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ComplianceLegalAugust 11, 2022

Compliance update: The 2022 amendments to Delaware’s business entity laws

Delaware has approximately two million active domestic business entities. A frequently cited reason for Delaware’s preeminent position as a formation state is its modern and flexible business entity statutes.

In order to keep the statutes up-to-date, and therefore able to meet the rapidly evolving needs of its entities and their stakeholders, the state’s lawmakers enact amendments to its business entity laws every year.

Keeping track of the changes to these laws is imperative for the people owning, managing, or investing in Delaware entities, as well as the in-house and outside counsel who advise Delaware entities and their management and owners.

This article helps all of those people keep track of the changes made to Delaware’s corporation, franchise tax, limited liability company, partnership, and limited partnership laws during the 2022 legislative session.

I. Amendments to the General Corporation Law (GCL) and Franchise Tax Law by Senate Bill 273

Senate Bill 273 enacted amendments to the GCL (Title 8, Sec. 101 et seq.) and the Franchise Tax Law (Title 8, Sec. 501 et seq.). All amendments are effective August 1, 2022, unless noted otherwise. The amendments include the following:

1. Exculpation of Officers. Sec. 102 is amended to provide that the certificate of incorporation may contain a provision eliminating or limiting the personal liability of an officer to the corporation or its stockholders for monetary damages for breach of fiduciary duty as an officer, provided that the provision cannot eliminate or limit the liability of an officer:

  1. for any breach of the officer’s duty of loyalty to the corporation or its stockholders;
  2. for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
  3. for any transaction from which the officer derived an improper personal benefit, or
  4. in any action by or in the right of the corporation.

The provision cannot eliminate or limit the liability of an officer for any act or omission occurring before the date when the provision becomes effective.

An amendment, repeal, or elimination of the provision will not affect its application with respect to an act or omission by an officer occurring before the amendment, repeal, or elimination unless the provision provides otherwise at the time of the act or omission.

All references to an officer mean only a person who at the time of an act or omission as to which liability is asserted is deemed to have consented to the delivery of service of process to the registered agent of the corporation pursuant to Title 10, Sec. 3114(b)(and for purposes of this sentence only, treating residents of Delaware as if they were nonresidents to apply Sec. 3114(b)).

(Title 10 Sec. 3114(b) states that the word “officer” means an officer of the corporation who:

  1. is or was the president, chief executive officer, chief operating officer, chief financial officer, chief legal officer, controller, treasurer, or chief accounting officer of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful;
  2. is or was identified in the corporation’s public filings with the SEC because such person is or was 1 of the most highly compensated executive officers of the corporation at any time during the course of conduct alleged in the action or proceeding to be wrongful; or
  3. has, by written agreement with the corporation, consented to be identified as an officer for purposes of this section.

2. Execution of Instruments. Sec. 103 is amended to clarify that the execution of an instrument by a person constitutes an oath or affirmation, under penalties of perjury, that the facts stated therein will be true at the time the instrument becomes effective.

3. Issuance of Stock - Authority to Delegate. Sec. 152 is amended to provide that a resolution of the board of directors may delegate to a person or body, in addition to the board of directors, the authority to issue stock provided the resolution fixes:

  1. a maximum number of shares of stock that may be issued pursuant to the resolution,
  2. a time period during which the shares may be issued, and
  3. a minimum amount of consideration for which the shares may be issued.

The resolution may not permit a person or body to issue stock to themselves. Sec. 152 is also amended to clarify that a board resolution providing for the issuance of stock may be made dependent on facts ascertainable outside the resolution.

4. Consideration for Stock. Sec. 153 is amended to provide that shares of stock with or without par value may be issued for such consideration as is determined in accordance with Sec. 152 and that treasury shares may be disposed of in the same manner that shares of stock are issued pursuant to Sec. 152.

5. Rights and Options – Authority to Delegate. Sec. 157 is amended to provide that a resolution of the board of directors may delegate to a person or body, in addition to the board of directors, the authority to issue rights or options in stock, provided the resolution fixes:

  1. a maximum number of rights or options and the maximum number of shares issuable upon exercise thereof, that may be issued pursuant to the resolution,
  2. a time period during which the rights or options, and during which the shares issuable upon exercise thereof, may be issued, and
  3. a minimum amount of consideration (if any) for which the rights or options may be issued and a minimum amount of consideration for the shares issuable upon exercise thereof.

The resolution may not permit a person or body to issue to themselves any rights or options.

Sec. 157 is also amended to clarify that the board resolution may be made dependent on facts ascertainable outside the resolution and to eliminate the requirement that the terms of a right or option be set forth or incorporated by reference in an instrument evidencing the rights or options.

6. Inspection of Stocklist. Sec. 219 is amended to eliminate the requirement to make a stocklist available for inspection during a meeting of stockholders and to clarify how the 10-day period is calculated for purposes of determining when the corporation must make the stocklist available for inspection by stockholders before the meeting date.

7. Stockholder Meetings. Sec. 222 is amended to

  1. clarify that a notice of a meeting of stockholders may be given in any manner permitted by Section 232, and
  2. clarify that a meeting of stockholders held by means of remote communication may be adjourned to address a technical failure to convene or continue the meeting.

In that event, notice of when the meeting will reconvene need not be given to stockholders if the electronic network for the meeting displays the information required by Sec. 222(c) about when and how the meeting will reconvene, or if the information regarding the adjourned meeting is provided for in the notice of meeting.

8. Actions by Consent. Sec. 228 regarding consent of stockholders and members in lieu of a meeting is amended to provide that if the person is not a stockholder or member of record when the 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.

9. Appraisal Rights. Sec. 262, governing appraisal rights is amended in several respects, including the following:

  1. to provide appraisal rights to stockholders in connection with a conversion of the corporation to a foreign corporation or to any other entity, unless appraisal rights are denied pursuant to the “market out” exception set forth in Sec. 262(b).

  2. to provide that a beneficial owner of stock, in the person’s name, may demand appraisal if (i) the beneficial owner has continuously maintained a beneficial ownership of the shares from the date of demand through the effective date of the merger, consolidation, or conversion, (ii) meets the requirements applicable to stockholders under Sec. 262(a), and (iii) includes in the written demand the identity of the record holder, documentary evidence of the beneficial owner’s beneficial ownership, and an address at which the beneficial owner consents to receive notice from the surviving, resulting, or converted entity.

    “Beneficial owner” means a person who is the beneficial owner of shares of stock held either in a voting trust or by a nominee on behalf of the person. The word “person” means any individual, corporation, partnership, unincorporated association, or other entity.

  3. To eliminate appraisal rights in connection with a merger, consolidation, or conversion of an entity that has domesticated as a Delaware corporation pursuant to Sec. 388, if the merger, consolidation, or conversion is authorized in accordance with Sec. 388.

  4. To clarify that appraisal rights are denied for holders of classes or series of stock that are listed on a national securities exchange or held by more than 2,000 record holders in connection with mergers, consolidations, or conversions adopted by stockholder consent to the same extent that appraisal rights are denied to those holders if one of those transactions is adopted at a stockholder meeting.

  5. To provide that, in lieu of including in a notice of appraisal rights a copy of Sec. 262 (and a copy of Sec. 114, if applicable) a corporation may instead include in the notice information directing the persons entitled to appraisal to a publicly available electronic resource to access Sec. 262 (and Sec. 114, if applicable).

  6. To clarify how the expenses of a stockholder or beneficial owner who participated in an appraisal proceeding may be charged pro rata against the value of all the shares entitled to an appraisal award, and that an unconditioned dismissal under Sec. 262(k) ends the Court of Chancery’s jurisdiction over a person that has demanded appraisal under Sec. 262.

  7. To clarify that a stockholder or beneficial owner may withdraw a demand for appraisal with respect to less than all of the shares for which the person initially demanded appraisal.

10. Conversions to a Domestic Corporation. Sec. 265 is amended to provide that the approval of a conversion of other entities to a corporation in the manner provided for by the document, instrument, agreement, or other writing governing the internal affairs of the converting entity and the conduct of its business or by applicable law, and the approval of the certificate of incorporation by the same authorization required to approve the conversion, are required to occur before the certificate of conversion to corporation becomes effective. (Formerly, before filing the certificate of conversion.)

11. Conversions of Domestic Corporations. Sec. 266 is amended to change the requirement for stockholder approval of the conversion of a corporation to another entity, from all of the outstanding shares of stock of the corporation to a majority of the outstanding shares of stock entitled to vote on a conversion.

If the corporation is converting to a partnership with one or more general partners, the conversion also requires the approval of each stockholder who will become a general partner of the partnership. Sec. 266 is also amended to provide that the certificate of conversion to a foreign entity must state that the corporation agrees to be served with process in Delaware in an action to enforce obligations arising from the conversion, including appraisal rights.

For any corporation incorporated before August 1, 2022, any provision contained in its certificate of incorporation or in a voting trust agreement or other written agreement between or among the corporation and one or more stockholders that restricts, conditions or prohibits consummation of a merger or consolidation is also deemed to apply to a conversion, unless the certificate of incorporation or the agreement expressly provides otherwise.

12. Dissolution. Secs. 275 are 276 are amended to provide that if a corporation (Sec. 275) or nonstock corporation (Sec. 276) has included in its certificate of incorporation a provision limiting the duration of its existence to a specified date in accordance with Sec. 102(b)(5), a certificate of dissolution must be executed, acknowledged and filed within 90 days before the specified date and will become effective on the specified date.

The failure to timely file the certificate of dissolution will not affect the expiration or its existence on the date specified in its certificate of incorporation pursuant to Sec. 102(b)(5) and will not eliminate the requirement to file a certificate of dissolution. A certificate of good standing issued by the Secretary of State after the date specified in the certificate of incorporation will be of no force.

Sec. 275 is also amended to provide that a corporation will be dissolved upon the earlier of (1) the date specified in its certificate of incorporation or (2) the effectiveness in accordance with Sec. 103 of a certificate of dissolution filed in accordance with this section.

13. Domestication. Sec. 388 is amended to permit a non-United States entity to adopt a plan of domestication setting forth, among other information, the terms and conditions of the domestication and the mode of carrying them into effect, the manner of exchanging or converting the equity interests of the non-United States entity to be domesticated, and any other details or provisions deemed desirable. The certificate of incorporation must be set forth as an attachment.

A plan of domestication may also set forth corporate actions to be taken by the domesticated corporation in connection with the domestication, each of which must be approved in accordance with the requirements of all applicable non-United States law before the effectiveness of the domestication. Once approved, those corporate actions will be deemed authorized, adopted, and approved, as applicable, by the domesticated corporation and its board of directors, stockholders, or members, as applicable, and will not require any further action of the board of directors, stockholders or members of the domesticated corporation.

A certificate of corporate domestication must certify that, if a plan of domestication is adopted, all provisions of the plan will be approved before the effectiveness of the certificate in accordance with all applicable non-United States law. The section is also amended to state that before the certificate of corporate domestication becomes effective, (formerly, before filing the certificate), the domestication must be approved in accordance with the document, instrument, agreement, or other writing, as the case may be, governing the internal affairs of the non-United States entity and the conduct of its business or by applicable non-United States law.

14. Annual Franchise Tax Report. Sec. 502 of the Franchise Tax Law is amended to clarify that the principal place of business address included in the annual franchise tax report cannot be the address of the registered office in Delaware unless the corporation maintains its principal place of business in Delaware and serves as its own registered agent.

15. Large Corporate Filer. Sec. 503 of the Franchise Tax Law is amended to provide that 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 for any year in which it does not meet the criteria to be a large corporate filer. The re-designation will be effective as of the date the evidence of re-designation is received by the Secretary of State and will not retroactively modify the large corporate filer status of any corporation.

16. Effective Date. The amendments are effective August 1, 2022, except the amendment to Sec. 266 is effective only with respect to corporations converting pursuant to resolutions of the board of directors approving the conversion that are adopted on or after August 1, 2022, and the amendments to Sec. 262 are effective only with respect to mergers, consolidations, or conversions adopted or entered into, as applicable, on or after August 1, 2022.

The amendments to Sec. 262 and 388 are effective only for domesticated corporations with respect to which a plan of domestication is entered into on or after August 1, 2022, or, if no plan of domestication is entered into in connection with the domestication, any domesticated corporations with respect to which the approvals required by Section 388(h), as amended by the bill, are obtained on or after August 1, 2022.

II. Amendments to the GCL enacted earlier in 2022

1. Captive Insurers. Sec. 145 was amended by Senate Bill 203, effective February 7, 2022, to expressly authorize a Delaware corporation to purchase and maintain insurance on behalf of its directors, officers, employees, and agents (D&O insurance) by or through a captive insurance company. This includes providing D&O insurance coverage in situations in which the corporation would not have the power to provide the covered person with indemnification.

2. Voting of Corporation’s Shares. Sec. 160 was amended by House Bill 295, effective February 16, 2022, to restore an incorrectly repealed phrase and clarify that shares of a corporation’s capital stock will neither be entitled to vote nor be counted for quorum purposes if the shares belong to another corporation, if a majority of the shares entitled to vote in the election of directors of that other corporation is held, directly or indirectly by the corporation.

IIl. Amendments to the Limited Liability Company Act (LLC Act), Revised Uniform Limited Partnership Act (RULPA), and Revised Uniform Partnership Act (RUPA)

Senate Bill 275 enacted amendments to the LLC Act (Title 6, Sec. 18-101 et seq.), Senate Bill 274 enacted amendments to RULPA (Title 6, Sec. 17-101 et seq), and Senate Bill 276 enacted amendments to RUPA (Title 6, Sec. 15-101 et seq.) All amendments are effective August 1, 2022. The amendments include the following:

1. LLC Agreement, Partnership Agreement. Secs. 18-101 and 17-101 are amended to provide (1) that any protected series or registered series of an LLC or LP is not required to execute its limited liability company agreement or partnership agreement, and (2) any protected series or registered series of an LLC or LP is bound by its limited liability company agreement or partnership agreement whether or not the protected series or registered series executes the limited liability company agreement or partnership agreement.

Secs. 18-101, 17-101 and 15-101 are amended to provide that a limited liability company agreement or partnership agreement may consist of one or more agreements, instruments, or other writings and may include or incorporate one or more schedules, supplements, or other writings containing provisions as to the conduct of the business and affairs of the LLC, LP, or partnership, or any series thereof.

2. Service of Process. Sec. 18-109, regarding service of process on an LLC’s manager or liquidated trustee, is amended to provide that the Prothonotary or the Register in Chancery of the court in which the civil action or proceeding is pending will mail copies of the process, together with a statement that service is being made pursuant to this section, addressed to the manager or liquidating trustee of the limited liability company at the principal place of business (formerly the registered office) of the limited liability company (if the address is known) and to the manager’s or liquidating trustee’s address last known to the party desiring to make the service.

3. Signatures. Secs. 18-113, 17-113, and 15-124 are amended to confirm that a signature on a certificate of limited liability company interest or certificate of partnership interest may be a manual, facsimile, or electronic signature

4. Execution of Certificates. Secs. 18-204, 17-204, and 15-105 are amended to clarify that the execution of a certificate by a person constitutes an oath or affirmation that, to the best of that person’s knowledge and belief, the facts stated therein will be true at the time the certificate becomes effective.

5. Domestication. Secs. 18-212, 17-215, and 15-904 are amended to provide that before a certificate of domestication becomes effective (formerly, before filing the certificate with the Secretary of State), the domestication will be approved in the manner provided for by the document, instrument, agreement or other writing, as the case may be, governing the internal affairs of the non-United States entity and the conduct of its business or by applicable non-Delaware law, as appropriate, and a limited liability company agreement or partnership agreement shall be approved by the same authorization required to approve the domestication.

6. Conversion. Secs. 18-214, 17-217, and 15-901 are amended to provide that the approval of a conversion to an LLC, LP, or partnership in the manner provided for by the document, instrument, agreement or other writing, as the case may be, governing the internal affairs of the other entity and the conduct of its business or by applicable law, as appropriate, and the approval of the LLC agreement or partnership agreement by the same authorization required to approve the conversion, are required to occur before a certificate of conversion to an LLC, LP, or partnership becomes effective. (Formerly, before the filing of the certificate of conversion).

7. Cancellation of Registered Series. Secs. 18-1108 and 17-1110 are amended to clarify that the certificate of registered series will be canceled if the annual tax for the registered series is not paid for a period of 3 years from the date it is due.

8. Revival of Series. Secs. 18-1109 and 17-1111, which set forth the effects of the filing of a certificate of revival of an LLC or LP whose certificate of formation or certificate of limited partnership was canceled are amended to provide that the effects of revival apply not only to the LLC or LP but to each registered series thereof whose certificate of registered series has not been canceled as a result of the cancellation and each protected series thereof that has not been terminated and wound up.

Conclusion

The 2022 amendments to Delaware’s corporation and unincorporated entity laws make several significant changes. Interested parties should read the bills discussed in this article in full. The bills can be accessed here:

Senate Bill 203

House Bill 295

Senate Bill 273

Senate Bill 274

Senate Bill 275

Senate Bill 276

Sandra Feldman
Publications Attorney
Sandra (Sandy) Feldman has been with CT Corporation since 1985 and has been the Publications Attorney since 1988. Sandy stays on top of the most pressing and pertinent business entity law issues that impact CT customers of all sizes and segments.
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