On July 17, 2024, Delaware Governor John Carney signed Senate Bill 313, which includes several significant amendments to the Delaware General Corporation Law (“DGCL”). The changes took effect on August 1, 2024. The amendments are a direct response to recent Court of Chancery decisions that some argued went against widely agreed-upon laws and common corporate governance practices.

Background Chancery Court Decisions Leading to Legislative Changes

First, in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024), the Court of Chancery held that a stockholder agreement that required specific stockholder approval of certain actions taken by the board of directors that did not otherwise require stockholder approval under the DGCL or the corporation’s certificate of incorporation violated DGCL § 141(a) and was therefore invalid and unenforceable.[1]

Second, the Court of Chancery in Sjunde AP-Fonden v. Activision Blizzard, Inc., No. 2022-1001-KSJM, 2024 WL 863290 (Del. Ch. Feb. 29, 2024), as corrected (Mar. 19, 2024), held that to approve a merger agreement under § DGCL 251(b), the board of directors must, at the time of approval, have the purchase price, the corporation disclosure letter (often called a disclosure schedule), the certificate of incorporation of the surviving corporation in the merger, and all finalized key terms.[2] The Court held this despite the Defendant’s argument that the “practical realities of negotiating merger agreements” have made it common practice for boards to “adopt resolutions approving a merger agreement in draft or near-final draft form and declaring its advisability before the agreement has been finalized, and this is especially true with respect to ancillary documents, including disclosure schedules.”[3] The Court also held that providing a summary of the merger agreement in the Proxy Statement did not meet the requirement of DGCL § 251(c) that notice of a stockholders’ meeting for the purpose of acting on a merger agreement must contain either the agreement or a brief summary of the agreement.[4]

Third, in Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023), a stockholder of an acquisition target sued when the buyer initially tried to back out of the transaction, which was later completed.[5] The Court of Chancery held that the stockholder lacked standing to sue for mootness fees (fees for providing a benefit to other stockholders) because the merger agreement’s Lost Premium Provision did not provide him with status as a third-party beneficiary, and the provision would be invalid if it only applied to the target’s ability to collect a premium owed to its stockholders, which would be damages for consideration the stockholder would not have expected to receive, constituting a penalty.[6]

Given that the outcome of these cases went against understood market practice, one might naturally ask why these issues have not been raised to the Court of Chancery before. The answer is likely that Professor Gabriel Rauterberg’s 2021 law review article on shareholders’ agreements gave plaintiff’s attorneys the idea to bring these cases.[7]

Changes to the DGCL:

Response to Moelis – Stockholders’ Agreements

In response to the Moelis decision, the Delaware legislature updated DGCL § 122(18). This update once again allows for the customary use of stockholders’ agreements that contain provisions requiring a stockholder vote for certain board actions not required by the DGCL or the corporation’s certificate of incorporation. The new section “specifically authorizes a corporation to enter into contracts with one or more of its stockholders or beneficial owners of its stock, for such minimum consideration as approved by its board of directors, and provides a non-exclusive list of contract provisions by which a corporation may agree to:

1. restrict or prohibit future corporate actions specified in the contract;
2. require the approval or consent of one or more persons or bodies (including the board of directors or one or more current or future directors, stockholders or beneficial owners of stock) before the corporation may take actions specified in the contract; and
3. covenant that the corporation or one or more persons or bodies (including the board of directors or one or more current or future directors, stockholders or beneficial owners of stock) will take, or refrain from taking, future actions specified in the contract.”[8]

Many have expressed concerns the amendments go beyond the pre-Moelis understanding of the law, and that such a change should not have been made less than six months after the decision without the review of a higher court.[9]

Response to Activision – Merger Approvals

In response to Activision, the Delaware legislature amended several sections of the DGCL. DGCL § 147 was added to allow boards to approve merger agreements in “substantially final” form.[10] If part of the approved agreement or document must be filed with the Secretary of State between the time of such approval and the effectiveness of the filing, the board can ratify the agreement or document, which shall be deemed to relate back to the time of the original approval.[11] New § 147 allows a board of directors “to approve an agreement, instrument or document if, at the time of board approval, all of the material terms are either set forth in the agreement, instrument or document or are determinable through other information or materials presented to or known by the board.”[12]

The Delaware legislature amended DGCL § 232(g) to revise the requirements of stockholder proxy statements.[13]  The amended “§ 232(g) provides that a notice given to stockholders is deemed to include any document enclosed with, or appended or annexed to, the notice (such as a proxy statement provided along with a notice of a stockholder meeting to approve an agreement of merger).”[14] Providing a summary of the merger agreement in the Proxy Statement, rather than the stockholders’ meeting notice, as was done in Activision, would now comply with the law.

Amended § 268(a) provides that a merger agreement (other than a holding company reorganization), need not include any provision relating to the certificate of incorporation of the surviving corporation if “all of the shares of capital stock of the constituent corporation issued and outstanding immediately before the effective time of the merger are converted into or exchanged for cash, property, rights or securities (other than stock of the surviving corporation).[15] In other words, when stockholders are cashed out, the board of directors need not approve the certificate of incorporation of the surviving corporation.

Amended § 268(b) clarifies that a board of directors does not need to approve a disclosure letter, disclosure schedule, or other similar document as part of its approval of the merger agreement.[16] § 268(b) provides that a disclosure schedule delivered in connection with a merger agreement of merger “will not, unless otherwise expressly provided by the agreement of merger or consolidation, be deemed part of the agreement.”[17]

Response to Musk

The Delaware legislature’s response to Musk ensures the continued use of termination and reverse termination fees.  Amended § 261(a)(1) clarifies that parties to a merger agreement “may, through express provision in the agreement, specify the penalties or consequences of a party’s failure to perform its obligations under, or comply with the terms and conditions of, such agreement before the effective time of the merger, or to consummate the merger or consolidation contemplated by such agreement.”[18] These penalties include “damages based on the lost premium that stockholders of a constituent corporation would be entitled to receive if the merger becomes effective in accordance with the terms of the agreement and reverse termination fees.”[19] A corporation is permitted to enforce the other party’s payment obligation and retain the payment it receives.[20] Further, companies are permitted “to allocate the risk of non-performance by provisions expressly set forth in agreements of merger or consolidation.”[21]

Amended § 261(a)(2) provides express authorization for the common use of stockholders’ representatives in merger agreements.[22] Stockholders, as parties to a merger agreement, “may, through express provision in the agreement, appoint one or more persons to serve as the representative of stockholders … including stockholders whose shares shall be cancelled, converted or exchanged in the merger… and [the stockholders may] delegate to such person(s) the exclusive authority to enforce the rights of such stockholders, such as rights to receive payments and enforce stockholders’ rights under an escrow or indemnification arrangement, and to enter into settlements with respect thereto.”[23]

Conclusion

The amendments to the DGCL mark a significant update in Delaware corporate law but are not likely to mark the end of litigation over these issues. 

[1] W. Palm Beach Firefighters' Pension Fund v. Moelis & Co., 311 A.3d 809, 819 (Del. Ch. 2024).

[2] Sjunde AP-fonden v. Activision Blizzard, Inc., No. 2022-1001-KSJM, 2024 WL 863290 (Del. Ch. Feb. 29, 2024), as corrected (Mar. 19, 2024).

[3] Id. at *5.

[4] Id. at *8.

[5] Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023).

[6] Id.

[7] See Rauterberg, Gabriel. "The Separation of Voting and Control: The Role of Contract in Corporate Governance." Yale Journal on Regulation 38, no. 4 (2021): 1124-1181.

[8] Original Synopsis to S.B. 313, available at https://legis.delaware.gov/BillDetail/141480.

[9] See e.g. “The move drew significant criticism, including from the chancellor and a vice-chancellor of the chancery court as well as representatives of large institutional shareholders.” Charles Elson, Delaware is jettisoning its traditional approach of protecting investors, Fin. Times, Jul. 9, 2024, available here; See also Travis Laster, It isn’t there, LinkedIn, Jun. 20, 2024, available here; See also Letter in Opposition to the Proposed Amendment to the DGCL, to the Honorable Members of the Delaware Legislature (Jun. 7, 2024), available at Letter in Opposition to the Proposed Amendment to the DGCL (harvard.edu).

[10] See Original Synopsis to S.B. 313.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.