On March 11, 2015, the Delaware State Bar Association gave its formal approval to HB 49, which was filed yesterday in the Delaware Legislature. If passed by the Legislature, the bill, which bears the title the Delaware Rapid Arbitration Act, will establish Delaware as a cutting-edge seat for business arbitrations. Building on the best of the state’s earlier experiment with judicially annexed arbitration, the new legislation was crafted with extensive consultation and input from constituencies around the US and internationally. One thing became clear as a result of those consultations: businesses and their advisors are alarmed at the marked drift in arbitration practice away from timely, efficient dispute resolution.
Posts Tagged ‘Delaware legislation’
As part of the annual update cycle for Delaware’s General Corporations Law (DGCL), the Delaware Bar has returned to last year’s controversy on fee-shifting provisions in bylaws and certificates of incorporation to propose, yet again, destroying the ability of Delaware corporations to, in their organizing documents, have the losing party in an intra-company (i.e. fiduciary duty) lawsuit pay the prevailing party’s legal fees.
The proposal is among several 2015 legislative changes to the DGCL proposed by the Council of the Corporation Law Section of the Delaware State Bar Association, which is the working-level body that, historically through consensus, creates changes to the DGCL.
In November 2013 I delivered the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. My lecture, entitled “Delaware’s Choice,” presented four uncontested facts from my prior research: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a “meaningful opportunity for success” in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed—so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success.
The State of Delaware recently enacted several significant changes to the Delaware General Corporation Law (“DGCL”) and the Delaware LLC Act (“LLC Act”).
Section 251(h); Back-end Mergers. The most significant amendment to the DGCL is new Section 251(h) that, subject to certain exceptions, permits parties entering into a merger agreement to “opt in” to eliminate a target stockholder vote on a back-end merger following a tender or exchange offer in which the acquiror accumulates sufficient shares to approve the merger agreement (a majority unless the target has adopted a higher vote requirement) but less than the 90% necessary to effect a short-form merger. DGCL Section 251(h) will eliminate in many cases the time and cost associated with a stockholder vote on a back-end merger; however, where regulatory or other constraints impose significant delays, DGCL Section 251(h) is unlikely to be helpful. DGCL Section 251(h) also facilitates the financing of two-step private equity-sponsored acquisitions because the tender offer and the merger can be closed substantially concurrently (generally, on the same day). It also will eliminate the need in most cases for targets to issue “top-up” options to friendly bidders who, before DGCL Section 251(h), needed to “top-up” the number of shares they were able to purchase in the tender offer to reach the 90% target share ownership needed to effect a short-form merger. DGCL Section 251(h) does not apply to transactions in which a party to the merger agreement is an “interested stockholder” of the target under DGCL Section203(c) at the time the merger agreement is approved by the target board. In addition, there are a number of other possible limitations, outlined below, to the utilization of new DGCL Section 251(h).
Beginning on August 1, 2013, the Delaware General Corporation Law will authorize the formation of public benefit corporations. The new provisions will allow entrepreneurs and investors to create for-profit Delaware corporations that are charged with promoting public benefits. These provisions modify the fiduciary duties of directors of PBCs by requiring them to balance such benefits with the economic interests of stockholders. In addition, the new provisions will require public benefit corporations to report to their stockholders with respect to the advancement of such non-stockholder interests.
Below are a few of the more salient elements of Delaware’s public benefit corporation legislation:
The Delaware General Assembly has adopted, and Delaware’s governor has signed into law, several important amendments to the State’s General Corporation Law (the “DGCL”) and Limited Liability Company Act (the “DLLCA”). Of particular interest to corporate and M&A practitioners are the following provisions:
- New DGCL Section 251(h), which eliminates the need for stockholder approval of second-step mergers following tender offers if certain conditions are met, thus eliminating the need for workarounds such as top-up options and dual-track structures;
- New DGCL Sections 204 and 205, which delineate a procedure to ratify defective corporate actions and to vest the Court of Chancery with jurisdiction over disputes regarding such actions;
- New DGCL Sections 361 through 368 (Subchapter XV), which permit the creation of public benefit corporations (i.e., for-profit corporations formed for the benefit of constituencies other than stockholders, such as categories of persons, entities, communities or interests); and
- Amended DLLCA Section 18-1104, which amendments confirm the default rule that fiduciary duties exist in the case of Delaware limited liability companies unless otherwise provided in the LLC agreement.
The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals. The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding shares, unless the company’s charter provides a higher threshold).
In the recent decision Gatz Properties LLC v. Auriga Capital Corporation, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s January 2012 decision in Auriga Capital Corporation v. Gatz Properties. In January of this year, the Court of Chancery held that a controlling member and manager of a limited liability company breached his fiduciary duties to the company’s minority members because the process by which he purchased the limited liability company from the minority members did not result in the payment of a fair price under the entire fairness standard of review. In affirming the decision, the Supreme Court stated that the question of whether the default standard under the Delaware Limited Liability Company Act is that a manager owes fiduciary duties to the members of a limited liability company remains unanswered and should not have been addressed by the lower court. Until this question is answered definitively, members of limited liability companies should clearly state in the limited liability company agreement whether and to what extent the company’s managers or controlling persons should have any fiduciary duties to the members.
Last month, the Columbia Business Law Review published “A Spatial Representation of Delaware-Washington Interaction in Corporate Lawmaking.” In this brief paper, I examine interaction between Delaware and Washington in corporate lawmaking, focusing on the shareholder access initiatives in each jurisdiction. The paper uses a straight-forward spatial model of the state-federal interaction, paralleling spatial models that political scientists have used to illustrate other instances of jurisdictional interaction.
In prior work I showed how Delaware corporate law can be, and often is, confined by, or influenced by, federal action. Sometimes Washington acts and preempts the field, constitutionally or functionally, leaving no space for state corporate law action. Sometimes Delaware tilts toward or follows Washington opinion, even if Washington opinion does not square perfectly with the state lawmakers’ own consensus view of the best way to proceed. I examined these channels in Delaware’s Competition, 117 Harvard Law Review 588 (2003), and Delaware’s Politics, 118 Harvard Law Review 2491 (2005).
In its latest session, the Delaware legislature enacted several amendments to Delaware’s four “alternative entity” statutes – the Delaware Limited Liability Company Act (“DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”), the Delaware Revised Uniform Partnership Act (“DRUPA”) and the Delaware Statutory Trust Act (“DSTA”).  Among other things, the amendments (i) provide a statutory default rule for the amendment of LLC agreements which requires the consent of all members; (ii)that a standard “supermajority amendment provision” applies only to supermajority provisions in an LLC agreement or partnership agreement and not to supermajority provisions under the applicable alternative entity statute; and (iii) modify the language relating to action by written consent by members, managers and partners to eliminate the requirement that the written consent set forth the action so taken thereby facilitating action by consent, particularly by electronic means.