Understanding Delaware's Latest Corporate Law Changes

Delaware has long been the preferred state for forming a company, attracting hundreds of thousands of businesses across the United States. Approximately 68% of Fortune 500 companies and 79% of new IPOs choose Delaware as their state of incorporation. One of the major attractions for these companies is Delaware’s corporate law structure, widely regarded as one of the most business-friendly in the United States. The Delaware Court of Chancery, known for its speed, fairness, and expertise in corporate law, is responsible for interpreting these laws.

Recently, the Court has made a number of controversial rulings that some have called “overzealous.” Most notable of these cases was the recent dispute between Elon Musk and shareholders. In this case, the Court blocked Musk’s nearly $56 billion compensation package, ruling that Tesla’s board was not truly independent due to their extensive personal and professional ties with Musk, even though Tesla obtained shareholder consent prior to the lawsuit being filed.

The State of Delaware has recently introduced Senate Bill 313 (SB 313), marking a significant change to its corporate laws. This new legislation, effective August 1, 2024, is designed to enhance corporate governance, streamline administrative processes, and offer greater flexibility for companies of all sizes. Whether you're a new entrepreneur or a seasoned corporate attorney, understanding these changes is crucial for navigating the business landscape in Delaware. Let's explore the key provisions of SB 313 and their implications.

1. New Contractual Flexibility

SB 313 allows Delaware corporations to enter into contracts with current or future stockholders, including specific terms that might not be listed in the company’s official documents. This means businesses can now have more detailed agreements that provide clear guidelines on what actions require stockholder approval or consent. This added flexibility helps ensure smoother operations and clearer expectations for everyone involved.

2. Simplified Board Approvals

The new law makes it easier for a company’s board of directors to approve and finalize important documents and agreements. Even if a board initially approves a document that isn’t in its final form, they can later ratify (officially approve) it. This helps prevent delays and ensures that business deals, like mergers, can move forward more smoothly.

3. Clearer Merger Terms

SB 313 clarifies the rules around merger agreements. It allows these agreements to include specific consequences if one party doesn’t fulfill their obligations, such as paying penalties. Additionally, the law lets companies appoint a representative to handle stockholder rights and payments after a merger. This makes the process of merging companies more straightforward and predictable.

4. Easier Amendments to Corporate Documents

The new legislation also makes it simpler to amend the certificates of incorporation for companies that survive a merger. Boards of directors can now make necessary changes without needing to include every detail in the merger agreement. This streamlines the administrative process and allows companies to adapt more quickly to changes.

SB 313 has been one of the most significant changes to Delaware corporate law in recent years. While there are aspects of the amendment that seem to reign in the perceived overzealousness of the Court, others argue the law “preempts the Delaware Supreme Court’s opportunity to act as the final arbiter of Delaware law.” Only time will tell how this new legislation will affect Delaware’s reputation as the Incorporation Capital of the World.

Looking to take advantage of the numerous benefits of Delaware when forming a company? Look no further than Harvard Business Services, Inc. Our expert and friendly staff are ready to assist you in forming your Delaware company!