Compliance Update: The 2013 Amendments to Delaware s Business Entity Laws WH ITE PAPER

Compliance Update: The 2013 Amendments to Delaware s Business Entity Laws WH ITE PAPER

CT Representation Services COMPLIANCE UPDATE: THE 2013 AMENDMENTS TO DELAWARE S BUSINESS ENTITY LAWS Every year Delaware amends its business entity laws. The managers, owners and legal advisors for Delaware s more than one million corporations, LLCs, LPs, and partnerships need to keep abreast of these amendments. This White Paper provides a summary of the 2013 amendments, most of which go into effect on August 1. INTRODUCTION Delaware has approximately one million active domestic corporations, limited liability companies (LLCs), limited partnerships (LPs) and general and limited liability partnerships (GPs and LLPs). A frequently cited reason for Delaware s preeminent position as a formation state is its modern and flexible business entity environment. The state has achieved this reputation through a variety of factors. One is that every year the state s lawmakers consider and enact amendments to its business entity statutes, which allows Delaware to meet the rapidly evolving needs of its entities. Keeping track of the changes to these laws is imperative for, among others: Managers of a Delaware business entity Owners and investors in Delaware entities In-house and outside counsel who advise Delaware entities Page 2 www.ctcorporation.com

Anyone else who may form or buy a business and who will have to select a formation state This White Paper helps all of those people keep track of the changes made to Delaware s corporation, LLC, LP and partnership laws during the recently completed 2013 legislative session. CHANGES TO THE GENERAL CORPORATION LAW (GCL) House Bill No. 127, effective August 1, 2013 unless otherwise specified, enacted various amendments to the General Corporation Law (Title 8, Chapter 1 of the Delaware Code), including the following: Ratification of Defective Acts Two new sections addressing this issue were added to the GCL. These sections will become effective on April 1, 2014. HOUSE BILL NO. 127, EFFECTIVE AUGUST 1, 2013 UNLESS OTHERWISE SPECIFIED, ENACTED VARIOUS AMENDMENTS TO THE GENERAL CORPORATION LAW. New Sec. 204 establishes a procedure under which a corporation may ratify an overissue of stock, an election of directors, or another corporate act or transaction that due to a lack of compliance with the GCL, certificate of incorporation, bylaws or other agreement or plan is void or voidable. In order to ratify the corporate act, the board of directors must adopt a resolution. That resolution will have to be approved by the stockholders if the corporate act being ratified required stockholder approval. If the act being ratified would have required a filing with the secretary of state, then the corporation will have to file a certificate of validation with the secretary of state. The certificate of validation must set forth: a copy of the resolution the date of the resolution the provisions of the certificate that would have been required to initially authorize the defective corporate act if a certificate had previously been filed in conjunction with the defective corporate act, the title and date of that certificate Page 3 www.ctcorporation.com

The filing fee for the certificate of validation is $2,500 (plus any additional fee that may be required if the authorized capital stock is increased). New Sec. 205 authorizes the Delaware Chancery Court to ratify defective acts when the Sec. 204 procedure is not available and to rule on the validity and effectiveness of an act ratified pursuant to Sec. 204. An application for a court proceeding may be filed by the corporation, a director, stockholder, or other person claiming to be adversely affected by a Sec. 204 ratification. [A] DELAWARE PUBLIC CORPORATION DOES NOT HAVE TO OBTAIN STOCKHOLDER APPROVAL TO EFFECT A MERGER IF THE ENTITY SEEKING TO ACQUIRE THE DELAWARE PUBLIC CORPORATION OBTAINS, IN A TENDER OFFER, THE PERCENTAGE OF SHARES THAT WOULD HAVE BEEN REQUIRED TO ADOPT THE MERGER AGREEMENT AND CERTAIN OTHER REQUIREMENTS ARE MET... Practice Pointer: Each corporate act ratified under this new procedure will no longer be deemed void or voidable and the effectiveness will be retroactive to the time of the defective act. Consideration for Stock Issuance Sec. 152, which deals with the authorization and issuance of capital stock, was amended to clarify that the board of directors may determine the price for a stock issuance by approving a formula by which the price will be calculated. Approval of Mergers Following Tender Offers Sec. 251, which governs mergers, was amended to provide that, unless otherwise required by its certificate of incorporation, a Delaware public corporation does not have to obtain stockholder approval to effect a merger if the entity seeking to acquire the Delaware public corporation obtains, in a tender offer, the percentage of shares that would have been required to adopt the merger agreement and certain other requirements are met, including that: The merger agreement expressly provides that the merger will be governed by this provision The merger is effected as soon as practicable after the tender offer All shares converted in the merger receive the same consideration as was received in the tender offer No interested stockholders are parties to the merger Page 4 www.ctcorporation.com

Practice Pointer: A procedure commonly used to acquire a public corporation is a two-step process involving a tender offer followed by a short-form merger (that is, a merger where stockholder approval is not required). Normally, an acquirer must own 90 percent of the shares of its target to enter into a short-form merger. With this amendment, the acquirer will only have to obtain the percentage that was required to adopt the merger agreement (often a majority of shares). SEC. 312 OF THE GCL WAS AMENDED TO CLARIFY THAT ONLY A CORPORATION S DIRECTORS OR STOCK- HOLDERS AND NOT ITS INCORPORATOR MAY AUTHORIZE A RENEWAL OR REVIVAL OF ITS CERTIFICATE OF INCORPORATION. Deterring Shelf Corporation Formation Sec. 502 of the Franchise Tax Law was amended to provide that a corporation s annual franchise tax report must list a director or directors except for the initial report and a report filed in conjunction with a certificate of dissolution. The amendment also prohibits an incorporator from signing an annual report after the initial report. Sec. 312 of the GCL was amended to clarify that only a corporation s directors or stockholders and not its incorporator may authorize a renewal or revival of its certificate of incorporation. Practice Pointer: These amendments were intended to deter the practice of forming shelf corporations with no stockholders or directors with the intent of renewing or aging the corporation for use several years in the future. Public Benefit Corporations Senate Bill No. 47, effective August 1, 2013, added a new subchapter XV, Secs. 361 to 368, to the GCL governing Public Benefit Corporations (PBCs). A PBC is defined as a for-profit corporation organized under the GCL that is intended to produce a public benefit and operate in a responsible and sustainable manner. The statute also states that a PBC shall be managed in a manner that balances the stockholders pecuniary interests, the best interests of those materially affected by the corporation s conduct, and the public benefit. Page 5 www.ctcorporation.com

The PBC s certificate of incorporation must identify the public benefit to be promoted and state within its heading that it is a PBC. An existing Delaware corporation may become a PBC by amending its certificate of incorporation or by a merger approved by 90 percent of the outstanding shares of each class of stock. A PBC is required to provide periodic notices to stockholders regarding the efforts taken to achieve the public benefits the corporation was formed to promote. AMENDMENTS TO THE DELAWARE LIMITED LIABILITY COMPANY ACT (DLLCA) House Bill No. 126, effective August 1, 2013, enacted various amendments to the Delaware Limited Liability Company Act (Title 6, Chapter 18), including the following: SEC. 18-1101 WAS AMENDED TO STATE THAT THE PROVISIONS OF THE LLC ACT APPLY WHETHER THE LLC HAS ONE MEMBER OR MORE THAN ONE MEMBER. Mergers and Other Transactions Secs. 18-209, 18-212, 18-213, 18-214, and 18-216 were amended to confirm that the rights or securities of, or interests in an entity that is surviving a merger, consolidating, domesticating, converting, transferring or continuing may remain outstanding in connection with the merger, consolidation, domestication, transfer, continuance or conversion. Charging Order Sec. 18-703, which deals with charging orders, was amended to clarify that attachment, garnishment, foreclosure or other legal or equitable remedies are not available to a member s judgment creditor, whether the LLC has one member or more than one member. Single-Member LLCs Sec. 18-1101 was amended to state that the provisions of the LLC Act apply whether the LLC has one member or more than one member. Practice Pointer: These amendments were a reaction to court decisions in other states holding that certain sections of LLC acts, including the charging order section, did not apply to single-member LLCs. Page 6 www.ctcorporation.com

Fiduciary Duties Sec. 18-1104 was amended to confirm that in the absence of a statutory or contractual provision the rules of law and equity relating to fiduciary duties govern. This amendment settled a conflict between the Delaware Chancery Court, which held that the common law fiduciary duties of loyalty and care applied to managers in the absence of an explicit provision in the LLC agreement, and the Delaware Supreme Court, which held that the Chancery Court s holding had no precedential value and that it was for the legislature to decide whether default fiduciary duties exist. AMENDMENTS TO THE DELAWARE REVISED UNIFORM LIMITED PARTNERSHIP ACT (DRULPA) AND THE DELAWARE REVISED UNIFORM PARTNERSHIP ACT (DRUPA) SEC. 18-1104 WAS AMENDED TO CONFIRM THAT IN THE ABSENCE OF A STATUTORY OR CONTRACTUAL PROVISION THE RULES OF LAW AND EQUITY RELATING TO FIDUCIARY DUTIES GOVERN. House Bill No. 124 and House Bill No 123, effective August 1, 2013 unless otherwise specified, enacted various amendments to DRULPA (Title 6, Chapter 17) and DRUPA (Title 6, Chapter 15), including the following: Mergers and Other Transactions Secs. 17-215, 17-216, 17-217, 17-219, 15-902, 15-903, 15-904, and 15-905 were amended to confirm that in connection with a merger, domestication, transfer, continuance, or conversion, the rights or securities of, or interests in an entity surviving the merger, domesticating, converting, transferring or continuing, may remain outstanding in connection with the merger, domestication, transfer, continuance or conversion. Charging Order Secs. 17-703 and 15-504 were amended to clarify that attachment, garnishment, foreclosure or other legal or equitable remedies are not available to a partner s judgment creditor. Provisions Related to LLLPs House Bill 124 also enacted amendments to Secs. 17-104 and 17-214 affecting limited liability limited partnerships (LLLPs). An LLLP is an LP that files both a certificate of limited partnership under DRULPA and a statement of qualification under DRUPA. By so doing, its general partners will have the same limited liability as partners in a limited liability partnership. Page 7 www.ctcorporation.com

The amendments affecting LLLPs will be effective April 1, 2014 and, among other changes: Clarify which provisions of DRUPA apply to LLLPs Confirm that an LLLP s statement of qualification may be canceled if it fails to appoint a successor registered agent Confirm that a canceled LLLP may apply for reinstatement Confirm that an LP s status as an LLLP begins upon the effective date of its statement of qualification. CONCLUSION The 2013 amendments to Delaware s business entity statutes contain some significant changes for each entity type. All corporations may be able to utilize the new provisions permitting the ratification of certain defective actions. Publicly traded corporations can benefit from the amended merger provisions. And, LLCs have the benefit of clarity regarding fiduciary duties. In addition, other key changes can impact each entity. Attorneys, business owners, investors and managers will benefit from familiarizing themselves with these pieces of legislation. CONTACT US Registered Agent Corporate Filings Licensing and Bonds 111 Eighth Avenue New York, NY 10011 800-624-0909 www.ctcorporation.com This White Paper, brought to you by our staff of Compliance and Governance experts, was produced August, 2013. This document is for general information purposes and is not intended to be and should not be taken as legal advice. Page 8 www.ctcorporation.com