On July 17, 2024, Delaware Governor John C. Carney signed into law several amendments to the General Corporation Law of the State of Delaware (DGCL). These amendments were first introduced by The Council of Corporation Law Section of the Delaware State Bar Association in March 2024, and were subsequently adopted by the Delaware General Assembly, as modified pursuant to Delaware Senate Bill 313 (SB 313) at the end of June 2024.
The amendments codify what is largely considered to be certain prevailing market practices in corporate governance, mergers, and other transformative transactions governed by Delaware law. They aim to specifically address concerns that the holdings in a recent line of caselaw coming out of the Delaware Court of Chancery were out of step with such practices. We discuss the relevant cases – Moelis, Activision, and Crispo – and their principal holdings, along with their legislative complements, at a high level in the summary that follows.
The amendments will go into effect on August 1, 2024, and will apply retroactively to all contracts and agreements (including merger and consolidation agreements) made by a Delaware corporation, as well as all contracts, agreements, and documents approved by the board of directors of a Delaware corporation (regardless of when made or approved). However, the amendments explicitly state that they will not apply to or affect any civil litigation that is pending or completed on or before August 1, 2024.
The full text of the amendments is available here.
Stockholder agreements and related authorizations
The case: In West Palm Beach Firefighters' Pension Fund v. Moelis & Co., the Chancery Court held, among other things, that certain governance, consent, and other “pre-approval” provisions in a stockholders agreement were facially invalid under the DGCL, because they substantially restricted the ability of the board to manage the business and affairs of the corporation in violation of DGCL § 141(a). These provisions included limitations on the board’s ability to change the size of the board, restrictions and requirements with respect to board and committee composition, and a list of 18 different types of corporate actions that were subject to pre-approval by the company’s founder before the board was permitted to act.
The market-practice issue: To varying degrees, stockholder agreements with provisions like those in Moelis have been customary in Delaware corporate practice for decades. These agreements have been a primary vehicle for granting significant stockholders contractual rights and have permitted them to participate in decision-making functions within the larger corporate enterprise. By calling into question the validity of these provisions, the Moelis decision introduced uncertainty into this long-standing market practice. This was surprising to practitioners, given Delaware’s pro-contract approach to private ordering, and prompted concern that, among other things, the floodgates would be opened to an influx of litigation challenging the validity of any similarly situated existing agreements that granted special governance rights to a particular investor (including activist settlement agreements).
The legislative solve: Amended DGCL § 122: The amendments explicitly address and partially abrogate the decision in Moelis by:
Board and stockholder approval processes
The case: In Sjunde AP-fonden v. Activision Blizzard, Inc., a stockholder challenged the validity of a merger, alleging a faulty process for obtaining board approval of the merger agreement, and deficient notice of the stockholder’s meeting to approve the merger agreement, in violation of Sections 251(b) and (c). The Chancery Court refused to dismiss plaintiff’s central claims, finding that it was reasonably conceivable (the low bar to survive a motion to dismiss) that:
The market-practice issue: As the defendants in Activision argued, “[g]iven the practical realities of negotiating merger agreements, boards commonly 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.” The “essentially complete” interpretation adopted by the court in Activision implicitly endorsed an interpretation of Section 251(b) that, at best, introduced uncertainty about the validity of mergers generally, and at worst upended established market practice for board approval processes for deals and merger agreements alike.
The legislative solve: New DGCL §§ 147, 232(g), and 268: In response to the Activision court’s holding that the statutory mandate of Section 251(b) requires a board to approve an “essentially complete” version of a merger agreement, the amendments add new Section 147. This section provides that whenever the DGCL requires board approval of a document (including merger and acquisition agreements), it can be approved in “final form or in substantially final form.”
The legislative synopsis expands upon what constitutes “substantially final form” for the purpose of new Section 147; a document will be deemed to be in “substantially final form” if all of the material terms are either set forth in the document or are determinable through other information or materials presented to or known by the board. In the event of any uncertainty as to whether the form of document initially approved by the board was substantially final, Section 147 also provides a mechanism that permits the board to ratify, after initial board approval, any document required to be filed (or required to be referenced in a filing) with the Delaware Secretary of State, so long as it does so prior to the effectiveness of the relevant filing.
Section 232 was amended to add new subsection (g), which addresses the ministerial deficiency of the stockholder notice that was articulated in Activision and provides that any materials included with a notice to stockholders would be deemed to be part of that notice.
In addition, to address the Activision court’s specific concerns that the surviving company charter and the disclosure schedules were omitted from the version of the merger agreement that was ultimately approved by the board, the amendments also enact new Section 268.
New Section 268(a) addresses the necessary board approvals and certain other ministerial requirements attendant to the adoption of a definitive merger agreement for an all-cash merger transaction, or any other merger (except a holding company reorganization under Section 251(g)) where the constituent stockholders receive any type of consideration other than stock in the surviving corporation. It includes the following three subparts:
Finally, new Section 268(b) articulates that, as a default rule, disclosure letters and schedules (used to modify or supplement representations, warranties, covenants, and conditions contained in a definitive agreement) will not be deemed part of the definitive agreement for the purposes of the DGCL, unless otherwise expressly stated in the agreement. Absent such an express statement, new Section 268(b) and its accompanying synopsis make clear that the DGCL does not require the board to formally approve final or substantially final disclosure letters or schedules, nor does it require such disclosure letters or schedules to be submitted to or adopted by the stockholders. Instead, they can be negotiated and prepared by officers and agents of the corporation at the direction of the board.
Merger agreement remedies: lost premium damages; stockholders’ representatives
The case: In Crispo v. Musk, the Chancery Court suggested (arguably in dicta, given the unusual procedural posture of the case) that “Con Ed” provisions (named after Con. Edison, Inc. v. N.E. Utilities, a 2005 decision from the US Court of Appeals for the Second Circuit applying New York law) – which purport to give a target company the right to seek expectancy damages on behalf of its stockholders in connection with a failed sales process – are potentially inconsistent with and may not be enforceable under Delaware law.
The Chancery Court’s analysis in Crispo was largely premised on the Second Circuit’s reasoning in Con Ed, which held that, under the “no third-party beneficiary” language of the merger agreement (which did not confer third-party beneficiary status to the target’s stockholders until after the consummation of the merger) and another provision which only permitted parties to the agreement (which did not include the target’s stockholders) to pursue damages for breach, the target company could not recover monetary damages representing the lost premium that would have been received if the merger had closed.
In a similar vein, the Crispo court held that there were two seemingly contradictory interpretations of the lost-premium provision. Under the first interpretation, the provision would be unenforceable because the target’s stockholders were not designated as third-party beneficiaries to the agreement generally or the provision specifically. The court explained that the target company had no right to recover lost-premium damages directly, as it had no right or expectation to receive consideration if the deal had closed. In other words, in a merger transaction, the consideration is paid to the stockholders, so the lost merger premium is a damage that is suffered by the target’s stockholders, not the target itself. The target therefore could not prevail under this theory because the lost-premium damages would be considered a contractual penalty that, unless the stockholders were made third-party beneficiaries, would be unenforceable under Delaware law.
The second interpretation of the lost-premium provision in Crispo recognized the target stockholders as third-party beneficiaries with rights to bring claims directly against the buyer. However, these rights would only accrue in the event the merger agreement had been terminated and specific performance was unavailable. Because, under the “curious procedural context” in which the case arose, the merger agreement was never validly terminated and the transaction ultimately closed, the plaintiff’s right to bring a suit under this theory never ripened.
The market-practice issue: The application of Con Ed’s approach under Delaware law was, until recently, a matter not directly addressed by Delaware courts. In the nearly 20 years since Con Ed, and prior to Crispo, many Delaware practitioners assumed that lost-premium damages were generally recoverable by a target company through one of two approaches: either by providing in the merger agreement that lost-premium damages were specifically within scope of the target company’s damages, or by allowing the target company, in its capacity as an agent of its stockholders, to pursue such damages on their behalf.
The court’s opinion in Crispo called into question the viability of both approaches. This potentially removed a powerful “stick” of lost-premium damages, which had presumably been a significant disincentive for buyer breaches. Consequently, the implications of this decision were thought to have potentially misbalanced the negotiating leverage between the parties by permitting buyers to abandon a deal with little economic repercussions.
The legislative solve: New DGCL § 261(a): The amendments add new subsection (a) to Section 261 to expressly address the uncertainty left in the wake of the Crispo court’s lost-premium ruling:
If you have any questions or want to discuss any issues relating to these DGCL amendments, please contact Christopher P. Giordano or Carina Meleca.