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Exploring the 2024 DGCL 'Market Practice' Amendments: What’s Next?

Kheyransa Aliyeva

On  August 1, 2024, new amendments to the Delaware General Corporation Law (DGCL) came into effect, introducing key changes expected to significantly impact corporate governance. Popularly referred to as the "Market Practice" Amendments, these amendments represent a proactive response to recent judicial interpretations and aim to align Delaware corporate law more closely with established business practices. These updates provide boards and corporations with greater flexibility in stockholder agreements, a more straightforward path for merger agreement approvals, and enforceable remedies for breaches of merger obligations, which should address some of the risks highlighted in recent cases like West Palm Beach Firefighters' Pension Fund v. Moelis & Co., Sjunde AP-Fonden v. Activision Blizzard, Inc., and Crispo v. Musk. The amendments, however, have not been universally accepted in the legal community. Some legal experts have raised concerns over specific changes, especially new Section 118(22), sparking debate and differing opinions.

Several prominent voices, including Delaware State Bar Association Executive Committee Secretary Mae Oberste, the Council of Institutional Investors, and NYU law professors Marcel Kahan and Edward Rock, expressed concerns over the rushed process of the amendments, particularly given that key cases are still pending in the appeals process. Law professors, including Gabriel Rauterberg, Sarath Sanga, and Lucian Bebchuk, criticized the amendments for undermining safeguards like stockholder approval and enabling contracts that bypass board and stockholder oversight. Marcel Kahan and Edward Rock argued that the revisions still leave uncertainty and could excessively expand the board’s ability to delegate authority.


What are the ‘Market Practice’ amendments?

Amendments include, among other things, three major changes to the DGCL: (i) allowing a board of directors to enter into stockholder agreements that provide specific governance rights to stockholders, (ii) enabling a board to approve a merger agreement in a form that is “substantially final,” and (iii) permitting parties in a contract to stipulate penalties or consequences, such as lost premiums, for non-compliance with or failure to fulfill obligations outlined in a merger agreement.


Stockholder Agreements

Background

In the case of West Palm Beach Firefighters' Pension Fund v. Moelis & Co., the Delaware Court of Chancery invalidated provisions in a stockholder agreement that granted significant approval rights to the company's founder. Specifically, the agreement (i) required the board to obtain approval of the founder for taking various corporate actions, (ii) authorized the founder to select the majority of directors, and (iii) provided the founder with rights over the composition of the board. The court held that these provisions prevented directors from utilizing their best judgment and placed substantive limitations on their discretion regarding management decisions. This was thereby deemed a violation of Section 141(a) of the DGCL, which grants the board of directors the authority to manage and oversee the business and affairs of the corporation.

This ruling disrupted Delaware’s longstanding practice of allowing stockholder agreements to grant governance rights to significant investors, sparking concerns among practitioners about potential litigation over similar stockholder agreements that allocate governance rights.


Legislative Response

In response, Delaware amended the DGCL by adding Section 122(18). This amendment permits boards to enter into governance agreements with stockholders without needing authorization in the certificate of incorporation. New § 122(18) allows boards to agree to contractual restrictions, veto or consent rights, and other governance covenants, provided these are consistent with the DGCL and the corporation's charter.


Implications

These amendments aim to bring Delaware law in line with market practices, but legal experts—including NYU School of Law Professors Edward Rock and Marcel Kahan —are concerned that the broad language could undermine established limits on board delegation. The amendments permit governance agreements without clearly defining boundaries, leaving uncertainty about the scope of permissible agreements and the standard of review that courts will apply. While the amendments require compliance with the law and certificate of incorporation, the broadness of these provisions means that Delaware courts will bear the responsibility for interpreting such agreements, which could potentially restrict such agreements by applying principles of equity and fiduciary duties. The market may react by calling for certificates of incorporation amendments to restrict or prohibit governance agreements, depending on the actions of large stockholders or advisory firms.


Merger Agreement Approval

Background

In Sjunde AP-Fonden v. Activision Blizzard, Inc., the court found it plausible that the board’s approval of the merger agreement was flawed because it did not include important terms, such as the consideration to be paid, the disclosure letter, and a dividend provision. This made the approved agreement not “essentially complete” and thus non-compliant with Section 251(b), which requires that a corporation’s board of directors approve a merger agreement that is essentially complete, covering key terms of the transaction. Furthermore, Section 251(c) mandates that stockholders receive a notice with sufficient details about the proposed merger. The court held that the notice sent to stockholders did not meet Section 251(c) requirements, as it failed to include the charter of the surviving corporation and provided only a proxy summary, which did not satisfy the statutory requirement for detailed notice.

The court’s “essentially complete” interpretation of Section 251(b) cast doubt on the validity of mergers approved in near-final draft form, challenging the established practice of board approvals for draft merger agreements and related documents.


Legislative Response

In response to this case, Delaware introduced several amendments to reduce uncertainty and better align with established market practices. New Section 147 allows boards to approve a merger if all material terms are included, determinable, or known to the board. Additionally, new amendments simplify merger procedures by allowing certain agreements to exclude the surviving corporation’s certificate of incorporation and recognizing attached materials as part of stockholder notices.


Merger Agreement Penalties

Background

In Crispo v. Musk, a Twitter stockholder sued Elon Musk, seeking to enforce the merger agreement between Musk and Twitter, aiming to compel Musk to complete the merger. After Musk agreed to proceed with the merger, the stockholder sought mootness fees, claiming partial credit for the transaction’s closure. However, the court rejected this, noting that stockholders would only receive lost premium damages if the merger agreement granted them third-party beneficiary status. This position raised concerns that a lack of strong economic consequences, such as paying lost premium damages in case of buyer breaches, could give target companies less leverage in merger negotiations.


Legislative Response

To address this, a new DGCL Section 261(a)(1) was enacted, enabling parties to a merger agreement to outline penalties, including lost premium damages, for a party’s failure to fulfill pre-closing obligations or to consummate the merger. The amendment affirms that a target company can enforce these penalties without designating stockholders as third-party beneficiaries. Additionally, new Section 261(a)(2) formalizes the practice of appointing a stockholder representative to act on behalf of stockholders in such agreements.


Conclusion

This piece serves to explore the most notable changes brought about by the DGCL 2024 ‘Market Practice’ amendments and discuss how they are likely to shape corporate governance. These updates aim to align Delaware's corporate governance framework with current business practices.  

However, the amendments have raised new questions, particularly around the limits of board delegation in stockholder agreements and the broad language that may require courts to step in to establish boundaries. Moving forward, companies and advisors should carefully evaluate the terms of any governance agreements and the language of merger provisions to ensure they are consistent with fiduciary standards and responsive to evolving court interpretations.

 

Kheyransa Aliyeva is an LL.M. candidate at NYU School of Law and serves as a Graduate Editor of the NYU Journal of Law & Business. Prior to enrolling at NYU, she practiced law in Azerbaijan for four years, working with local law firms and advising clients on various complex legal matters, specifically in contracts, corporate, and labor law. She also served as Lead Legislative Counsel at the Center for Legal Scrutiny and Legislative Initiatives, where she was involved in the drafting and scrutiny of normative legal acts in the field of private law. She is also a Hauser Global Scholar and serves as a Graduate Student Research Fellow at NYU Pollack Center for Law & Business.


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