Recent Amendments to Delaware Corporation and LLC Statutes: Adoption of Section 251(h) Facilitates Tender and Exchange Offers; Fiduciary Duties Obtain in LLC Absent Elimination; Public Benefit Corporations AuthorizedSullivan & Cromwell LLP - September 17, 2013
The State of Delaware recently enacted several significant changes to the Delaware General Corporation Law (“DGCL”) and the Delaware LLC Act (“LLC Act”).
Section 251(h); Back-end Mergers. The most significant amendment to the DGCL is new Section 251(h) that, subject to certain exceptions, permits parties entering into a merger agreement to “opt in” to eliminate a target stockholder vote on a back-end merger following a tender or exchange offer in which the acquiror accumulates sufficient shares to approve the merger agreement (a majority unless the target has adopted a higher vote requirement) but less than the 90% necessary to effect a short-form merger. DGCL Section 251(h) will eliminate in many cases the time and cost associated with a stockholder vote on a back-end merger; however, where regulatory or other constraints impose significant delays, DGCL Section 251(h) is unlikely to be helpful. DGCL Section 251(h) also facilitates the financing of two-step private equity-sponsored acquisitions because the tender offer and the merger can be closed substantially concurrently (generally, on the same day). It also will eliminate the need in most cases for targets to issue “top-up” options to friendly bidders who, before DGCL Section 251(h), needed to “top-up” the number of shares they were able to purchase in the tender offer to reach the 90% target share ownership needed to effect a short-form merger. DGCL Section 251(h) does not apply to transactions in which a party to the merger agreement is an “interested stockholder” of the target under DGCL Section 203(c) at the time the merger agreement is approved by the target board. In addition, there are a number of other possible limitations, outlined below, to the utilization of new DGCL Section 251(h).
The Delaware legislature also amended DGCL Section 262, the appraisal statute, to make clear that appraisal rights are available in the case of a 251(h) back-end merger (if they otherwise would be available, as they are in cash or partial-cash transactions), and that notice of appraisal rights can be effected through the applicable tender or exchange offer documents.
Section 18-1104 of the LLC Act; Default Fiduciary Duties. Delaware also recently amended the LLC Act to clarify, among other things, that, in the absence of a contrary provision in any LLC agreement, fiduciary duties are owed by managers and controllers and other persons who at law or equity would owe such fiduciary duties.
Sections 204/205; Ratification of Defective Acts. Delaware also enacted DGCL Sections 204 and 205 that, beginning April 1, 2014, will establish a safe harbor for ratifying defective corporate acts and issuances of “putative stock” resulting from proper authorization failures, and vest the Delaware Court of Chancery with jurisdiction over matters relating to such actions.
Public Benefit Corporations. The new Delaware legislation also authorized the creation of for-profit public benefit corporations that aim to produce a “public benefit” and to operate in a “responsible and sustainable manner”. Delaware public benefit corporations must be managed in a manner that balances (i) the stockholders’ pecuniary interests, (ii) the best interests of those materially affected by the corporation’s conduct, and (iii) the public benefit identified in its certificate of incorporation.
Shelf Corporations. Delaware also amended DGCL Sections 312(b) and 502(a) to discourage the formation (for use in the future) of “shelf” corporations with no directors or stockholders.
Section 152; Stock Issuances. Lastly, Delaware amended DGCL Section 152 (which relates to issuances of capital stock) to clarify that a board of directors may determine the price at which stock will be issued by reference to a formula.