News

Compliance Update: The 2016 Amendments to Delaware’s 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 2016 legislative session.
 
CT Corporation Note: To view the text of the amendments, see HB 371, HB 372, and HB 367.
 

Amendments to the Delaware General Corporation Law (DGCL)

 
House Bill 371 enacted amendments to Delaware's General Corporation Law (Title 8, Sec. 101 et seq.). The amendments are effective August 1, 2016 unless otherwise specified.  Highlights include the following:
 
Court of Chancery Jurisdiction - Sec. 111 was amended to permit the Court of Chancery to exercise jurisdiction over a civil action involving an instrument, document, or agreement (1) to which a corporation and one or more of its stockholders are parties and pursuant to which any one or more stockholders sell or offer to sell any of the corporation’s stock, or (2) by which a corporation agrees to sell, lease or exchange any of its property or assets and which by its terms provides that one or more stockholders approve of or consent to the sale, lease or exchange.  
 
Quorum and Voting Rules for Committees and Subcommittees – Sec. 141(c) was amended to provide that a majority of the directors serving on a committee or  subcommittee shall constitute a quorum for the transaction of business by the committee or subcommittee, unless the certificate of incorporation, the bylaws, a resolution of the board of directors or a resolution of a committee that created the subcommittee requires a greater or lesser number, provided that in no case shall a quorum be less than 1/3 of the directors. 
 
Sec. 141(c) was also amended to provide that the vote of the majority of the members of a committee or subcommittee present at a meeting at which a quorum is present shall be the act of the committee or subcommittee, unless the certificate of incorporation, the bylaws, or a resolution of the board or the committee requires a greater number. 
 
Execution of Stock Certificates – Sec. 158 was amended to provide that any two officers of the corporation who are authorized to do so may execute stock certificates on behalf of the corporation.  Previously, the signatures of the chairperson or vice-chairperson of the board of directors, or the president or vice-president, and the treasurer or an assistant treasurer, or the secretary or an assistant secretary was required.
 
Mergers – Sec. 251(h), which permits an acquisition via a short-form, back-end merger after a front-end tender or exchange offer if certain conditions are met was amended in several respects.  Among other things, the bill (1) clarifies that the procedure is applicable to a constituent that has any class or series of stock that is listed on a national securities exchange or held of record by more than 2,000 holders, (2) clarifies that the offer may be effected through separate offers for separate classes or series of stock, (3) provides that the offer may be conditioned on the tender of a minimum number or percentage of any class or series, (4) provides that in calculating whether the offeror has obtained the minimum amount of stock required, rollover stock and certain stock held by the offeror or by offeror affiliates may be included and that such stock may be excluded from conversion into the merger consideration, and (5) clarifies the meaning of the terms “affiliate”, “excluded stock”, “received” (with respect to certificated and uncertificated shares), and “rollover stock”.
 
Appraisal Rights - Sec. 262, which governs appraisal rights, was amended to provide that if immediately before the merger or consolidation the shares of the class or series of stock of the constituent corporation as to which appraisal rights are available were listed on a national securities exchange, the Chancery Court shall dismiss the proceedings as to all holders of such stock who are otherwise entitled to appraisal rights unless (1) the total number of shares entitled to appraisal exceeds 1% of the outstanding shares of the class or series eligible for appraisal, (2) the value of the consideration provided in the merger or consolidation for such total number of shares exceeds $1 million, or (3) the merger was approved pursuant to Secs. 253 or 267.
 
Sec. 262 was also amended to provide that at any time before the entry of judgment in the proceedings, the surviving corporation may pay to each stockholder entitled to appraisal an amount in cash, in which case interest will accrue only upon the sum of (1) the difference, if any, between the amount so paid and the fair value of the shares as determined by the Court, and (2) the interest theretofore accrued, unless paid at that time. 
 
Restoration of Certificate of Incorporation – Sec. 311 was amended to provide that within three years following the expiration of the time limited for the corporation’s existence as provided in its certificate of incorporation, a corporation may restore its certificate of incorporation.  The board must adopt a resolution recommending restoration, the stockholders must approve, and a certificate of restoration must be filed.  Sec. 311 was also amended to clarify that a corporation desiring to revoke its dissolution or restore its certificate of incorporation must file all annual franchise tax reports and pay all franchise taxes that the corporation would have had to file and pay if it had not dissolved or expired.
 
Revival of Certificate of Incorporation – Sec. 312 was amended to distinguish the procedure to restore a corporation’s certificate of incorporation if it has expired by limitation from the procedure to revive a corporation’s certificate of incorporation when it has become forfeited or void.  Sec. 312, as amended, only applies to a corporation whose certificate of incorporation has become forfeited or void.  This procedure is now called “revival”.  References to the terms “renewal”, “extension” and “restoration” were deleted.  Sec. 312 was also amended to clarify that the section is not applicable to a corporation whose certificate of incorporation has been revoked or forfeited by the Chancery Court pursuant to Sec. 284.  
 
In addition, Sec. 312 was amended to provide that for purposes of this section the board of directors consists of the persons, who, but for the certificate of incorporation having become forfeited or void, would be the duly elected or appointed directors, and to provide that the requirement for authorization of a revival by the board of directors is satisfied if a majority of the directors then in office, even though less than a quorum, or the sole director then in office, authorizes the revival.  
 
Effective Dates -  The amendments are effective August 1, 2016 except for the following:
 
  • The amendment to Sec. 111 is effective only with respect to instruments, documents, and agreements entered into on or after August 1, 2016. 
  • The amendments to Sec. 251(h) are effective only with respect to merger agreements entered into on or after August 1, 2016.  
  • The amendments to Sec. 262 are effective only with respect to transactions consummated pursuant to agreements entered into (or, in the case of mergers pursuant to Sec. 253, resolutions adopted, or, in the case of mergers pursuant to Sec. 267, authorizations provided) on or after August 1, 2016, and appraisal proceedings arising out of such transactions. 
 

Amendments to the Delaware Limited Liability Company Act (DLLCA)

 
House Bill 372 amended the Delaware Limited Liability Company Act (Title 6, Chapter 18, Sec. 18-101 et seq.).  The amendments are effective August 1, 2016 and include the following:
 
Service of Process on Series - Sec. 18-105 was amended to specify how service of process on a series of a Series LLC may be effected, and to provide that if service of process is made upon the LLC’s registered agent on behalf of the series or upon the Secretary of State on behalf of the series, such process shall include the name of the LLC and the name of the series.
 
Series LLC – Agreement to be Liable – Sec. 18-215(b) was amended to clarify that neither the first sentence of the subsection (which provides for the limitation of liability for the LLC and its series), nor any language in an LLC agreement shall be construed as restricting a series, or an LLC on behalf of a series, from agreeing to be liable for any or all of the debts, liabilities, obligations or expenses incurred, contracted for or otherwise existing with respect to the LLC or any other series thereof, or restricting an LLC from agreeing to be liable for any or all of the debts, liabilities, obligations or expenses incurred, contracted for or otherwise existing with respect to a series.  
 
Approval by Members and Managers – Secs. 18-302 and 18-404 were amended to provide that actions by members and managers may be taken without a meeting, prior notice or a vote if “consented to or approved, in writing, by electronic transmission or by any other means permitted by law”.  Previously, the sections read “consented to in writing or by electronic transmission.” 
 
Consent to Actions – Various sections were amended to eliminate the requirement for a written consent and thereby permit the members (or in some cases their personal representatives) to consent to the specified action by means other than a writing.  The sections include Secs. 18-215(k) (termination of series), Sec. 18-304 (dissociation of bankrupt member), Sec. 18-702(a) (assignment of interest), Sec. 18-704 (right of assignee to become member), Sec. 18-801(a) (dissolution), and Sec. 18-806 (revocation of dissolution).
 
Voluntary Assignment of Interests by Sole Member – Sec. 18-704 was amended to provide that unless otherwise provided in the LLC agreement by a specific reference to Sec. 18-704(a)(3) or as otherwise provided in connection with the assignment, upon the voluntary assignment by the sole member of the LLC of all of the LLC interests to a single assignee, the assignee is admitted as a member of the LLC.  It also provided that an assignment will be voluntary if it is consented to by the member at the time of the assignment and is not effected by foreclosure or other similar legal process.
 

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

  
House Bill 367 amended the Delaware Revised Uniform Limited Partnership Act (Title 6, Chapter 17, Sec. 17-101 et seq.).  The amendments are effective August 1, 2016 and include the following:
 
Service of Process on Series - Sec. 17-105 was amended to specify how service of process on a series of a Series LP may be effected, and to provide that if service of process is made upon the LP’s registered agent on behalf of the series or upon the Secretary of State on behalf of the series, such process shall include the name of the LP and the name of the series.
 
Series LP – Agreement to be Liable – Sec. 17-218(b) was amended to clarify that neither the first sentence of the subsection (which provides for the limitation of liability for the LP and its series), nor any language in a partnership agreement shall be construed as restricting a series, or an LP on behalf of a series, or a general partner associated with a series from agreeing to be liable for any or all of the debts, liabilities, obligations or expenses incurred, contracted for or otherwise existing with respect to the LP generally or any other series thereof, or restricting an LP  or a general partner of the LP from agreeing to be liable for any or all of the debts, liabilities, obligations or expenses incurred, contracted for or otherwise existing with respect to a series.  
 
Approval by Partners Without a Meeting – Secs. 17-302 and 17-405 were amended to provide that actions by partners may be taken without a meeting, prior notice or a vote if “consented to or approved, in writing, by electronic transmission or by any other means permitted by law”.  Previously, the sections read “consented to in writing or by electronic transmission.” 
 
Consent to Actions – Various sections were amended to eliminate the requirement for a written consent and thereby permit the partners (or in some cases their personal representatives) to consent to the specified action by means other than a writing.  The sections include Sec. 17-218(k) (termination of series), Sec. 17-704(a) (right of assignee to become limited partner), Sec. 17-801 (dissolution), Sec. 17-806 (revocation of dissolution), Sec. 17-401(b) (admission of general partner), and Sec. 17-402 (events of withdrawal of general partner).   
 

Conclusion

 
The 2016 amendments to Delaware’s business entity statutes contain some significant changes.  Attorneys, business owners, investors and managers will benefit from familiarizing themselves with these important pieces of legislation.
 
 

Questions?

We are ready to help. Contact us today.

Request a Custom Quote

Have a specific question about a product? A CT Specialist will follow up with a custom quote along with a comprehensive assessment of your needs.