The proposed changes to the DGCL would explicitly cover pandemics and give companies greater flexibility to postpone stockholders’ meetings or to delay the payment of dividends.
The Delaware State Bar Association (DSBA) has proposed legislation that would make it easier for the boards of companies incorporated in Delaware to deal with the challenges of the COVID-19 pandemic and to take other actions that could result in the postponement of stockholders’ meetings or the delay of dividend payments. Reports about the DSBA proposal to amend the Delaware General Corporation law (DGCL) have tended to focus on the pandemic-specific provisions regarding stockholders’ meetings and dividends, but the proposal includes many other provisions that also could have a significant impact on corporate practice in Delaware.
Emergency bylaws. The DSBA proposal would amend DGCL Section 110(a) to include epidemics and pandemics, and an emergency declaration by the U.S. government, as possible subject matter for emergency bylaws. Current DGCL Section 110(a) contemplates bylaws that could address: (1) an attack on the United States or on a locality in which the corporation conducts its business or customarily holds meetings of its board of directors or its stockholders; (2) nuclear or atomic disaster; and (3) any catastrophe, or other similar emergency condition. The revised provision, thus, would explicitly allow a board to adopt emergency bylaws to deal with the COVID-19 pandemic as it relates to board or stockholders’ meetings.
Revised DGCL Section 110(a), if enacted, also would make a number of related changes. For example, current DGCL Section 110(a) provides that the inability of a board or standing committee to readily achieve a quorum for an action must be "as a result of" the specified event. Revised DGCL Section 110(a) would eliminate the "as a result of" language and state instead that is does not matter ("irrespective of") whether a quorum of a board or standing committee can readily be convened. Revised DGCL Section 110(a) would also add that if a quorum cannot be achieved, emergency bylaws could be adopted by a majority of the directors present.
A synopsis included in the proposed legislation states that the revision to DGCL Section 110 should not be understood to limit or eliminate other powers or emergency actions that have not been expressly enumerated in DGCL Section 110.
Stockholders’ meetings and dividends. The proposed DGCL revision would add new Section 110(i) to provide that, during an emergency, a board could take any practical and necessary action to address the emergency with respect to a stockholders' meeting or dividend payments. In the case of a stockholders' meeting, the board could postpone the meeting but, if the company is an Exchange Act reporting company, the company would have to notify shareholders of the postponement solely via a document publicly filed with the SEC. Similarly, a board could change each of the record date and payment date for an anticipated dividend that has been declared but for which the record date has not occurred. In the case of dividends, the company must notify shareholders of the changes promptly as soon as practicable but again, if the company is an Exchange Act reporting company, the company would have to notify shareholders solely via a document publicly filed with the SEC.
Moreover, proposed DGCL Section 110(i) would provide that no liability can attach, nor could a stockholders' meeting be postponed or voided, because of the failure to make stocklist available if it was not practicable to allow inspection during an emergency.
Potential opposition to DGCL changes. It is unclear when the Delaware General Assembly could meet again to consider the DSBA’s proposed DGCL changes because the legislature has postponed its session until further notice due to the COVID-19 pandemic. Still, some potential opposition has begun to emerge, suggesting that the proposal may face additional scrutiny if it were to move forward.
For example, the Olshan law firm, which represents activist investors, issued a client alert expressing concern that the DSBA could "fast track" the proposal. The firm said the "causal link" between the emergency event and a board’s inability to muster a quorum could be broken by the elimination of the "as result of" language in favor or the phrase "irrespective of whether" in DGCL Section 110(a).
"While these are unprecedented times and ensuring the health and safety of all meeting participants should be the highest priority, the proposed amendments have far-reaching implications for stockholders and their ability to exercise their ultimate form of corporate democracy that we believe require more careful consideration by DSBA leadership," said the Olshan client alert. "In order to reduce the likelihood of unscrupulous boards invoking these rules for entrenchment purposes, any amendment to Section 110 should preserve the language requiring a causal link between the emergency and an inability to convene a quorum for board action and contain other features that protect the interests of stockholders."
Attorneys: (Olshan Frome Wolosky LLP ).
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