Delaware governor approves significant amendments to the Delaware General Corporation Law

On July 17, 2024, Governor John Carney signed into law several amendments to the Delaware General Corporation Law (“DGCL”) that are intended to address market uncertainty created by recent Chancery Court decisions. Effective on August 1, 2024, these amendments are intended to provide more predictability with respect to market practice and reassurance for businesses operating under Delaware law.

Key takeaways from these amendments:

• Stockholders will be permitted to enter into agreements with a corporation that grants the stockholders governance rights or limiting or prohibiting the corporation from taking certain actions.
• Stockholders will be allowed to recover the loss of premium that they would have received if a merger had been consummated, and to appoint a representative to enforce stockholder rights in a merger agreement.
• Board of directors will be able to approve the material terms of a document in substantial final form that is required to be filed with the Delaware Secretary of State.

Governance Rights in Stockholder Agreements

In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024), the Chancery Court held that the provisions of a stockholder agreement providing consent rights to stockholders over corporate actions and rights to determinate the composition of the board were invalid. The court reasoned  that the DGCL requires that the business and affairs of the corporation be managed by the board of directors.  Responding to the Moelis decision, the first set of recent amendments to the DGCL permit stockholder agreements that restrict a corporation from seeking board approval for certain actions or requiring stockholders approval. For example, a stockholder agreement may: (1) restrict or prohibit the corporation from taking specific actions,;(2) require the approval or consent of one or more persons or bodies (e.g., the board of directors, directors, or stockholders) before the corporation takes specific actions; and (3) mandate that the corporation or one or more persons or bodies will take or refrain from taking future specific actions.

Proponents of these amendments insist they are necessary to codify long-standing commercial practices; but that foundational point was strongly challenged in the amendment debate. Notably, the amendments do not alter existing fiduciary obligations. It is accordingly anticipated that unaffiliated stockholders will closely scrutinize any agreement purporting to restrict a board’s governance rights and obligations.

Possible Consequences of the Early Breach of Merger Agreements

In Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023), the Chancery Court held that a stockholder lacked the third-party beneficiary status necessary to seek damages for lost stockholder premium arising from the acquiror’s breach of the merger agreement. The Chancery Court further held that a corporation could not appoint itself as the stockholders’ agent to recover lost-premium damages.

The second set of amendments to the DGCL address the Crispo decision in two ways. First, the stockholders may agree to penalties or consequences for an earlier breach of the merger agreement that occurs due to the acquirer’s failure to consummate the merger. In the event of the acquirer's early breach of the merger agreement, the DGCL will allow parties to specifically establish damages based on the amount of any premium the stockholder would have received had the merger been consummated. Second, the stockholders may appoint a stockholder representative authorized to enforce the rights of the stockholder under a merger agreement. Such damages provisions will undoubtedly become a significant negotiating point in future transactions.

Formalities for Board Approval of Agreements and Other Questions in Blizzard

In Sjunde AP-Fonden v. Activision Blizzard, Inc., 2024 Del. Ch. LEXIS 63 (Del. Ch. Feb. 29, 2024) the Chancery Court concluded that the agreement approved by the board was not “an essentially complete” version due to the omission of several terms at the time of approval.  Reacting to this decision, the third set of DGCL amendments will permit a board approval of a corporate document based on its material terms and before the document is in final form. This new section also allows a document to refer back to the board’s approval of material terms when the document is filed with the Delaware Secretary of State.

Lastly, the amendment provides that, unless established in the merger or consolidation agreement, the disclosure letters and schedules concerning representations, warranties, covenants, or conditions that modify the merger agreement are not deemed part of the agreement. This change seeks to clarifies the Blizzard ruling that a final disclosure schedule must have been approved by the board in order to be considered fully authorized by the board.