David S. Rosenthal
New York +1 212 698 3616
On May 16, 2023, the Delaware State Senate passed a bill proposing several amendments (the "2023 Amendments") to the General Corporation Law of the State of Delaware (the “DGCL”), including an amendment to Section 242 that would eliminate or reduce the need to obtain the vote of holders of a majority of outstanding shares for certain amendments to a corporation’s certificate of incorporation. The amendments would ease the process for Delaware corporations to amend their charters in connection with various transactions, including:
Currently, Section 242 of the DGCL provides that, with few exceptions, a corporation may only amend its certificate of incorporation if the amendment is approved by its board of directors, holders of a majority of its outstanding voting shares and, if applicable, the holders of a majority of each class entitled to vote on the amendment as a separate class.
The 2023 Amendments add a new Section 242(d) to the DGCL that sets forth circumstances in which approval of the holders of a majority of outstanding shares may not be required. If enacted into law, the 2023 Amendments may provide a path for the hundreds of NYSE- and Nasdaq-listed companies currently out of compliance with their applicable stock exchange listing requirements to maintain their listing without the obstacle of first obtaining majority stockholder approval.
Under new Section 242(d)(1), no vote of the stockholders will be required for:
New Section 242(d)(2) reduces the stockholder vote required to approve each of the following charter amendments, from requiring holders of a majority of outstanding shares to approve the charter amendment to requiring only that the votes cast for the charter amendment exceed the votes cast against the charter amendment:
Abstentions have no effect on whether the required approval is obtained.
If a corporation does not want the amended voting thresholds to apply, it may “opt in” to the currently operative majority-of-outstanding-shares vote threshold in Section 242(b) by expressly providing for it in its charter. A corporation may also expressly “opt out” of the proposed provisions of Section 242(d).
The proposed amendments to Section 242 of the DGCL are a legislative response to the difficulties that publicly traded companies have been experiencing trying to obtain approval from holders of a majority of their outstanding shares to pass certain proposed charter amendments. This phenomenon is a result of the increase in the number of shares held by retail stockholders (who by and large do not bother to vote on corporate matters, regardless of the underlying merit) and brokerage firms declining to exercise discretionary authority to vote shares held in “street name.” As a result, some companies have had to adjourn meetings, at times repeatedly, and/or spend significant time and resources, including incurring the costs of hiring proxy solicitation firms and running solicitation campaigns, in order to get the votes needed to pass amendments. Others have had amendments fail altogether. At times, public companies have been unable to effect reverse stock splits that would have enabled them to regain the minimum share price necessary to remain listed on a national securities exchange and/or free up shares that could be sold to bring in much needed capital, at great loss to the company.
The proposed amendments to Section 242 of the DGCL would lessen these obstacles for companies that would otherwise struggle to pass necessary (and often stockholder-friendly) charter amendments due to their broad investor base, enabling them to amend their charters more efficiently in ways that will allow them to maintain their listings, support stockholder liquidity and potentially obtain financing. In addition, most public companies currently effect forward stock splits by issuing a dividend; by easing the approval process for a charter amendment, new Section 242(d)(1) may incentivize public companies to change that practice
The proposal next moves to the Delaware House of Representatives for consideration. If enacted, the 2023 amendments will become effective on August 1, 2023.