A number of amendments to the Delaware General Corporation Law (the "DGCL") have been adopted by the Delaware General Assembly and signed into law. The changes became effective on August 1, 2004. While many of the amendments are technical in nature, several important changes have been made to Sections 102, 152 and 303 of the DGCL. In particular, Section 152 was amended to expand the types of consideration for which a Delaware corporation may issue shares of its stock, in conformity with a similar amendment to the Constitution of the State of Delaware of 1897, as amended (the "Delaware Constitution"). The amendment to the Delaware Constitution became effective contemporaneously with the amendments to the DGCL. A brief summary of these recent amendments is set forth below.
The Content of Certificates of Incorporation
Section 102, which addresses the content of certificates of incorporation, has been amended to add a new subsection (d). New subsection (d) clarifies that a corporation's certificate of incorporation may, subject to certain exceptions, include provisions that are dependent on facts ascertainable outside the certificate of incorporation, provided that the manner in which such facts shall operate upon such provisions is clearly and explicitly set forth therein. This amendment is consistent with changes previously made to Section 151 of the DGCL, involving the terms of stock, and Subchapter IX of the DGCL, involving mergers and consolidations.
Consideration for the Issuance of Stock
Section 152 of the DGCL, which addresses the type of consideration for which Delaware corporations may issue stock, has been deleted in its entirety and replaced with provisions that eliminate restrictions on the types of consideration that may be paid for the issuance of stock. The restrictions in Section 152 had conformed to those set forth in Section 3 of Article IX of the Delaware Constitution, which, before its amendment, provided that a corporation could issue stock only for cash, services rendered, personal property, real property, leases of real property, or a combination thereof. The Delaware Constitution has been amended to eliminate Article IX, Section 3 in its entirety. Accordingly, Section 152 now permits the board of directors of a Delaware corporation to issue stock for any type of consideration the board deems appropriate. Thus, shares may be issued for consideration such as services to be rendered in the future, a binding promissory note, or other contractual consideration that does not necessarily represent the type of "in-hand" consideration historically required by Section 152. Amended Section 152 retains the protection in the previous statute to the effect that the judgment of the directors as to the value of any consideration for which shares are issued shall be conclusive in the absence of "actual fraud." The term "actual fraud" as used in Section 152, however, has been interpreted by the Delaware Court of Chancery to mean something different than common law fraud. See Parfi Holding AB v. Mirror Image Internet, Inc., 794 A.2d 1211, 1234 (Del. Ch. 2001) (concluding that the term "seems to have little to do with common law fraud"); Lewis v. Scotten Dillon Co., 306 A.2d 755, 757 (Del. Ch. 1973) (finding that Section 152 does not bar a challenge to the directors' judgment on the value of non-cash consideration when an "excessive valuation ... is so gross as to lead the Court to conclude that it was due, not to an honest error of judgment but to bad faith or a reckless indifference to the rights of others").
Two other points are worth noting. First, the amendment of Section 152 does not eliminate the limitation imposed by Section 153 of the DGCL that shares of stock having par value may be issued only for consideration having a value not less than the par value thereof. Second, conforming changes have been made to Section 154 (clarifying that the consideration paid for stock need not consist of property or cash) and Section 157 (clarifying that the consideration to be paid for stock issued upon the exercise of rights or options need not consist of property or cash).
Delegation of Board Authority to Committees
Section 141(c)(2), which deals with the creation and composition of committees by the board of directors, has been amended to clarify that a board of directors may delegate to a committee the authority to recommend the nomination or removal of members of the board. This clarification eliminates any doubt that a nominating committee may be delegated the power of the board to recommend candidates for election as directors notwithstanding the language in Section 141(c)(2) that prohibits committees from having exclusive power and authority to approve or recommend to stockholders any action or matter that the DGCL expressly requires to be submitted to stockholders.
Reorganization
Section 303, which permits the effectuation of corporate actions approved in the context of a federal bankruptcy proceeding, has been amended to clarify that the provisions of Section 303 apply not solely to reorganization proceedings but to any type of federal bankruptcy proceeding, whether involving liquidation or reorganization. The amendments also clarify that the validity of corporate action taken pursuant to Section 303 is not dependent upon the existence or pendency of a confirmed plan of reorganization. Section 303, as amended, applies to any corporation with respect to which an order for relief has been entered pursuant to the Federal Bankruptcy Code, 11 U.S.C. §§ 101, et seq., or any successor statute. The previous language had created some questions concerning the ability of Delaware corporations to effect corporate actions taken with bankruptcy court approval but without a stockholder vote (such as changes in the composition of the board of directors or interim asset sales). Revised Section 303 eliminates any doubt that such actions are permitted.