Summarized below are the currently proposed changes to the Delaware General Corporation Law (the “DGCL”) that, if enacted, would become effective.
Statute of Limitations
Under current Delaware law, breach of contract claims are subject to a three-year statute of limitations period (or four years, in the case of a contract governed by the UCC). Recent case law in Delaware’s Chancery Court has questioned the right of contracting parties to mutually agree to extend applicable time periods beyond these limits. As a result, purchasers and other parties seeking a right of indemnification that extends beyond the limited period (e.g. as in the case of certain “fundamental” representations and warranties) are utilizing a Delaware mechanic that allows parties to enter a contract “under seal”, which allows parties to opt into a longer, 20-year statute of limitations period. The proposed amendment to the DGCL, if enacted, would allow parties to a contract valued in excess of $100,000 to avail themselves of the longer, 20-year period without having to observe the formalities of entering into a contract under seal.
Mergers and Section 251(h)
A recent addition to the DGCL, Section 251(h), when initially enacted in 2013, eliminated the need for stockholder approval of a back-end merger following a tender offer, assuming the tender offer met a number of conditions, including the requirement that no party to the merger agreement be an “interested stockholder” (as defined in the DGCL). The proposed amendment would eliminate this requirement.
Under current Delaware law, it is not clear that a written consent executed by a director in advance of applicable corporate action to be taken is effective, often complicating the mechanics of transactions in which board action is required to complete a transaction. The proposed amendment would allow any person, whether or not then a director, to give an instruction (as far as 60 days in advance) to execute a consent at a future time. A similar change would effect a similar result in the context of stockholder consents.
Most amendments to a corporate charter under current Delaware law require both the consent of the board as well as holders of the majority of the corporation’s capital stock. Among other things, the proposed amendment would allow a corporate name change based solely upon a board consent (without the need to seek stockholder consent).
Somewhat rarely used, stockholders in a Delaware corporation are allowed deposit their stock with a voting trust such that the voting trust becomes the record owner of stock while the stockholder maintains the underlying economic interest in such stock. Currently, any voting trust agreement must be available for inspection at the corporation’s registered office within the State of Delaware. As amended, the DGCL would simply allow any such voting trust to be maintained at the corporation’s primary place of business.
In many instances, the individual responsible for acting as an incorporator of a corporation has no lasting relationship with that corporation (i.e. they are as often as not an outside service provider to the corporation). As amended, the DGCL would allow an entity on whose behalf the incorporator was working to take any action that the incorporator was entitled to, but failed to take.