2022 Amendments to the Delaware General Corporations Act and Alternate Entity Statutes | Saul Ewing Arnstein & Lehr LLP

On July 27, 2022, Delaware Governor John Carney signed into law the 2022 Amendments to the Delaware General Corporations Law (the “DGCL”), the Delaware Limited Liability Corporations Act ( the “LLC Act”), the Delaware Revised Uniform Limited Partnership Act (the “LP Act”) and the Delaware Revised Uniform Partnership Act (the “Partnership Act”). LLC law, LP law, and partnership law are sometimes referred to as the “alternative entity laws.”

No changes were made to the Delaware Statutory Trust Act.

Each of the changes will come into effect on August 1, 2022.

What you need to know :

Among other changes, these modifications:

• Extend personal liability protections to corporate officers;
• Expand expert review rights for beneficial owners; and
• Facilitate the domestication process for foreign entities seeking to incorporate in Delaware.

Below is a brief summary of the changes.

GENERAL COMPANY LAW

Civil Liability of Corporate Officers

The most significant change to the DGCL is the extension of the Section 102(b)(7) personal liability exemption to corporate officers. Previously, Section 102(b)(7) only allowed personal liability exemptions for directors of corporations. This discrepancy between directors’ and officers’ liability has often created problems in litigation involving persons acting as both directors and officers of corporations. In such cases, a person could be exempt from liability as a director while remaining liable as an officer.

The newly revised Section 102(b)(7) corrects this discrepancy by allowing corporations to adopt exculpatory provisions in their certificates of incorporation that limit or eliminate the personal liability of officers, as well as directors. As with directors’ liability, corporations can only limit an officer’s liability for breach of duty of care. Specifically, executives can only be exempted from due diligence claims brought directly by shareholders. Officers remain liable for claims of breach of fiduciary duty brought directly by the company or indirectly by shareholders, as well as breaches of duty of loyalty and willful acts or omissions.

The liability waiver under section 102(b)(7) is only available to executives who are entitled to receive service of process under Delaware law. These officers include the president, CEO, chief financial officer, chief operating officer, chief legal officer, controller, treasurer, chief accounting officer, and other individuals named as executives in SEC filings.

Authorization to issue shares and options

The 2022 amendments also grant company directors the possibility of delegating their power to issue shares and options to a natural or legal person. These amendments build on earlier amendments giving executives the power to grant options, but leaving the board responsible for setting the terms of the rights or options. This distinction has created opportunities for corporations to inappropriately issue stock, options and rights. The 2022 amendments aim to clarify the process and eliminate opportunities for boards and leaders to make these mistakes.

It is important to note that natural or legal persons to whom such power has been delegated are not authorized to issue shares, options or rights to themselves. To delegate this power, the board of directors must pass a resolution specifying the details of the issue, including the number of shares, options or rights to be issued and the amount of the consideration.

Access to the list of shareholders

Additionally, the 2022 amendments eliminate the requirement for corporations to provide shareholder lists at all shareholder meetings. Now, under Section 219(a), corporations are only required to provide the list of shareholders during the 10-day period preceding the shareholders’ meeting, not at the meeting itself.

Assessment rights

A significant addition in the 2022 Amendments is the extension of valuation rights to beneficial owners. Previously, beneficial owners of shares in a company could only assert valuation rights if the owner of their share register required a valuation on their behalf. Now, under Section 262(d)(3), beneficial owners may assert assessment rights themselves so long as they retain beneficial ownership from the time of application until the date effective date of the merger, consolidation or conversion in question. In addition, the beneficial owners must provide documents evidencing their ownership in order to properly assert their expert rights.

In addition to valuation rights for beneficial owners, the newly enacted section 262(b) permits valuation rights for corporate conversions. Previously, shareholders who voted against a proposed transaction could only assert expert rights for mergers and consolidations. Now, dissenting shareholders may also request a valuation for conversions, provided that such shareholders are not precluded from requesting a valuation under the “off-market” exception.

Shareholder approval of conversions

The 2022 DGCL amendments also change the approval requirements for company conversions. Previously, a corporate conversion required unanimous shareholder approval, while a corporate merger only required a majority shareholder vote. The newly amended section 266(b) equalizes these voting thresholds by requiring a majority vote of shareholders entitled to vote to approve a corporatization. In the event of transformation into a general partnership, the approval of each shareholder who will become general partner is necessary.

Domestication of foreign entities

Finally, the 2022 DGCL Amendments also facilitate the process of converting a non-US entity to a Delaware corporation. The recently revised Section 388 now allows foreign entities to develop and adopt a “domestication plan” detailing the conditions for domestication as well as the corporate actions to be taken in relation to the domestication. These actions include amending the certificate of incorporation, issuing shares and carrying out mergers with other entities. To be effective, the domestication plan must be approved by the foreign entity in accordance with applicable foreign law as well as Delaware law. Once the plan is approved under applicable foreign law, it is deemed authorized under Delaware law. No further action by the newly domesticated company regarding the domestication plan is necessary.

ALTERNATE ENTITY STATUS

Documents Governing Alternative Entities

The entity’s alternative articles of association have each been amended to clarify that a limited liability partnership agreement, limited partnership agreement or partnership agreement may include or incorporate multiple documents, such as additional schedules, supplements or other elements. Amendments to the LLC Act and LP Act also clarify that any registered series or protected series of a limited liability partnership or limited partnership is bound by the limited liability partnership agreement or entity’s partnership agreement, as the case may be, that the series is executed the agreement.

Signatures on ownership certificates

Each of the alternative entity statuses has been amended to confirm that a signature on a certificate evidencing a limited liability company, limited partnership, or partnership interest can be a manual, fax, or electronic signature.

Effectiveness of declarations and certificates

With respect to the effective timing of declarations and certificates made by an entity, the entity’s alternative statutes have each been amended to clarify that the execution of a declaration or certificate by a person authorized by the entity constitutes an oath or affirmation that, to the best of such person’s knowledge and belief, the facts stated therein will be true at the time such statement or certificate becomes effective, rather than at the when the declaration or certificate is signed.

Approval of conversions and domestications

The LLC Act, LP Act and Partnership Act have each been amended to provide that upon the conversion or domestication of an entity into a Delaware limited liability company, limited partnership or partnership, the approval of such conversion or domestication and approval of the limited liability company limited liability partnership agreement, limited partnership agreement or partnership agreement of the converted or domesticated Delaware entity shall take place before the entry into force of the certificate of conversion or domestication.