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The 2015 Amendments to Delaware Business Entity Laws

 
Delaware has more than one million active domestic corporations, limited liability companies, and partnerships.  A frequently cited reason for Delaware’s preeminent position as a formation state is its modern and flexible business entity environment.  The state has achieved this reputation through a variety of factors.  One is that every year, the state’s lawmakers consider and enact amendments to its business entity statutes, which allows Delaware to meet the rapidly evolving needs of its entities.
 
Keeping track of the changes to these laws is imperative for, among others:
 
  • The people managing a Delaware business entity
  • The people owning or investing in Delaware entities
  • In-house and outside counsel who advise Delaware entities
  • Anyone else who may form or buy a business and who will have to select a formation state
 
This article helps all of those people keep track of the changes made to Delaware’s corporation, limited liability company, and limited partnership laws during the recently completed 2015 legislative session.
 

Amendments to the General Corporation Law (GCL)

 
Senate Bill No. 75 enacted a number of amendments to Delaware's General Corporation Law (Title 8, Sec. 101 et seq.). The amendments go into effect on August 1, 2015 unless otherwise specified.  Highlights include the following:
 
Use of indistinguishable names – Sec. 102(a) was amended to authorize the Division of Corporations to waive the requirement that a corporation’s name must be distinguishable upon the records from other business entity names if the corporation or a predecessor entity previously made substantial use of the name (or a substantially similar name), the corporation made a reasonable effort to secure the other business entity’s written consent to use the name, and the waiver is in the state’s interests.
 
Fee shifting charter clause – Sec. 102(f) was added to provide that the certificate of incorporation may not contain any provision that would impose liability on a stockholder for the attorney’s fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in new Sec. 115.
 
Fee shifting bylaw – Sec. 109(b) was amended to provide that the bylaws may not contain any provision that would impose liability on a stockholder for the attorney’s fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in new Sec. 115.
 
Fee shifting and nonstock corporations – Sec. 114 was amended to provide that Secs. 102(f) and 109(b) do not apply to nonstock corporations.
 
Forum selection provisions – A new Sec. 115 was added which provides that the certificate of incorporation or bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in Delaware, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of Delaware. "Internal corporate claims" means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which the GCL confers jurisdiction upon the Court of Chancery.
 
Stock Issuance - Sec. 152 was amended to clarify that the board of directors may authorize stock to be issued in one or more transactions in such numbers and at such times as is determined by a person or body other than the board of directors or a committee of the board, provided the resolution authorizing the issuance fixes the maximum number of shares that may be issued, the time frame during which the shares may be issued and establishes a minimum amount of consideration for which the shares may be issued.  It was also amended to clarify that the formula for determining consideration may include reference to or be made dependent upon the operation of extrinsic facts.
 
Sec. 157 was amended to clarify that the formula for determining consideration for stock issued upon the exercise of rights and options may include reference to or be made dependent upon the operation of extrinsic facts.
 
Ratification of defective acts by corporation- Sec. 204, which sets forth the procedures through which a corporation may ratify a defective corporate act was amended in several respects including the following: 
 
  • Confirming that a board of directors’ resolution may include more than one defective act
  • Providing that the quorum and voting requirements for the board of directors and stockholders are those quorum and voting requirements applicable to each defective act, viewed on an act-by-act basis
  • Addressing the situation where the initial board of directors is not named in the original certificate of incorporation and has not been constituted by the incorporators
  • Providing that the notice to stockholders may either include the board’s resolution or certain specified information
  • Providing that the certificate of validation does not have to have the board resolution attached and instead must include certain specific information
  • Clarifying that a separate certificate of validation must be submitted for each defective act except for two limited exceptions
  • Changing the information that must be included in the certificate of validation
  • Clarifying which stockholders are entitled to vote and be counted for quorum purposes
  • Permitting publicly traded corporations to provide notice to stockholders by means of a public filing pursuant to the Securities Exchange Act
  • Clarifying how notice may be given when stockholders are acting upon consent
  • Clarifying that the failure of the board or an officer to approve an act or transaction may constitute a failure of authorization
  • Amending the meaning of the term "validation effective time"
  • Clarifying that Sec. 204 is not the exclusive means of ratifying corporate acts
 
Ratification of defective acts by Chancery Court- Sec. 205, which permits the Chancery Court to hear cases involving the ratification of a defective corporate act, was amended to confirm that the 120-day period during which a stockholder may challenge the ratification of defective acts begins from the later of the validation effective time and the time at which notice is given to the stockholder. 
 
Public Benefit Corporations- The subchapter governing public benefit corporations was amended as follows:
 
Sec. 362 was amended to provide that the name of a public benefit corporation may (but is not required to) contain the words “public benefit corporation” or abbreviations “P.B.C” or “PBC”.  If it does not, the corporation, before issuing shares must provide notice to the stockholder that it is a public benefit corporation (unless the issuance is pursuant to an offering registered under the Securities Act or the corporation has a class of registered securities.)
 
Sec. 363 was amended to provide that a corporation that is not a public benefit corporation may become one with the approval of two-thirds of the outstanding stock entitled to vote on the amendment to the certificate of incorporation or on the merger or consolidation that results in it becoming a public benefit corporation.  (Formerly, approval of 90% of the outstanding shares of each class  of stock, whether voting or nonvoting, was required.)
 
Sec. 363 was also amended to provide that a corporation that is a public benefit corporation may not, without the approval of two-thirds of the outstanding stock entitled to vote, amend the certificate of incorporation to delete the provision that it is a public benefit corporation or enter into a merger or consolidation that results in it no longer being a public benefit corporation.
 
Furthermore, Sec. 363 was amended to restrict appraisal rights where the shares of the public benefit corporation were listed on a national securities exchange or held of record by more than 2,000 stockholders.
 
Copies from SOS - Sec. 391 was amended to confirm that the Secretary of State may issue public records in the form of photocopies or electronic image copies and need not provide public records in any other form.
 
The amendments are effective August 1, 2015 except that (1) the amendments to Secs. 204 and 205 are effective with respect to defective acts and proposed issuances of putative stock ratified or to be ratified pursuant to a resolution adopted by a board of directors on or after August 1, 2015, (2) the amendments to Sec. 363 are effective only with respect to mergers and consolidations consummated pursuant to agreements entered into on or after August 1, 2015, or in the case of amendments, amendments approved by the board of directors on or after August 1, 2015, and (3) the amendment to Sec. 391 is effective June 24, 2015.
 

Amendments to the Delaware Limited Liability Company Act (DLLCA)

 
Senate Bill 78 amended the Delaware Limited Liability Company Act (Title 6, Chapter 18 et seq.).  The amendments are effective August 1, 2015 unless stated otherwise and include the following:
 
Proxies - Sec. 18-204, which deals with the granting of powers of attorney and the circumstances upon which they will be considered irrevocable, was amended to confirm that the provisions apply to proxies as well as powers of attorney and to confirm that the provisions shall not be construed to limit the enforceability of a proxy or power of attorney that is part of an LLC agreement.
 
Class or Group voting - Secs. 18-209, 18-213, 18-215, 18-216, 18-801, and 18-803 were amended to delete the default requirement for a class or group vote of members in connection with a merger, consolidation, transfer, continuance, termination and winding up of series, conversion, and windup of an LLC.  They were also amended to provide that an LLC whose original certificate of formation was filed with the Secretary of State and effective on or before July 31, 2015 will continue to be governed by the default requirement of a class or group vote unless the LLC agreement provides otherwise. 
 
Delegation of management – Sec. 18-407 was amended to confirm that unless otherwise provided in the LLC agreement a delegation of the rights and powers to manage and control the business and affairs of an LLC by a member or manager is irrevocable if it states that it is irrevocable.
 
Copies from SOS - Sec. 18-1105 was amended to confirm that the Secretary of State may issue public records in the form of photocopies or electronic image copies and need not provide public records in any other form.  This amendment went into effect on June 24, 2015. 
 

Amendments to the Delaware Revised Uniform Limited Partnership Act (DRULPA)

 
Senate Bill 77 amended the Delaware Revised Uniform Limited Partnership Act (Title 6, Chapter 17 et seq.).  The amendments are effective August 1, 2015 unless stated otherwise and include the following:
 
Proxies – Sec. 17-204, which deals with the granting of powers of attorney and the circumstances upon which they will be considered irrevocable, was amended to confirm that the provisions apply to proxies as well as powers of attorney and to confirm that the provisions shall not be construed to limit the enforceability of a proxy or power of attorney that is part of a partnership agreement.
 
Class or Group voting - Secs.  17-204, 17-211, 17-214, 17-216, 17-218, 17-218, 17-219, 17-801, 17-803, and 17-806 were amended to delete the default requirement for a class or group vote in connection with certificates of cancellation, mergers and consolidations, conversions to a limited liability limited partnership, transfers or continuances, termination and winding up of series, conversions, the dissolution and winding up of a limited partnership and the revocation of dissolution.  The sections were also amended to provide that an LP whose original certificate of limited partnership was filed with the Secretary of State and effective on or prior to July 31, 2015, will continue to be governed by the default requirements for a class or group vote as in effect on July 31, 2015 (except for the vote regarding a certificate of cancellation, conversions to a limited liability limited partnership, and the revocation of dissolution), unless otherwise provided in its partnership agreement.
 
Delegation of management – Sec. 17-403 was amended to confirm that unless otherwise provided in the partnership agreement a delegation of the rights and powers to manage and control the business and affairs of an LP by a general partner is irrevocable if it states that it is irrevocable.
 
Copies from SOS - Sec. 17-1107 was amended to confirm that the Secretary of State may issue public records in the form of photocopies or electronic image copies and need not provide public records in any other form.  This amendment went into effect on June 24, 2015. 
 

Conclusion

 
The 2015 amendments to Delaware’s business entity statutes contain some significant changes.  Attorneys, business owners, investors, and managers will benefit from familiarizing themselves with these pieces of legislation.
 
​By Sandra B. Feldman, Publications Attorney for CT.
 
 

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