U.S. M&A Newsletter — April 15, 2024

On March 28, 2024, the Council of the Corporation Law Section of the Delaware State Bar Association (the “Council”) approved its legislation proposing to amend the General Corporation Law of the State of Delaware (“DGCL”) and it is expected to be introduced to the Delaware General Assembly for consideration during its 2024 regular session. The proposed amendments address issues raised in several recent Delaware Court of Chancery (the “Court”) opinions, including issues relating to the validity of certain stockholders’ agreement provisions, board approval of merger agreements, remedies for lost premium damages and amendments to the certificate of incorporation of surviving corporations. 

The proposed changes include amendments to the following sections of the DGCL:

DGCL § 122: Stockholder Agreements

Legal Background

The amendments to Section 122 of the DGCL are being proposed in response to the Court’s opinion in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.^[1] (“Moelis”). In Moelis, the Court found that certain commonly used stockholders’ agreement provisions were facially invalid because they impermissibly constrained the board’s management authority under the DGCL. The Court also suggested that the invalid provisions in the stockholders’ agreement would not have been problematic if they had been included in the certificate of incorporation, which the DGCL expressly permits. 

Proposed Amendments

• If enacted, Section 122 will be amended to provide that a board of directors may take any actions permitted under Section 122, whether or not such action is provided for in the corporation’s certificate of incorporation;
• Subsection 122(5) will be amended such that it clarifies that any agreement empowering an officer or agent to act on behalf of the corporation would remain subject to DGCL § 141(a) and any related existing common law addressing over-delegation of duties and authority of the board, thereby preventing directors from over delegating their authority to manage the corporation.
• The new Subsection 122(18) will provide a nonexclusive list of the types of provisions that may be included in a contract with stockholders or stockholders’ agreement, including those that:
  • restrict or prevent the corporation from taking actions specified in the contract;
  • require the approval or consent of one or more persons (including directors and stockholders) before the corporation may take actions specified in the contract; and
  • covenant that the corporation or one or more persons (including directors and stockholders) will take, or refrain from taking, actions specified in the contract.

DGCL § 147: Approval of Agreements, Documents and Instruments

Legal Background

The proposed amendments would introduce a new Section 147 in light of the Court’s opinion in Sjunde AP-Fonden v. Activision Blizzard, Inc.^[2] (“Activision”). In Activision, the Court declined to grant a motion to dismiss the plaintiff’s claims that the board failed to adequately authorize a merger agreement because the board approved a draft version of the merger agreement. The Court held that although the board did not have to approve an “execution version” of the merger agreement, at a minimum the board was required to approve an “essentially complete” version of the merger agreement.

Proposed Amendments

• If enacted, the new Section 147 would require any agreement, instrument, or document that must be approved by a board to be in final or substantially final form when it is approved. Although the new section does not explicitly describe what constitutes “substantially final”, according to the Council’s synopsis of this amendment, the new section is intended to enable a board to approve an agreement instrument, or document if:
  • all of the material terms are set forth in the agreement, instrument, or document; or
  • determinable through other information or materials presented to or known by the board.
• Section 147 will also provide a mechanism for a board to ratify an agreement, instrument, or document that it has approved, and that is required under the DGCL to be filed with the Delaware Secretary of State (e.g., a certificate of merger), before such a filing has been made or before the filing is effective. The Council’s synopsis explains that this ratification provision will be available as an option to provide greater certainty in circumstances where there may be a question as to whether the agreement, document or instrument as initially approved was in substantially final form at the time of its approval.

DGCL § 268: Certificate of Incorporation of Surviving Corporation; Disclosure Schedules, Disclosure Letters and Other Similar Documents 

Legal Background

The proposed amendments would introduce new Sections 268(a) and 268(b) to the DGCL in response to some other issues that came up in Activision. Section 268(a) is being proposed in light of an issue highlighted in the Activision opinion, in which the plaintiff also alleged that the board of directors did not approve the post-merger certificate of incorporation of the surviving corporation, which was not included in the merger agreement approved by the board. The proposed Section 268(b) was introduced to avoid any implication from the Court’s decision in Activision that, in order for a merger agreement to have been duly authorized, the board of directors must have approved final or substantially final disclosure schedules (or similar documents), or that the disclosure schedules (or similar documents) must be submitted to or adopted by the stockholders.

Proposed Amendments

• If enacted, the new Section 268(a) would provide that any merger agreements where all of the constituent corporation’s stock will be converted into or exchanged for cash, property, rights, or securities (other than stock of the surviving corporation) would not need to include a provision regarding the surviving corporation’s certificate of incorporation to be considered in final form or substantially final form. In addition:
  • any amendment of the surviving corporation’s certificate of incorporation may be adopted by the constituent corporation’s board or any person acting at the board’s direction; and
  • any alteration or change to the surviving corporation’s certificate of incorporation would not constitute an amendment to the merger agreement.
• If enacted, the new Section 268(b) would provide that unless the merger agreement expressly provides otherwise, the disclosure schedules or similar documents would not be deemed part of the merger agreement for purposes of requiring the board to approve a final or substantially final form of the agreement. Hence, the new section would reflect the fact that disclosure schedules are often incorporated by reference into the agreement but are not actually part of the agreement itself.

DGCL § 261: Remedies for Lost-Premium Damages; Appointment of Stockholders’ Representatives

Legal Background

The proposed amendments would introduce a new Section 261(a) in response to the Court’s ruling in Crispo v. Musk^[3] (“Crispo”)- that the plaintiff was not entitled to a mootness fee, finding that his claims were not meritorious since he lacked status as a third-party beneficiary to bring the claims. In Crispo, the Court aligned with the reasoning in Consolidated Edison, Inc. v. Northeast Utilities^[4] (“Con Ed”), that an acquiror could not be held liable for a target shareholder’s lost merger premium if the target’s shareholders were not intended third-party beneficiaries entitled to such relief. The merger agreement in Elon Musk’s purchase of Twitter (now X) had a provision that stated that in the event damages were payable by the buyer, the damages would include the lost stockholder premium. However, the agreement also had a no third-party beneficiaries’ clause that did not carve out stockholders as third-party beneficiaries for the lost stockholder premium. 

Proposed Amendments

• If adopted, the proposed new Section 261(a)(1) would clarify that the target is allowed to contractually provide in a merger agreement that it is entitled to seek damages (including lost premium damages) for the buyer’s failure to perform its pre-closing obligations or failure to consummate the merger under the terms and conditions of the merger agreement. The proposed amendment would also provide that a target company is allowed to retain such payments (so the target would not have to distribute these proceeds to its stockholders). This amendment would effectively allow commercial parties to contract for an outcome different from that contemplated by Con Ed.
• Section 261(a)(2) would also confirm that parties to a merger agreement may include express provisions appointing a stockholders’ representative to enforce the rights of stockholders in connection with the merger, including regarding payment of merger consideration, escrow disbursement, and indemnification claim settlements. Under the proposed Section 261(a)(2), the stockholders’ representative would only be authorized to enforce the rights of stockholders under the agreement. Thus, for example, the amendments would not empower a stockholders’ representative, acting solely pursuant to a provision adopted under new Section 261(a)(2), to:
  • waive, compromise, or settle any rights to appraisal or assert any direct claim for breach of fiduciary duty; or
  • consent to restrictive covenants.

Other Amendments

The proposed amendments would also introduce a new Section 232(g) to clarify that documents enclosed with or annexed or appended to a notice are deemed incorporated in the notice.

Effective Date of Amendments

If enacted, the amendments will become effective on August 1, 2024, and apply to: (i) all contracts made by a corporation; (ii) all agreements, instruments or documents approved by the board of directors; and (iii) all agreements of merger or consolidation entered into by a corporation, and in each case the amendments would apply, regardless of the date of approval or execution. However, the amendments would not apply to or affect any civil action or proceeding completed or pending on or before August 1, 2024.

In Other News

We thought you might find the following articles featuring our Linklaters colleagues useful.

• Harvard Business Review: Solving the Integration Challenges Surrounding Carve-Out Transactions
• Agenda: Are Companies Really Reincorporating in Nevada?
• Linklaters: SEC Voluntarily Stays Climate Disclosure Rules
• Linklaters: A Bitter Pill from Antitrust Enforcers? Regulators Examine Private Equity Investments in Healthcare

[1] West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.,— A.3d —, 2024 WL 747180 (Del. Ch. Feb. 23, 2024).

[2] Sjunde AP-Fonden v. Activision Blizzard, Inc., 2024 WL 863290 (Del. Ch. Feb. 29, 2024).

[3] Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023).

[4] Consolidated Edison, Inc. v. Northeast Utilities, 426 F.3d 524 (2d Cir. 2005).