2002 Summary of Amendments to the Delaware General Corporation Law
A number of amendments to the Delaware General Corporation Law (the "DGCL") became effective on July 1, 2002. While many of the amendments are technical in nature, several important changes have been made to Sections 203, 212 and 223 to clarify that references to "voting stock" or "shares" in the DGCL are to be interpreted with reference to the total voting power of all shares, rather than their number. A brief summary of the amendments is set forth below.
Filings with the Secretary of State
Section 103(c)(6), which addresses the filing of instruments with the Secretary of State of the State of Delaware (the "Secretary of State"), has been amended to clarify that any instrument filed with the Secretary of State in accordance with this section will be maintained permanently as a public record.
Boards of Directors
Section 141(b), which deals with the composition of and voting by boards of directors, has been amended to clarify that only natural persons may serve as directors of a Delaware corporation.
Section 158, which authorizes the issuance of stock certificates, has been amended to make clear that Delaware corporations may not issue stock certificates in bearer form.
References to "Voting Stock" or "Shares" in the DGCL
Sections 203(a)(2) and 203(c)(8) have been amended to clarify that references in Section 203 to a percentage of the "voting stock" or "shares" refer to a percentage of the voting power of such stock, not the number of shares of such stock. Section 212(a) provides that, where shares have more or less than one vote per share, references in the DGCL to "a majority or other proportion of stock" are interpreted as referring to "such majority or other proportion of the votes of such stock." However, the application of the voting power concept embodied in Section 212(a) to DGCL Section 203 was called into question by the decision of the Delaware Court of Chancery in In re Digex, Inc. Shareholders Litig., 2000 WL 33671760 (Del. Ch. Dec. 13, 2000), in which Chancellor Chandler found it likely that Section 212(a)'s voting power concept did not apply to Section 203. The Digex ruling, made in dicta, created uncertainty as to the appropriate interpretation of Section 203 in circumstances where a target corporation has more than one class or series of stock, one of which has more or less than one vote per share. The 2002 amendments eliminate this uncertainty. Thus, it is now clear that the calculation of whether a person is an "interested stockholder" (defined as a person owning 15% or more of the "voting stock" of the subject corporation, subject to certain exceptions) or has acquired a sufficient number of shares to satisfy Section 203(a)(2) (which, as amended, makes Section 203's restrictions inapplicable to a person who acquires 85% of the outstanding "voting stock" of the target in the transaction in which it becomes an interested stockholder), is made with reference to the total voting power of all shares, and not their number.
A conforming change was made to Section 212(a), adding the words "voting stock or shares" to clarify that Section 212(a) applies to all provisions of the DGCL that contain these words.
Finally, Section 223(c), which governs the filling of vacancies on boards of directors and of newly created directorships, was amended to clarify that an application by the holders of at least ten percent of the voting power of the corporation, not the total number of shares outstanding, is necessary to trigger the Court of Chancery's statutory authority to summarily order a meeting of stockholders to fill such a vacancy or newly created directorship.
Business Combinations with Interested Stockholders
Two additional amendments have been made to Section 203. First, Section 203(a)(2) was amended to clarify that, while shares owned by persons who are directors and also officers and by certain employee stock plans are not to be included in determining the total amount of shares that are outstanding for purposes of calculating the 85% exemption to Section 203, such shares are included in the determination of the amount of voting stock owned by an interested stockholder.
Section 203(c)(5) also has been amended to correct an internal cross-reference that had become incorrect as a result of a prior amendment to Section 203.
Notice to Stockholders Sharing an Address
The 2002 amendments also add a new Section 233 to the DGCL, which prescribes new rules for corporations seeking to comply with statutory notice requirements with respect to providing notices to stockholders who share an address. Section 233 conforms the DGCL with the "householding" amendments to the proxy rules promulgated under the Securities Exchange Act of 1934, which permit corporations to satisfy the requirements for sending proxy statements, information statements and certain other materials with respect to two or more stockholders sharing the same address by sending a single document to those stockholders. Specifically, Section 233 provides that, where a corporation is required to send notice to each of its stockholders under the DGCL, its certificate of incorporation, or its bylaws, the corporation will satisfy this requirement if it sends a single notice to two or more stockholders sharing the same address if such stockholders do not object in writing to the corporation within sixty days of having been given written notice by the corporation of its intention to send the single notice. Any such consent is revocable by the stockholder by written notice to the corporation. The section also applies to members of nonstock corporations.
Merger or Consolidation of Domestic Corporation and Partnership
Section 263(b), which authorizes the merger or consolidation of one or more Delaware corporations with one or more Delaware or non-Delaware partnerships, has been amended to correct the inadvertent deletion in a previous amendment of the word "limited" from the last sentence of that section.
Revocation of Voluntary Dissolution
Section 311 has been amended by adding a new subsection (c), which provides that the provisions of Section 211(c) (authorizing the Court of Chancery to order the holding of stockholder meetings to elect directors in certain circumstances) apply to corporations that have utilized Section 311 to revoke their voluntary dissolution. The amendment also provides that the period of time the corporation was in dissolution shall be included within the calculation of the 30-day and 13-month periods set forth in Section 211(c). In addition, the amendment provides that an election of directors may also be held at the special meeting of stockholders called under Section 311(a) to approve the revocation. The addition of subsection (c) conforms Section 311 to Section 312 (which governs the renewal, revival, extension or restoration of certificates of incorporation).
Renewal or Revival of Certificate of Incorporation
Section 312(i) has been amended to clarify that, after a renewal or revival of the certificate of incorporation of a corporation has been effected, the provisions of Section 211(c) shall apply, and the period of time that the certificate of incorporation was forfeited pursuant to Section 136(b) or was inoperative or void, or after its expiration by limitation (but not the period of time that the corporation was in dissolution), shall be included within the calculation of the 30-day and 13-month periods to which Section 211(c) refers.
Corporations Using "Trust" in Name
Section 395(b), which restricts the use of the word "trust" in corporate names, has been amended to correct the inadvertent omission of the word "Company" in referring to the Savings and Loan Holding Company Act.
Section 395(c) also has been amended to apply to corporations only (and not to any other person, firm, or association of persons), thereby limiting to corporations the restrictions contained in that Section.
Repeal of Charters of Corporations That Have Failed to Pay Franchise Taxes
Section 512 was amended in its entirety to permit the Secretary of State to utilize electronic communications, such as a website posting, to comply with its obligation to provide notice of corporations proclaimed void for failure to file franchise taxes.
- John F. Grossbauer is a partner and Nancy N. Waterman is an associate at Potter Anderson & Corroon LLP in Wilmington, Delaware. The views expressed herein are those of the authors and may not be representative of the views of the firm or its clients.