The following is a summary of the most important amendments impacting the creation, regulation, operation and dissolution of Delaware corporations. These amendments modify statutory provisions covering: (i) the use of “distributed ledger” or “blockchain” technology for corporate records, (ii) the elimination of the date requirement for each stockholder's signature on stockholder consents, (iii) updates to the DGCL sections dealing with mergers and consolidations of different types of entities, and (iv) clarification of the effective date when invoking Section 203 of the DGCL.
Blockchain Technology for Corporate Records
Sections 219, 224 and 232 of the DGCL are proposed to be amended this year with the goal of modernizing the DGCL by permitting the use of “distributed ledger” or “blockchain” technology for corporate records, including stock ledgers. Blockchain technology allows for the transfer and issuance of shares without a third party intermediary, thereby increasing the accuracy of recording such transfers and issuances and minimizing the potential for clerical mistakes. While the amendments will accommodate the use of this emerging technology and modernize the way Delaware corporations can keep their books and records, the amendments are only applicable to corporations with uncertificated shares. Therefore, not all corporations will be able to utilize this technology for the maintenance of their stock ledgers.
Specifically, the proposed amendments to Sections 219 and 224 permit records to be stored in “one or more electronic networks or databases (including one or more distributed electronic networks or databases).” Further, the amendment to Section 224 of the DGCL would require the stock ledger to serve three main functions: (i) to enable the corporation to prepare a list of shareholders specified in Sections 219 [list of stockholders entitled to vote] and 220 [inspection of books and records] of the DGCL, (ii) to record information specified in Sections 156 [partly paid shares], 159 [dealing with of shares of stock for collateral security], 217(a) [voting rights of fiduciaries] and 218 [relating to voting trusts], and (iii) to transfer stock as governed by Article 8 of the Uniform Commercial Code.
To further modernize the DGCL, Sections 151, 202 and 364 are being amended to clarify that electronic notices may be used for holders of uncertificated securities. The overall effect of these amendments is to permit blockchain technology to be used for corporate records required by DGCL.
These amendments are a significant step in the Delaware Blockchain Initiative, which was implemented by Governor Jack Markell in May 2016. The initiative aims at implementing blockchain technology into the DGCL for the benefit of Delaware corporations.
Elimination of Consent Dates
The proposed amendment to Section 228 of the DGCL eliminates the requirement that stockholders individually date their signatures on stockholder consents. The amendment further provides that the sixty (60) day period for the delivery of the requisite number of consents for stockholder action will start on the date that the first consent is delivered, instead of the date of the stockholder's signature. Failure to properly date stockholder consents is a common mistake, and this amendment eliminates this requirement thereby avoiding technical errors that might invalidate such consents.
It is important to note that this amendment is effective for consents that have a record date on or after August 1, 2017.
Merger and Consolidation with Different Entities
Sections 254, 263 and 264 of the DGCL are proposed to be amended this year with the goal of expressly authorizing and clarifying merger and consolidation provisions concerning different types of entities. Technical in nature and aimed at consistency, these amendments intend to authorize mergers and consolidations of Delaware corporations with joint-stock or other associations, limited liability companies, and partnerships formed or organized under the laws of a non-US jurisdiction.
Further, the proposed amendments to Sections 252, 253, 254, 256, 258, 263, 264 and 267 of the DGCL, which govern mergers and consolidations with non-Delaware entities, would permit mergers and consolidations so long as the laws of the non-Delaware jurisdiction do not prohibit such transactions. These amendments are aimed at providing consistency among DGCL provisions, as well as providing flexibility to corporations seeking to merge or consolidate.
Additionally, the proposed amendments to Sections 251, 252, 253, 255, 258 and 267 seek to clarify DGCL provisions as they relate to mergers and consolidations. Section 251 eliminates the language that any two or more corporations “existing under the laws of [the State of Delaware]” may merge or consolidate. Instead, the amendment describes the corporations as “corporations of this State.” It is important to note that this clarification does “not change the intent of such sections prior to the amendments.” Sections 252, 253, 258 and 267 are being amended to include the use of the term “foreign corporation” as it is defined in Section 371(a). Again, the goal of the amendments is consistency throughout the DGCL.
Moreover, the proposed amendments to Sections 255, 256 and 257 seek to clarify and confirm how the memberships and membership interests in a nonstock corporation may be treated in a merger. These amendments are also aimed at improving consistency throughout the DGCL. As a result of these amendments, Section 257 eliminates language dealing with membership interests, as it is no longer necessary.
Lastly, the amendments aim to eliminate the confusion between “organized” and “formed” throughout the merger and consolidation sections of the DGCL. Under the proposed amendments, “organized” will refer to corporations and how they are formed, incorporated or created, while “formed” will refer to entities that are not corporations and how they are formed or created.
Section 203 “Opt-Out”
The proposed amendment of Section 203 of the DGCL clarifies the effective date of an amendment “opting out” of restrictions on business combinations under that section. Section 203 restricts a corporation from entering into certain business combinations. However, a corporation’s stockholders can elect to opt-out of this section. The amendment states that the opt-out effective date is either the date under Section 103, which is the effective filing date, or twelve months after the effective date of the amendment, rather than the time at which the amendment is adopted by stockholders. As a result, persons amending the certificate of incorporation to opt-out of Section 203 have a clearer indication of when the amendment becomes effective.