The General Corporation Law of the State of Delaware was amended on August 1, 2024. The most controversial amendments were adopted in response to decisions issued by the Delaware Court of Chancery that many practitioners considered to be inconsistent with market practice. The amendments preserve companies’ flexibility but could threaten Delaware’s reputation as a neutral forum for corporate governance.
The General Corporation Law of the State of Delaware (DGCL)—the legal code governing a significant majority of U.S. public companies—now contains several important amendments that became effective on August 1, 2024. The changes clearly reflect the legislature’s endorsement of companies’ use of generally accepted market practice over the strict statutory interpretations recently reached by the Delaware Court of Chancery.
Senate Bill 313, enacted in response to two recent decisions by the Chancery Court, addresses companies’ ability to enter into agreements on the status and prerogatives of major stockholders, as well as the form and content of disclosures that companies are required to provide in merger agreements. While some public companies might welcome the flexibility the new legislation provides, critics say the amendments weaken Delaware’s protection of minority shareholders and undermine Delaware’s status as a neutral forum for corporate governance.
Triggered by two court decisions
In two decisions issued in February 2024, the Chancery Court struck down corporate actions that it ruled had violated Delaware’s statutory provisions:
- In West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. (Moelis), the court ruled that pre-approval requirements and board composition provisions that Moelis’s board granted to the company’s founder violated the DGCL, as those agreements effectively gave the founder managerial authority by restricting the board’s independent judgment.
- In Sjunde Ap-Fonden v. Activision Blizzard Inc. (Activision), the court found that the Activision board’s approval process of the company’s acquisition by Microsoft Corporation violated the DGCL because the draft merger agreement was missing key items, including disclosure schedules, the certificate of incorporation of the surviving corporation, the amount of consideration, and the final provisions on dividends Activision would be permitted to pay between signing and closing.
In both cases, the court was applying statutory law to overrule common market practice. “When market practice meets a statute, the statute prevails,” the court declared in Moelis.
The legislature responds
In response, Delaware’s legislature acted quickly to change the statute.
S.B. 313, adopted in June and signed by the governor on July 17, amends the DGCL to:
- Specifically authorize a corporation to enter into contracts with its stockholders agreeing to take or refrain from taking certain corporate actions, provide stockholders veto rights over certain corporate decisions, support the election of director nominees designated by those stockholders, and appoint directors designated by those stockholders to board committees.
- Allow a board to approve any agreement or document if the board can determine all the material terms either in the text of the agreement or through other information known by the board.
- Modify the DGCL’s notice requirements on mergers to grant boards broad rights to use alternative means of disclosure, including attachments to shareholder notices.
Implications for companies
Many public companies incorporated in Delaware may welcome the legal protection that S.B. 313 offers to common business practices, such as agreements with major shareholders. In the longer term, some legal scholars argue that the new law will erode the rights of minority shareholders and undermine Delaware’s position as the preferred jurisdiction for incorporation.
How CSC can help
Founded in Delaware 125 years ago, CSC closely monitors legal developments that affect Delaware corporations. Tap into CSC’s rich resources—including our insight report on The Delaware Effect, detailing how the second-smallest state became the central location for U.S. corporations—to stay abreast of significant changes that can affect your company.