Effective August 1, 2022, several amendments have been made to the General Corporation Law of the State of Delaware (the “DGCL”) which, among other things, extended personal liability protections to corporate officers, expanded a board’s ability to delegate stock and option issuing authority, modified the notice requirement for a “virtual” meeting of stockholders adjourned to another time, eliminated the requirement to make available a list of stockholders during a meeting of stockholders, and expanded appraisal rights for beneficial owners.
Corporate Officers’ Personal Liability
The DGCL was amended to allow any Delaware corporation to include exculpatory provisions in its certificate of incorporation to limit the personal liability of corporate officers against certain claims. Previously, these protections extended only to a company’s directors.
Delaware corporations can now adopt charter provisions that limit liability for certain officers for certain breach of fiduciary duty claims. Directors and officers of Delaware corporations remain liable for claims brought by stockholders for breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct, and for transactions from which the individual derived an improper personal benefit.
The limit of liability only applies to officers authorized to receive service of process under Delaware law, including the president, chief executive officer, chief financial officer, chief operating officer, chief legal officer, chief accounting officer, controller, and those identified in filings with the Securities and Exchange Commission.
The limitation on personal liability for corporate officers is not automatic. An existing Delaware corporation wishing to extend the limit on liability afforded by the DGCL to its officers will need to amend its certificate of incorporation, which requires both board and stockholder approval, in addition to any company-specific corporate governance requirements. A newly-formed Delaware corporation should consider including a provision in its certificate of incorporation providing for a limitation on personal liability for both officers and directors.
Delegating Authority to Issue Stock and Options
While the DGCL has been expanded in recent years to allow boards and board committees to delegate authority to grant stock options and other rights to acquire stock, there were limits to this authority. These amendments are intended to clarify and make more consistent the process by which a corporation can delegate stock and option issuing authority.
The DGCL was amended to allow a Delaware corporation’s board or a board committee, if so authorized, to delegate to an individual or body the authority to issue stock, sell treasury shares, and issue rights or options to acquire stock. These amendments give Delaware corporations increased flexibility in delegating equity grant-making authority. Under the amendments, a board may delegate this authority by adopting a resolution that fixes (i) the maximum number of shares of stock, rights, or options that the delegate may issue or sell; (ii) a time period during which the issuances or sales may occur; and (iii) the minimum amount of consideration to be received for the issuances or sales. An individual or body delegated authority by a board or board committee may not sell or issue to themselves any stock, rights, or options.
Additionally, the amendments eliminated the requirement that the terms of a right or option be set forth or incorporated by reference in an instrument, clarifying that rights or options may be issued either in book entry or electronic form.
The amendments provide Delaware corporations with increased flexibility to delegate authority to administer their equity plans. Prior to a board’s delegation of authority to issue stock and options, it should confirm that the company’s certificate of incorporation (and, if applicable, board committee charter), equity plan document, and other governing documents permit the delegation. The company should also consider whether board approval for the indemnification of the party delegated authority is necessary or advisable (if not already provided for by the company’s certificate of incorporation, its by-laws, or otherwise).
Notice of Stockholder Meetings
The DGCL was amended to clarify that unless otherwise required by a corporation’s by-laws, when a “virtual” meeting of stockholders is adjourned to another time or place (including an adjournment of a “virtual” meeting resulting from technical difficulties), notice does not need to be given of the adjourned meeting time, place, and/or means of remote communication, if such details are displayed on the same electronic network used to enable stockholders to participate in the meeting virtually or set forth in the original notice. With respect to the latter, corporations may address the potential for technical failures in their meeting notices and provide advance adjournment notice, procedures, and instructions. Prior to the amendments, the only way a corporation could bypass the formal notice requirement was if the time, place, and/or means of remote communication were announced at the meeting at which the adjournment was taken.
The DGCL was amended and no longer requires a corporation to make available a list of stockholders during a meeting of stockholders. However, the list still needs to be made available for inspection at least the ten days prior to the meeting.
An existing Delaware corporation should consider whether its by-laws track the old statutory language and, if so, then whether an update in light of these amendments is necessary (otherwise, the corporation would still have to comply with its by-laws and make the list available during the meeting).
Conversions and Appraisal Rights
The DGCL was amended to change the requirement for stockholder approval of the conversion of a Delaware corporation to another entity from all of the outstanding shares of stock to a majority of the outstanding shares of stock entitled to vote on the conversion. If the corporation is converting to a partnership with one or more general partners, then the conversion also requires approval of each stockholder who will become a general partner of the new entity. Pursuant to the amendments, the approval of the conversion under the governing document must occur prior to the effective date of the certificate of conversion filed with the Secretary of State of Delaware
On a related note, the DGCL was amended to provide appraisal rights in connection with the conversion of a corporation for stockholders who don’t vote in favor of the conversion (unless appraisal rights are denied pursuant to the “market out” exception, which applies to publicly traded shares).
Therefore, although conversions of Delaware corporations are theoretically easier to consummate as a result of the amendments, the availability of appraisal rights will likely deter many private Delaware corporations from converting to another entity without the approval of all stockholders because of the economic implications of appraisal rights. If you have any questions about any of the DGCL amendments, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.