Delaware has approximately 2 million active domestic business entities. A frequently cited reason for Delaware’s preeminent position as a formation state is its modern and flexible business entity statutes.
In order to keep the statutes up-to-date, and therefore able to meet the rapidly evolving needs of its entities and their stakeholders, the state’s lawmakers enact amendments to its business entity laws every year.
Keeping track of the changes to these laws is imperative for the people owning, managing, or investing in Delaware entities, as well as the in-house and outside counsel who advise Delaware entities and their management and owners. This article helps all of those people by highlighting some of the most significant changes made to Delaware’s corporation, limited liability company, partnership, and limited partnership laws during the 2023 legislative session.
I. Amendments to the General Corporation Law (GCL) A. Senate Bill 114 enacted amendments to the GCL (Title 8, Sec. 101 et seq.) All amendments are effective August 1, 2023 unless noted otherwise. The amendments include the following: 1. Ratification of Defective Acts - Sec. 204, governing the ratification of defective acts by a corporation, is amended in several respects including the following: (1) To eliminate the requirement to file a certificate of validation with the Secretary of State where the ratified defective corporate act required the filing of a certificate under another sectin of the GCL, the certificate was filed, and no change is required to the certificate to give effect to the defective corporate act.
(2) To simplify the contents of the certificate of validation by, among other things, eliminating the need to set forth the underlying defective corporate act and the nature of the failure of authorization.
(3) To provide that no vote of stockholders on the ratification is needed if as of the adoption of the resolution by the board (formerly, the record date for determining the stockholders entitled to vote on the ratification) there are no shares of stock outstanding and entitled to vote on the ratification.
(4) To provide that where the holders of valid stock must vote on the ratification, the time for determining which shares are valid and entitled to vote is when the board adopted the resolution to ratify (formerly, the record date for determining the stockholders entitled to vote).
2. Amendments to the Certificate of Incorporation - Sec. 242, governing amendments to the certificate of incorporation, is amended in several respects including the following:
(1) To provide that unless the certificate of incorporation specifically provides otherwise, no meeting or vote of stockholders is required for an amendment that subdivides the issued shares of a class of stock into a greater number of shares (a forward stock split) so long as such class is the only class of the corporation’s capital stock then outstanding and such class is not divided into series.
(2) To provide that no vote is required in connection with such subdivision in order to increase the authorized number of shares of such class up to an amount proportionate to the subdivision.
(3) To provide that unless the certificate of incorporation specifically provides otherwise, a corporation can reclassify by combining the issued shares of a class into a lesser number of issued shares (a reverse stock split) if (A) the shares of the class are listed on a national stock exchange immediately before the amendment becomes effective and the corporation meets the listing requirements relating to the minimum number of stockholders class immediately after the amendment becomes effective, (B) the corporation has received a delisting notice from the national stock exchange and such amendment becomes effective before the final deadline to cure the delisting notice, (C) the amendment concomitantly decreases the authorized number of shares of capital stock, and (D) the votes cast for the amendment exceed the votes cast against the amendment, and if the amendment decreases the authorized number of shares of a class and class voting is required, the votes cast for the amendment by the members of the class also exceed the votes cast against the amendment.
3. Conversion of Other Entity to Delaware Corporation – Sec. 265, authorizing and governing conversions to a Delaware corporation, is amended in several respects including the following:
(1) To permit an other entity to adopt a plan of conversion setting forth, among other things, the terms and conditions of the conversion and the manner of converting or exchanging the equity interests of the entity to be converted.
(2) To provide that a plan of conversion may also set forth actions to be taken by the converted corporation in connection with the conversion, each of which must be approved in accordance with applicable law before the conversion. Once approved, any such action shall be deemed authorized, adopted, and approved and does not require any further action to be authorized, adopted, or approved.
The amendments to Sec. 265 apply to a corporation that either entered into a plan of conversion or obtained approvals for the conversion on or after August 1, 2023.
4. Conversion of Delaware Corporation to Other Entity – Sec. 266, authorizing and governing conversions of Delaware corporations, is amended in several respects including to permit the corporation to adopt a plan of conversion setting forth, among other things, the terms and conditions, and the manner of converting or exchanging the equity interests.
5. Transfer, Continuance, and Domestication of Delaware Corporation – Sec. 390, authorizing and governing transfers, continuances, and domestications, is amended in several respects including the following:
(1) To permit a corporation to adopt a plan of transfer, continuance, or domestication setting forth, among other things, the terms and conditions and the manner of converting or exchanging the corporation’s stock.
(2) To change the requirement for stockholder approval from all of the outstanding shares of stock to a majority of the outstanding shares of stock entitled to vote. However, if the corporation is transferring, domesticating, or continuing as a partnership, with one or more general partners, the approval of each stockholder who is to become a general partner is also required.
(3) To provide that for any corporation incorporated before August 1, 2023, any provision of the certificate of incorporation, voting trust, or other written agreement in effect on or before August 1, 2023 that restricts, conditions, or prohibits a merger or consolidation is deemed to apply to a transfer, domestication, or continuance unless such provision or agreement expressly provides otherwise.
The amendments to Sec. 390 apply to a corporation whose board of directors adopted a resolution approving a transfer, domestication, or continuance on or after August 1, 2023.
6. Some Other Amendments of Interest
1. Secs. 152 and 153 are amended to clarify that treasury shares may be sold for less than par value.
2. Sec. 157 is amended to clarify issues related to the delegation of authority to enter into transactions to issue rights or options.
3. Sec. 228 is amended to provide that notice of an action by stockholders upon consent without a meeting must be given to those non-consenting stockholders who were stockholders as of the record date for the action and who would have been entitled to notice of a meeting if the action was taken at a meeting and the record date was the same.
4. Sec. 260 is amended to confirm the authority of a corporation following a conversion or domestication to issue bonds and obligations and issue or cancel shares, rights, securities or interests.
5. Sec. 262 is amended in several respects included to give appraisal rights to stockholders in connection with transfers, continuances, and domestications. Appraisal rights will not be available when the market out exception applies. The amendments to Sec. 262 apply to mergers, consolidations, conversions, domestications, transfers, and continuances adopted or entered into on or after August 1, 2023.
6. Sec. 272 is amended to add a safe harbor for selling, leasing, or exchanging collateral assets that secure a mortgage or pledge without obtaining stockholder approval under Sec. 271.
B. Senate Bill 110, effective August 1, 2023, amends Sec. 103 to increase the courthouse municipality fee assessed on domestic corporate filings from $20 to $40.
II. Amendments to the Delaware Limited Liability Company Act (DLLCA), Delaware Revised Uniform Limited Partnership Act (DRULPA), and Delaware Revised Uniform Partnership Act (DRUPA)
A. Senate Bill 113 enacted amendments to DLLCA (Title 6, Sec. 18-101 et seq.). Senate Bill 112 enacted amendments to DRULPA (Title 6, Sec. 17-101 et seq.) Senate Bill 115 enacted amendments to DRUPA (Title 6, Sec. 15-101 et seq.) All amendments are effective August 1, 2023.
1. Mergers and Consolidations – Secs. 18-209, 17-211, and 15-902 are amended to confirm that an amendment to a LLC agreement or partnership agreement or adoption of a new LLC agreement or partnership agreement may be effected only with respect to the LLC agreement or partnership agreement of the surviving or resulting LLC, LP, or partnership, and not the non-survivor.
2. Termination of Protected Series – Secs. 18-215 and 17-218 are amended to permit the revocation of termination of a protected series before the completion of the winding up of the protected series.
3. Dissolution of Registered Series – Secs. 18-218 and 17-221 are amended to permit the revocation of dissolution of a registered series before the filing of a certificate of cancellation of the certificate of registered series with the Secretary of State.
4. Divisions – Secs. 18-217 and 17-220 are amended to provide for the filing of a certificate of amendment to a certificate of division. An amendment must be promptly filed if the name or business address of the division contact, set forth in the certificate of division, changes or any other information in the certificate of division changes. The requirement does not apply after the expiration of 6 years following the effective date of the division. The sections are also amended to clarify that a dividing LLC or LP is divided into distinct and independent division LLCs or LPs and to confirm that a dividing LLC or LP need not be a surviving LLC or LP.
5. Subscriptions – New Secs. 18-506, 17-506, and 15-208 are added to confirm that a subscription for LLC, LP or partnership interests is irrevocable if the subscription states that it is irrevocable to the extent provided by the terms of the subscription.
6. General Partners of Series LPs – Secs. 17-218 and 17-221 are amended to clarify that the rule for designating a general partner of a series LP applies only to the initial general partner.
7. Foreign LLP Annual Report – Sec. 15-1003 is amended to confirm that an annual report must be filed by foreign LLPs.
8. Definition of Foreign Partnership – Sec. 15-101 is amended to define a foreign partnership as a partnership formed under the laws other than the laws of Delaware.
B. Senate Bill 110, effective August 1, 2023, amends Sec. 18-206 to increase the courthouse municipality fee assessed on domestic and foreign LLC filings from $20 to $40.
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