On August 1, 2024, an extensive and important set of amendments to the Delaware General Corporation Law (the DGCL) will become effective. The amendments, which will apply both prospectively and retrospectively, were largely intended to address several recent Delaware Court of Chancery decisions that many practitioners considered inconsistent with prevailing market practice. Our previous client alert detailing the proposal of these DGCL amendments is available here. The most pertinent information about the new amendments is described below.
The 2024 DGCL Amendments
The DGCL amendments provide for a number of important rules, including as to the following matters:
- The amendments provide that companies and stockholders can enter into stockholder agreements conferring, among other things, governance rights upon stockholders and obligations upon the corporation. These amendments address concerns raised in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.,1 where the Court of Chancery determined that a stockholder agreement that provided a large stockholder with an array of consent rights and governance rights outside of the certificate of incorporation infringed on the board’s obligation to oversee the company in governance matters. Our previous client alert detailing that case is available here. The DGCL amendments provide that, outside of the certificate of incorporation, a corporation can enter into agreements with current or prospective stockholders giving stockholders consent rights or specifying that the corporation, stockholders, or directors will take certain actions or refrain from taking certain actions.
- In the M&A context, the amendments permit parties to a merger agreement to provide for penalties or consequences for a breach of the merger agreement and to allow the target corporation to obtain an award of damages based on the loss of premium payable to stockholders should the deal fall apart. This amendment addresses Crispo v. Musk,2 in which the Court of Chancery held that, because merger consideration is generally paid directly to stockholders (as opposed to the corporation itself), when a buyer wrongfully terminates a merger agreement, the target company generally has no right or expectation to receive the merger consideration, and the target company is therefore not entitled to pursue lost stockholder premium damages in the event of a busted deal. Our previous client alert detailing that case is available here. Prior to this case, many practitioners generally had assumed that target companies could seek such damages under Delaware law, so the DGCL amendments align the statute with that market expectation.
- The amendments also broadly authorize the use of stockholder representatives in merger agreements, in response to questions raised over the years about how extensively such a concept can be used under Delaware law.
- The amendments provide clarity around the manner in which boards and stockholders must approve merger agreements, as Delaware law generally requires for corporations that are parties to a merger. In particular, the amendments provide that any agreement, instrument, or other document that requires board approval under the DGCL may be approved by the board in “substantially” final form, that disclosure schedules are not part of the merger agreement that the board and stockholders must approve, that the merger agreement does not have to include a copy of the as-amended charter of the surviving corporation in deals where stockholders will not receive stock in the surviving corporation, and that documents enclosed with or annexed to notices delivered to stockholders pursuant to the DGCL will be deemed part of the notice for purposes of determining whether the notice was duly given. The amendments also provide a ratification process by which a board can approve an instrument such as a merger agreement following a prior approval that might have been incomplete, before certain filings in respect of such instrument are filed and become effective with the State of Delaware. These amendments address a recent decision—Sjunde AP-fonden v. Activision Blizzard3—in which the Court of Chancery called into question whether the board and stockholders of a target company had validly approved a merger agreement in compliance with the Delaware statute based on a variety of alleged foot faults that the new amendments now address. The amendments concerning board approvals are drafted broadly enough that they should extend beyond merger agreements to other types of instruments that require board approval, such as charter amendments—and thus may provide relief in other types of transactional settings as well.
Conclusion
The DGCL amendments will have significant impacts for both private and public companies and should mitigate many questions about market practice raised in the recent Delaware Court of Chancery rulings. We will monitor how the Delaware courts interpret the new DGCL amendments and provide further updates as appropriate.
For more information on this or any related matter, please contact any member of Wilson Sonsini's corporate governance or corporate governance litigation practices.
[1] 311 A.3d 809 (Del. Ch. 2024).
