Delaware Proposes Amendments to General Corporation Law to Facilitate Certain Actions

Amendments would make it easier to:

• Fix defective corporate acts
• Effect reverse and forward stock splits and changes in authorized shares
• Pledge or dispose of certain corporate assets without stockholder approval

Last month, the Delaware State Senate passed several amendments to the Delaware General Corporation Law (“DGCL”) designed to address practical issues companies face when completing certain corporate actions.  The amendments now go to the House and, if adopted, would be signed into law by the Governor and become effective August 1, 2023. We believe it is likely that these amendments will be approved, so we have prepared this client alert to help prepare clients who may be impacted by these changes. 

Ratifying Defective Corporate Acts.  

In 2014, Delaware adopted Section 204 of the DGCL to provide corporations with a statutory mechanism to ratify previously void or voidable corporate actions, such as failing to authorize stock issuances or issuing stock beyond a previously authorized amount.  In practice, though, such mechanisms proved burdensome and time consuming, particularly in transactional matters such as public offerings and M&A deals where companies must fix any issues prior to closing.

The proposed amendments seek to simplify and expedite the ratification process by either eliminating the requirement to file a certificate of correction or validation with the Delaware Secretary of State in many circumstances or significantly reducing the level of detail required in the certificate.  Under the proposed amendment, a company will only be required to file a certificate of validation if any section of the DGCL independently requires that a certificate be filed for a defective act being ratified and such certificate was never filed or such act must be amended to give effect to the ratification.

The proposed changes not only streamline the ratification process for companies but also reduce the information required in the certificate, making it faster for the Company making the filing and easier for the Delaware Secretary of State to review and process the certificates more efficiently.  

Stock Splits and Changes in Number of Authorized Shares

Historically, under Delaware law, stock splits and changes in authorized shares have required an absolute majority vote of stockholders to approve the required amendment to the company’s certificate of incorporation (i.e., approval of a majority of all outstanding shares entitled to vote, not just a majority of the quorum or votes in favor exceeding votes against).  Stock splits – particularly reverse stock splits – have become a widely used strategy for public companies to increase their stock price when it falls below minimum price requirements imposed by exchanges (see, e.g., Nasdaq Marketplace Rule 5550(a)(2) and NYSE Listed Company Manual Section 802.01).  However, obtaining an absolute majority has become increasingly difficult to achieve because brokers, dealers and other direct holders own the majority of shares in “street name”, and such holders have refused to exercise discretionary authority (i.e., acting on behalf of the ultimate beneficial owners) to vote on such matters either by abstentions or simply refusing to vote (i.e., broker non-votes).  As a result, many companies seeking to effect a reverse stock split have difficulty obtaining the required vote, particularly when time is of the essence such as when a de-listing notice has been issued for a low stock price.

The proposed amendments to Section 242 of the DGCL aim to address this issue.  Unless otherwise provided in a company’s certificate of incorporation, the vote requirement will be relaxed from an absolute majority of the outstanding shares to a majority of the votes cast, thus rendering abstentions and broker non-votes irrelevant for determining the outcome.

Separately, forward stock splits (and in some cases the need for an increase in the number of authorized shares) most often occur in connection with public or other offerings seeking to adjust the number of outstanding shares based on pricing of those offerings.  However, obtaining stockholder approval in these circumstances is impractical.  In response, companies resort to a practice whereby boards will ask stockholders to approve several alternative ratios for the stock split, and the board thereafter approves the most appropriate ratio.  It is important to note that there is no economic or voting consequence to stockholders as all shares are subject to the same treatment, so realistically these changes should be relatively non-controversial; however, it is often times difficult to timely explain these considerations prior to such vote which makes obtaining this approval more difficult.

The proposed amendments to Section 242 eliminate the need for stockholder approval to amend a company’s certificate of incorporation to effect forward stock splits, unless otherwise required in a company’s certificate of incorporation.

Dispositions of Pledged or Mortgaged Assets

For years, there has been debate over whether insolvent corporations are required to comply with Section 271 of the DGCL, which requires stockholder approval for the sale or other disposition of substantially all of a corporation’s assets.  In its recent decision in Stream TV Networks, Inc. v. SeeCubic, Inc., 279 A3d 323 (Del. 2022), the Supreme Court of Delaware laid the matter to rest and clarified that there is no such exception under Delaware law, noting that “a common law insolvency exception, if one ever existed, did not survive the enactment of Section 271.” (id. at 337)

Under the proposed amendments to Section 272 of the DGCL, the legislature would provide a safe harbor from the Section 271 stockholder approval requirements in connection with sales or dispositions of assets subject to a mortgage or pledge if certain conditions are met.

Specifically, the proposed amendment to Section 272 would permit sales of such assets without stockholder approval only in cases in which the secured party thereof has the right to sell such assets without the corporation’s consent and either:

(i) the secured party exercises such right or

(ii) in lieu of the secured party exercising such right, the board of directors authorizes an alternative transaction involving a sale, lease or exchange of the secured property or assets, either with the secured party or with another person, that reduces or eliminates the liabilities or obligations secured by such property or assets. However, this authorization can only proceed if:

1. the value of the secured property or assets to be disposed of does not exceed the amount of liabilities or obligations reduced or eliminated as a result of such alternative transaction; and
   
2. such transaction is not prohibited by the law governing the secured party’s mortgage or pledge.

These proposed amendments to Section 272 aim to provide a clear framework and exemption from the stockholder approval requirements of Section 271, in certain circumstances and subject to the specified conditions being satisfied. One item of note is that the proposed amendments to Section 272 do not create a broad “general insolvency” exception to Section 271 requirements (i.e., these amendments do not fully adopt the argument that the Delaware Supreme Court rejected in SeeCubic, Inc.), rather they seek to provide a safe harbor for secured creditors to realize the value of their securitization against the assets of a company. 

We anticipate that these amendments will be adopted by the House and signed into law by the Governor.  These amendments adequately address the problems that companies and practitioners have been facing for several years and represent a step forward for Delaware corporations.

For more information, contact your CFDB lawyer or