Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

2018 DGCL Amendments

Every year changes are typically made to the Delaware General Corporation law (the “DGCL”), and this year is no different.  This post will focus on several that seem particularly noteworthy.  The legislature has passed those changes, and they are currently pending approval by the governor.

Market-Out Exception For Intermediate-Form Mergers – Delaware law has long made available an “appraisal” cause of action for certain shareholders to require the Court of Chancery to value their shares under certain circumstances.  Delaware had previously amended that right in “long-form” mergers under 8 Del. C. § 262 by including a “market out” exception.  Under this exception, appraisal rights may not be available for shares that are listed on a national securities exchange or held of record by more than 2,000 holders (which shares the market already arguably values).

This amendment would extend the market-out exception to so-called “intermediate-form” mergers under 8 Del. C. § 251(h).  (In an intermediate-form merger, two companies’ boards approve a merger agreement under which one company offers to buy all of the other company’s voting stock; and enough shares are tendered to the first company that it owns more of the other company’s shares than would be needed to approve the merger, thus making a stockholder vote unnecessary.)

Amendments to Section 204 Governing Ratification – In 2013, the DGCL was amended to add a new provision, 8 Del. C. § 204, which formally allows corporations to ratify certain defective corporate acts and stock.  This most recent amendment would make certain changes to that statute.

First, corporations would be able to use Section 204 even in circumstances in which there is no valid stock outstanding.  (Section 204 generally requires approval by both the board and the stockholders, but in this circumstance only board approval would be required).

Second, Section 204 clarifies that any act or transaction within a corporation’s power under the DGCL would be subject to ratification.  In Nguyen v. View, Inc., the Delaware Court of Chancery had arguably adopted a narrower view, that an act was not within corporate power and therefore could not be ratified if not approved according to the corporation’s organizational documents and the DGCL.  This amendment therefore would clarify that Section 204 has a broader application.


Filed under: Appraisal, Ratification

What’s the Big Deal with Blockchain?

Over the past year or so there has been a good deal of discussion about using “blockchain” technology as a method to store corporate records, particularly about stockholders.  But what exactly is blockchain anyway, and is it coming soon to a Delaware corporation near you?

What is “blockchain”?  Blockchain technology was invented by the unidentified founder (alias “Satoshi Nakamoto”) of, and used in the establishment of, the currency “bitcoin”.  For those who have been living under a rock for the past ten years, bitcoin is a type of money that operates without a central authority and, as of January 11, 2018, had a market capitalization of approximately $240 billion.

Blockchain technology operates by replacing a single record-book with multiple identical record-books maintained by a network of participants.  For instance, with respect to bitcoin, it has enabled the creation of an entirely electronic currency (no actual coins or counterfeit-proof paper bills needed) without the necessity for a central authority to keep records of it (which central authority would need to be trusted and possibly paid by transaction fees).

There are several ways that technology has, both generally and with respect to bitcoin, to reduce the possibility of fraud.  For instance, it can apply decision rules to resolve disputes, such as when copies of the record-book disagree with others as to a transaction.

So what is the connection to Delaware corporate law?  One way in which blockchain technology shows promise is as a replacement for record-books of corporate stockholders.  As corporate lawyers know, but John Q. Stockholder might be surprised to learn, “stockholders” of large publicly held Delaware corporations frequently don’t hold their own shares.

Rather, they are what the law calls “beneficial owners”.  For historical reasons, the system that has evolved in the Unites States is that most such shares of stock are held by an organization called Depository Trust Company (“DTC”) and issued in the name of its nominee, Cede & Company (“Cede”).

So, if a “beneficial owner” wishes to vote their shares, they frequently must tell their broker to tell Cede to vote the way they want or use some other equivalent process.  This can give rise to costly unfair results.  For instance, in one phase of the Dell appraisal litigation, because the name of the stockholder of record changed, Delaware law requiring continuous ownership of shares was violated, resulting in a lost potential damages award.  In another, a mistaken instruction cost a stockholder a potential $200 million award.

One of the long-term promises of blockchain technology is to replace DTC, thereby reunifying beneficial and record ownership and hopefully eliminating some potentially unfair results under Delaware law.  A recently published article by Vice Chancellor J. Travis Laster and Skadden Arps lawyer Marcel Rosner, Distributed Stock Ledgers and Delaware Law, 73 Bus. Law. 319 (Spring 2018), goes into detail regarding blockchain technology and the promise it holds for various facets of Delaware law, and is recommended reading for those looking for a deeper understanding.

Is blockchain technology coming to a Delaware corporation near me?  The answer is maybe, but slowly.  The Delaware General Corporation Law was amended in 2017 to permit, theoretically and under certain conditions, keeping corporate records like stock ownership in blockchain format.  That being said, law and corporate America can be conservative.  The path is open for enterprising Delaware corporations to use and show the success of blockchain recordkeeping, and perhaps others will follow.

In the meantime, as Vice Chancellor Laster recommended in the first Dell decision discussed above, Delaware courts (or the Delaware legislature, for that matter), could consider changing Delaware law to ameliorate these argued unfair results.

Filed under: Appraisal, Court of Chancery

2016 DGCL Amendments

On August 1, 2016, the latest amendments to the Delaware General Corporation Law became effective (amendments available here).

Two sets of amendments are summarized below.  One set limits the availability and extent of the appraisal remedy, while another expands the Court of Chancery’s jurisdiction over disputes involving certain corporation stock or asset sale agreements.

Appraisal amendments – One amendment prohibits certain appraisals of shares of public corporations.  It has three exceptions:

  • It does not apply to short-form mergers (i.e. the parent owned at least 90% of the subsidiary’s shares before the merger).
  • It does not apply if the shares entitled to appraisal (their holders have perfected their appraisal rights) exceed 1% of those eligible.
  • It does not apply if the merger consideration for the shares entitled to appraisal is greater than $1M.

Another amendment allows corporations to avoid paying interest on appraisal awards if and to the extent they prepay the amount to those entitled to appraisal.  This amendment was adopted due to a concern that some appraisal proceedings were at least partly motivated by the difference between low current interest rates and the high legal interest rate available in appraisal actions.

Chancery jurisdictional amendment – Section 111 has been amended to expand the Court of Chancery’s subject-matter jurisdiction.  The Court may now hear cases involving agreements between a corporation and one or more stockholders in which stockholders sell or offer to sell their stock.  It also has nonexclusive jurisdiction over cases involving agreements by corporations to sell, lease or exchange assets pursuant to stockholder consent.  This amendment expands the Court of Chancery’s jurisdiction to contractual disputes typically involving many of the same issues the Court of Chancery already dealt with in its preexisting jurisdiction.

Sandra Feldman of CT Corporation summarizes other 2016 amendments to Delaware’s various business entity laws here.

Filed under: Appraisal, Court of Chancery, Subject-matter jurisdiction

Chancery Validates Opt-In Method To Avoid Appraisal Remedy

The Court published a decision yesterday, Krieger v. Wesco Financial Corp. (available here), involving a matter of first impression under the Delaware appraisal statute.  The Court held that a judicial appraisal may not be available to stockholders even when receiving cash as a default matter if the stockholders are given an election to receive stock if they wish.  The short (10-page) decision bears reading by those who draft proxy statements and those who represent stockholders considering whether to assert appraisal rights.

Wesco underwent a merger with its parent Berkshire Hathaway, Inc. and a Berkshire subsidiary.  Under Delaware’s appraisal statute, Section 262, appraisal rights may be available in such mergers even when (as here) Wesco’s shares were listed on a national securities exchange.  Under Section 262 such rights are available if (to simplify a bit) the shareholders are “required” by the terms of the merger agreement to receive anything other than shares of stock in the surviving entity or a nationally traded company.  Wesco shareholders received cash as a default, but could elect to receive shares  in another Berkshire entity.

The Court ruled that under the language of 262 the shareholders were not “required” to accept cash and therefore an appraisal remedy was not available.  In doing so it rejected the argument that appraisal rights were available, on a stockholder-by-stockholder basis, to those stockholders who did not elect.

Wesco had informed stockholders that it believed appraisal rights were not available but that there were no authorities one way or the other.  The Court noted that this had been an accurate statement.

The Wesco proxy statement also stated that Wesco reserved the right to “take the position that appraisal . . . may not be exercised with respect to any shares as to which cash was elected or stock was received.”  The Court noted that such a position would have been incorrect as the appraisal statute does not depend on an individual stockholder’s election; and that a quasi-appraisal remedy could be available if such a disclosure was material.  The Court, however, held the statement to be immaterial here because appraisal was not available in any event.

Two points of interest here.  First, the Court did not make a distinction between Wesco stating that it might take such a position later as opposed to purporting to state the law. Thus, if a disclosure is otherwise innacurate, phrasing it as a potential position may not help avoid a quasi-appraisal remedy.

Second, the Court did not discuss any argument that the disclosure might have discouraged stockholders from electing to receive stock if they concluded (i) from the disclosures of the absence of specific decisional law on point that an appraisal remedy might be available and (ii) that not making an the election to receive stock (consideration the availability of which makes the appraisal remedy unavailable) gave them a better chance of receiving an appraisal.  The Court either did not hear this argument or, if it did, was not swayed by it.

Filed under: Appraisal, Court of Chancery




Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.