Proposed Changes to Delaware Law: No More Top-up Options and Default Fiduciary Duties for LLC Managers | Practical Law

Proposed Changes to Delaware Law: No More Top-up Options and Default Fiduciary Duties for LLC Managers | Practical Law

The Delaware State Bar Association's Corporate Council will meet to decide whether to endorse several substantial proposed amendments to the DGCL and the LLC Act.

Proposed Changes to Delaware Law: No More Top-up Options and Default Fiduciary Duties for LLC Managers

by PLC Corporate & Securities
Published on 21 Mar 2013 • Delaware
The Delaware State Bar Association's Corporate Council will meet to decide whether to endorse several substantial proposed amendments to the DGCL and the LLC Act.
On March 20, 2013, the Delaware Corporation Law Section announced that it will hold a meeting to consider significant amendments to the Delaware General Corporation Law (DGCL), as well as amendments to the Limited Liability Company Act (LLC Act). Amendments to the laws governing limited partnerships will also be considered. At the meeting, the Corporate Council will determine whether it will endorse the amendments to take before the legislature. If approved by the Delaware legislature, most of the amendments would take effect on August 1, 2013.

No Shareholder Approval Requirement After Tender Offer

The proposed amendments would insert a new DGCL § 251(h) that would eliminate the requirement that stockholders of a constituent corporation, whose shares are listed on a national securities exchange or held of record by more than 2,000 holders, must approve certain mergers if a statutorily defined minimum number of shares is tendered in a tender offer or exchange offer consummated by an arms-length third-party acquiror, as long as:
  • The merger agreement is entered into on or after August 1, 2013 and expressly provides that the merger is governed by § 251(h).
  • The corporation consummates a tender or exchange offer for any and all of the outstanding stock of the constituent corporation, under the terms of the merger agreement, that would otherwise have been entitled to vote on the adoption or rejection of the merger agreement.
  • The corporation owns at least the required stock of the constituent corporation necessary to adopt the merger agreement.
  • No party to the merger agreement is an "interested stockholder" of the constituent corporation.
  • The corporation consummating the offer merges with or into the constituent corporation under the merger agreement.
  • The outstanding shares of the constituent corporation that were not cancelled by the merger are converted through the merger into, or into the right to receive, the same amount and kind of cash, property, rights or securities paid for shares of the constituent corporation upon consummation of the offer.
This change would eliminate the need for a top-up option and further streamline the tender offer process. New § 251(h) does not prohibit the certificate of incorporation from requiring shareholder approval of certain mergers following a tender offer. It also does not change the fiduciary duties of directors in connection with these types of mergers, nor the level of judicial scrutiny that applies to the decision to enter into the merger agreement.
This section, if adopted, would become effective August 1, 2013.
For the text of the proposed amendments, see Proposed DGCL Amendments. For more information on tender offers, see Practice Note, Tender Offers: Overview.

Ratification of Defective Corporate Acts and Stock

The proposed amendments would add:
  • New DGCL § 204, which provides a safe harbor procedure for ratifying corporate acts or transactions and stock that would otherwise be void or voidable due to a "failure of authorization."
  • New DGCL § 205, which confers jurisdiction on the Delaware Court of Chancery to hear actions brought under § 204.
These sections, if adopted, would become effective April 1, 2014. For the text of the proposed amendments, see Proposed DGCL Amendments.

Other Amendments to the DGCL

The proposed amendments would also:
  • Amend DGCL § 152 to permit a board of directors to determine the price or prices for which stock will be issued by approving a formula that would calculate the consideration received for the capital stock issued.
  • Amend DGCL §§ 312(b) and 502(a) to deter the formation of "shelf" corporations with no stockholders or directors.
  • Add new Subchapter XV to the DGCL to authorize the creation of public benefit companies.
These sections, if adopted, would become effective August 1, 2013.
For the text of the proposed amendments to the DGCL, see Proposed DGCL Amendments. For the text of the proposed Subchapter XV, see Public Benefit Corporation Provisions.

Default Fiduciary Duties for Managers of LLCs

The proposed amendments would amend LLC Act § 18-1104 to confirm that in some circumstances, a manager owes fiduciary duties not explicitly provided for in the LLC agreement. This amendment does not prevent an LLC agreement from expanding, restricting or eliminating certain fiduciary duties.
If adopted, this section would become effective August 1, 2013. For the text of the proposed amendments to the LLC Act, see Proposed LLC Act Amendments.
For a discussion of the current state of law relating to fiduciary duties in the LLC context, see the accompanying drafting notes to Standard Document, LLC Agreement (Multi-Member, Board-Managed) (Private Equity Buyout).