Delaware General Corporations Law Conversion Amendments | Denton

Venture capital funds and other early-stage investors often only invest in Delaware C corporations. As a condition of receiving the necessary investment capital, it is often necessary to convert high-growth corporations formed in other jurisdictions or as other types of business entities into Delaware C corporations.

Fortunately, Delaware law generally allows entities to convert to Delaware corporations. For example, Section 265 of the Delaware General Corporations Act (“DGCL”) governs the conversion of domestic or foreign entities into Delaware corporations and Section 388 of the DGCL governs the domestication of foreign entities into Delaware corporations, subject to certain conditions.

The Delaware Legislature has enacted amendments affecting the foregoing provisions which became effective August 1, 2022 and apply to securities transactions made on or after that date (the “Amendments”). Founders considering converting their business organization to a Delaware corporation should be aware of these changes.

Conversion Changes

First, Section 265 of the DGCL governs the conversion of “other entities” (entities other than corporations or entities incorporated outside of Delaware) into Delaware corporations. The changes changed the approval timeframe for a conversion. The previous version of Section 265 required that the conversion and related certificate of incorporation be approved before filing a certificate of conversion with the office of the Secretary of State. The amendments allow the conversion and the certificate of incorporation to be approved at any time before the effective date of the certificate of conversion, which may be after the filing of the certificate of conversion.

Domestication changes

Second, Section 388 of the DGCL governs the domestication of “non-US entities” in Delaware corporations. Section 388 has the same general effect as Section 265. It permits the filing of a certificate of domestication prior to receiving approval from the business of domestication and certificate of incorporation, so long as the necessary approval (including approvals required by any applicable law of the non-jurisdiction of the United States) is received before the effective date of the certificate of domestication.

The amendments allow companies to adopt a domestication plan setting out:

1. the terms and conditions of domestication;
2. the mode of implementation of the same;
3. a statement that the certificate of incorporation of the domesticated company will be as set out in the attachment to the domestication plan;
4. the manner, if any, of exchanging or converting shares, rights or securities of, or interests in, the non-US entity;
5. any corporate actions to be taken by the Domesticated Company in connection with the Domestication, each of which requires approval under all applicable non-US laws;
6. any details or arrangements deemed desirable; and
7. any other terms or facts required to be set forth in a domestication plan by the laws of the jurisdiction under which the non-U.S. entity is organized. Companies may make the terms of the domestication plan dependent on verifiable facts outside the plan, including the occurrence of any event or any decision of any person or entity.

Under the revised Article 388, legal persons may rely on the domestication plan as authorization for their actions in connection with domestication. Section 388 now provides that any corporate action to be taken by the domesticated corporation, in connection with a domestication that is set forth in a domestication plan, duly approved and within the power of a corporation, shall be deemed authorized, adopted and approved by the domesticated company and its board of directors, shareholders and members and will not require any further action by the board, shareholders or members.

Conclusion

Overall, the updates made by the Delaware Legislature to the conversion and domestication provisions of the Delaware General Corporations Act streamline the process and make it easier for startups to become Delaware corporations. However, conversions and domestications are technical transactions that require an understanding of both general Delaware corporate law and the statutes of corporations or other entities in the jurisdiction where a startup is currently formed. Founders interested in converting or domesticating their corporations into Delaware corporations to attract venture capital investment should consult with their legal and tax advisors on how to structure the transaction and keep abreast of future updates to the Delaware general corporate law.