Delaware Amends Its Business Entity Laws

In keeping with Delaware’s annual tradition of updating its business entity statutes, Governor Carney signed Senate Bills 273 – 276 into law on July 27th, 2022, amending Delaware’s General Corporation Law (DGCL), Limited Liability Company Act (LLC Act) Revised Uniform Limited Partnership Act (LP Act) and Revised Uniform Partnership Act.

Let’s look at some of the key highlights of these amendments, effective generally on August 1, 2022.

Amendments to the DGCL

Senior Officers - Limitation of Personal Liability for Breach of the Duty of Care:

Senate Bill 273 amends DGCL section 102(b)(7) to allow for limitation of liability of certain officers for the breach of the duty of care. Under current law, this limitation is only available for directors. The limitation is subject to certain restrictions. An “officer” in this instance means only “a person who at the time of an act or omission as to such liability is asserted is deemed to have consented to service by the delivery of process to the registered agent of the corporation pursuant to Title 10, section 3114(b)”.

The “officers” referred to in section 3114(b) are a corporation’s: president, CEO, COO, CFO, chief legal officer, controller, treasurer or chief accounting officer, an individual identified in public filings as one of the most highly compensated officers of the corporation and an individual who, by written agreement with the corporation, has consented to be identified as an officer for purposes of section 3114(b).

The amendment does not allow for limiting liability due to: any breach of an officer’s duty of loyalty to the corporation or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law; or any transaction from which the officer derived an improper personal benefit or an officer in any action by or in the right of the corporation. Finally, the provision does not allow for limiting the liability of an officer for any act or omission occurring prior to the amendment’s effective date.

Notice of Meetings:

 Section 222, “Notice of Stockholder Meetings”, is amended to add that unless the bylaws require otherwise, a notice of adjournment is not required when taken to address a technical failure to convene or continue a meeting using remote communication, so long as certain requirements are satisfied.

 Section 228, a provision relating to stockholders’ consent in lieu of meeting, is amended to include that if a person is not a stockholder or member of record when consent is executed the consent will not be valid unless the person is a stockholder or member of record as of the record date for determining stockholders or members entitled to consent to the action. 

 Under section 219, a list of stockholders entitled to vote at a physical or remote meeting is no longer required to be produced at the physical meeting or made available on an electronic network during the meeting.

Dissolution:

Currently, section 275 states that a corporation is dissolved upon a certificate of dissolution becoming effective in accordance with section 103. Amendments to section 275 provide that if a corporation has included a provision limiting the duration of its existence to a specified date, a certificate of dissolution must be executed, acknowledged, and filed according to law within 90 days before the specified date and will become effective on the specified date. The failure to timely file a certificate of dissolution in this instance will not affect the expiration of the corporation’s existence specified in the certificate of incorporation and will not eliminate the requirement to file a certificate of dissolution. If the Secretary of State issues a certificate of good standing after the date specified in a corporation’s certificate of incorporation limiting its duration of existence under section 102(b)(5), the certificate of good standing will be of no force or effect. There is a similar amendment under section 276 for nonstock corporation dissolution. 

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Franchise Tax:

The annual franchise tax provisions in section 502(a)(3) are amended to provide that unless a corporation maintains its principal place of business in Delaware and serves as its own registered agent, for purposes of this subsection, the principal place of business address will not be the address of the registered office of the corporation in Delaware. A provision is added to the rates and computation of franchise tax in section 503, relating to corporations that meet the large corporate filer criteria. Once a corporation is designated by the Secretary of State as a large corporate filer, it will be considered a large corporate filer until it submits evidence to the Secretary of State otherwise for the year in which the criteria has not been met. Any such re-designation will be effective as of the date the re-designation evidence is received by the Secretary of State and will not retroactively modify any corporation’s large corporate filer status. Except as otherwise authorized by law, no large corporate filer will be granted a refund of taxes paid due to failure to comply. 

Stock: 

Amendments to section 152 provide that a board of directors may delegate to an additional person or body the authority to enter transactions to issue stock and set consideration, subject to certain conditions. Amended section 153 states that others delegated by the board of directors may issue shares without par value as well as dispose of Treasury shares if permitted in the certificate of incorporation. Rights or options may also be delegated, but the person or body that the board delegates to cannot issue shares, options or rights to themselves.

Beneficial owners and stock appraisal:   

Amended section 262 permits beneficial owners of stock to demand appraisal of their shares directly. The beneficial owner must continuously own the shares through the effective date of a merger, consolidation, or conversion, and otherwise satisfy applicable conditions. The beneficial owner’s demand must include reasonable identification accompanied by documentary evidence of such beneficial owner’s beneficial ownership of stock, a statement relating to the validity of the documentary evidence, provide an address at which it consents to receive notices given by the surviving, resulting or converted entity, and to be set on a required verified list containing the names and addresses of persons who have demanded appraisal for their shares and with whom agreements as to share value has not been reached (by the surviving or resulting entity). 

Conversions:

Section 265, relating to conversion of other entities to a domestic corporation, is amended to provide that the conversion must be approved before the time the certificate of conversion becomes effective as opposed to before it is filed. Section 266 relating to conversion of a domestic corporation to other entities is amended to change a requirement for authorization from all the outstanding shares of stock entitled to vote to a majority of shares of stock. An exception includes if the corporation converts to a partnership having one or more general partners. In addition to the other set approval requirements, authorization requires approval of each shareholder of the corporation who will become a general partner because of the conversion. 

Domestication of non-US entities:

Amended section 388 provides that for domestication of a non-US entity to a Delaware corporation, the plan of domestication and any corporate actions described within it must be approved before the effectiveness of the certificate of domestication. 

Amendments to the LLC and Partnership Acts

Senate Bill No. 275 amends Chapter 18, Title 6 of the Delaware Code, sections 18-101 to 18-1208 (the Delaware Limited Liability Company Act). Senate Bill No. 274 amends Chapter 17, Title 6, sections 17-101 to 17-1208 of the Delaware Code (the Delaware Revised Uniform Limited Partnership Act.)  Senate Bill No. 276 amends Chapter 15 of Title 6 of the Delaware Code, sections 15-101 to 15-1210 (the Delaware Revised Uniform Partnership Act). The citations in this section refer to these Code provisions.

Agreements:

Definitions in sections 18-101(9) and 17-101(14) are amended to point out that any registered series or protected series of a limited liability company/limited partnership is bound by the limited liability company agreement/partnership agreement whether or not the registered or protected series executed the limited liability company/partnership agreement. Sections 18-101 (9)/ 17-101(14)/ 15-101(14) are also amended to add that a written limited liability company agreement/partnership agreement or another writing may consist of one or more agreements, instruments or other documents that may include or incorporate one or more schedules, supplements, or other writings to govern the business of the limited liability company/limited partnership or its series, where applicable, or the business of a partnership.  

Execution:

The amendment to sections 18-113(b)/ 17-113(b)/ 15-124(b) relating to document signatures includes a provision that a signature on a certificate of limited liability company interest/certificate of partnership interest may be manual, facsimile, or electronic. Execution provisions in section 18-204 /17-204/15-105 are also amended to state that the execution of a certificate by an authorized person constitutes an oath or affirmation under penalties of perjury that, to the best of such person’s knowledge and belief, the facts shall be true at the time the certificate becomes effective as provided by law.

Approval:

Certain sections relating to domestication of non-US entities (18-212) (17-215) (15-904) and conversions (18-214) (17-217) (15-901) are amended to provide that required approval and authorization must be obtained before the time the certificate of domestication or conversion becomes effective, instead of before the time of filing.

For the complete text of the amendments, see the links below.

1. Senate Bill No. 273
2. Senate Bill No. 274 (as Amended by House Amendment No. 1)
3. Senate Bill No. 275
4. Senate Bill No. 276

Delaware has also made amendments to its statutory trust provisions. See Senate Bill 284 for the complete text.