The Delaware General Assembly recently passed several amendments to Title 8 of the Delaware General Corporate Law ("DGCL"), which became effective on July 1, 1999. The amendments affect the following Sections of Title 8:
- Section 111 -- Interpretation and Enforcement of the Certificate of Incorporation and Bylaws: This new section to the DGCL explicitly grants the Delaware Chancery Court jurisdiction to resolve disputes that arise from any provision of a corporation's bylaws or certificate of incorporation. This expansion of jurisdiction is not intended to preempt any preexisting law that establishes the subject matter jurisdiction of the Chancery Court.
- Section 202 -- Restrictions on Transfers and Ownership of Securities: The amendments to Section 202 expressly permit corporations to place reasonable restrictions on the transferability of its securities and the quantity of its securities that may be owned by any person or group of persons. Such restrictions may be imposed through a corporation's certificate of incorporation or by-laws, or through a shareholders' agreement. Restrictions that are "conspicuously" noted on security certificates are enforceable against the holder of such securities. Under the amendments, the following restrictions on the transfer or ownership of a corporation's securities are "conclusively presumed to be for a reasonable purpose:" (i) restrictions necessary to maintain any favorable tax attributes (including net operating losses); (ii) restrictions necessary to qualify a corporation as a real estate investment trust; (iii) restrictions necessary to maintain or comply with any statutory or regulatory advantages or requirements.
- Section 265 -- Conversion of Other Entities to a Domestic Corporation: This new DGCL section enables a Delaware limited liability company, a Delaware limited partnership or a Delaware business trust to convert to a Delaware corporation. To effectuate such a conversion, the original entity must file a certificate of conversion and a certificate of incorporation with the Delaware Secretary of State. Under the amendments, a conversion by the original entity into a Delaware corporation will not affect any of the obligations or liabilities that the original entity may have incurred prior to its conversion. Moreover, the act of converting an original entity into a corporation will not constitute a dissolution of the original entity and will not require the original entity to "wind up its affairs or pay its liabilities and distribute its assets." Rather, the amendments provide that the conversion "shall constitute a continuation of the converting . . . entity," except in a corporate form.
- Section 266 -- Conversion of a Domestic Corporation to Other Entities: In contrast to Section 265, this new addition to the DGCL provides a mechanism for a Delaware corporation to convert from a corporate entity to a Delaware limited liability company, a Delaware limited partnership or a Delaware business trust. In order to execute such a conversion under the amendments, the board of directors of the Delaware corporation must pass a resolution approving such action, obtain the approval from all outstanding shareholders (whether voting or nonvoting) and file a certificate of conversion with the Delaware Secretary of State. Moreover, the conversion of a corporation to another entity will not affect any of the obligations or liabilities that the converting corporation may have incurred before its conversion.
- Other amendments to the DGCL include: (i) clarifications to the dividend policies for nonstock, nonprofit and profit corporations; (ii) revised procedures for the governing body of a nonstock corporation in connection with amendments to its certificate of incorporation; (iii) relaxed stock ownership requirements for a parent corporation in consummating a short form merger; (iv) changed voting requirements necessary to approve a merger of a nonstock corporation (from two-thirds to a majority); (v) elimination of the requirement that a holding company's stockholders must vote to elect or remove directors of a subsidiary corporation; and (vi) clarification of the proper punctuation for corporate names and words of foreign countries or jurisdictions. *
1999 Delaware Laws CH. 123 (SB No. 137).