if the merger transaction had been consummated.

New Subsection 261(a)(2) aims to target post-closing issues, including allowing the appointment of a constituent corporation stockholder representative to be included as a contractual provision in a merger agreement. This new subsection is intended to address the increasing prevalence of these types of provisions in merger agreements.

Other Amendments

SB 313 sets forth several amendments in response to Sjunde AP-Fonden v. Activision Blizzard, Inc., where the Delaware Court of Chancery held that valid board of directors’ approval of a transaction document requires the approval of, essentially, a complete version of the agreement. These amendments include:

New Section 147. The addition of the new Section 147 provides that whenever board of directors’ approval of an agreement or document is expressly required by the DGCL, such an agreement or document may be approved in its final or substantially final form. This new Section 147 is intended to enable a board of directors to approve a transaction at a time when all material terms are set forth in the agreement. Furthermore, to create additional surety regarding final form agreement status, Section 147 allows the board of directors to ratify previously approved agreements, even before those agreements are filed with the Delaware Secretary of State, as required by the DGCL.

New Subsection 232(g). The new subsection (g) was added to Section 232 and expressly incorporates any document that is annexed, appended, or enclosed with a stockholder notice regarding a merger or transaction approval as part of such stockholder notice.

New Section 268. This newly created section aims to codify two approval clarifications meant to provide flexibility in the merger/transaction context. Subsection 268(a) provides that, in the context of a merger, if an agreement provides that the shares of capital stock of a constituent corporation are converted into cash, property, rights, or securities in the merger, then:

• the merger agreement approved by the board does not need to include any provision regarding the charter of the surviving corporation to be considered in final or substantially final form;
• an amendment or restatement of the charter of the surviving corporation can be adopted by the board of the constituent corporation or any person acting at its direction; and
• no change to such charter is deemed an amendment of the merger agreement.

Furthermore, subsection 268(b) purposefully excludes disclosure schedules or disclosure letters
as part of merger agreements, allowing for further flexibility in the negotiation process without requiring formal approval in the statutory context.

Key Dates to Know

The amendments will take effect on August 1, 2024, and will be retroactively applied to all contracts and agreements (including merger and consolidation agreements) made by a Delaware corporation and all contracts, agreements and documents approved by a board of directors of a Delaware corporation.

Connect with Ice Miller for More Details

If you have any questions regarding this topic, please contact Leslie Johnson, Miranda Greene, Jay Geiss, Christopher Williams or another member of the Business Group at Ice Miller.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.