Delaware General Corporation Law amendments go into effect – what companies should know
On August 1, 2023, amendments to the Delaware General Corporation Law (the DGCL) went into effect that will, among other things, simplify the process by which Delaware corporations may take certain corporate actions.
Of particular focus in this alert are amendments affecting the processes for authorizing (i) certain types of stock splits and (ii) changes to a corporation’s authorized shares.
The Delaware Court of Chancery’s December 2022 decision in Garfield v. Boxed Inc. upended the widely held understanding among corporate practitioners that, for purposes of Section 242(b) of the DGCL, dual classes of a corporation’s common stock could be considered different “series” rather than different “classes” of common stock – and thus could collectively, rather than by separate class votes, approve a charter amendment to increase a corporation’s authorized shares. In Boxed, the court found that the subject company’s “Class A” and “Class B” common stock, as used in the subject company’s charter, were in fact two distinct classes of common stock requiring separate class approvals.
The Boxed decision had an immediate impact, particularly on those companies that became publicly traded through a “de-SPAC” transaction. Many de-SPAC companies have dual classes of common stock, and a de-SPAC transaction often involves a stockholder vote to increase the SPAC’s number of authorized shares for use as consideration in the business combination, typically effectuated via merger. As a result, dozens of companies filed Section 205 petitions with the Court of Chancery to validate previously completed stockholder votes, the validity of which were in question following Boxed.
The Delaware legislature responded by adopting amendments to the DGCL, including amendments that reduce the voting threshold necessary to approve certain types of stock splits and to increase or decrease a corporation’s authorized shares.
Forward stock splits
Forward stock splits, those in which a corporation’s shares are divided into a greater number of issued shares, previously required a charter amendment approved by the affirmative vote of a majority of the outstanding shares entitled to vote thereon and, as applicable, a majority of each class of stock entitled to a separate class vote.
Pursuant to the recently added Section 242(d)(1) of the DGCL, unless otherwise required by a corporation’s charter, stockholder approval of a charter amendment to implement a forward stock split or proportionally increase the number of authorized shares in order to accommodate a forward stock split is no longer required, provided that the corporation has only one class of outstanding stock and that class is not divided into series.
Reverse stock splits
Reverse stock splits, those in which a corporation’s shares are consolidated into a fewer number of issued shares, previously required the same approval threshold as a forward stock split. Pursuant to the recently added Section 242(d)(2) of the DGCL, the threshold for stockholder approval of a charter amendment to effectuate a reverse stock split has been reduced from the affirmative vote of a majority of the outstanding shares entitled to vote thereon to the affirmative vote of a majority of the votes cast, so long as (i) the applicable class of shares is listed on a national securities exchange immediately before the charter amendment’s effective date and (ii) the corporation will meet exchange listing requirements concerning minimum shareholders immediately after the amendment’s effective date.
Increase and decrease to authorized shares
Like the voting threshold applicable to a forward or reverse stock split, a charter amendment to increase or decrease the number of authorized shares of a class (in a manner not involving a forward stock split) previously required the affirmative vote of a majority of the outstanding shares entitled to vote thereon and, as applicable, a majority of each class of stock entitled to a separate class vote. Following the adoption of Section 242(d)(2) of the DGCL, an increase or decrease in authorized shares may be approved by the affirmative vote of a majority of the votes cast, subject to the same conditions as those described above concerning reverse stock splits.
The recent amendments to the DGCL will likely allow Delaware corporations to streamline certain corporate actions and act with more agility in the capital markets. The revised voting thresholds to effectuate reverse stock splits and changes to the authorized share capital of a corporation effectively remove the impact of abstentions on a stockholder vote. This should allow publicly traded corporations, particularly those with large retail stockholder bases and low voting participation, to take corporate actions that would otherwise require time-consuming and expensive stockholder outreach prior to the requisite vote.
Please contact any of the authors or your DLA Piper relationship attorney with any questions regarding these new amendments and their implications.