Business Associations: Agency, Partnerships, LLCs, and Corporations, 2024 Statutes and Rules
English
By (author): Stephen M. Bainbridge
This edition incorporates recent updates to the Model Business Corporation Act, Delaware General Corporation Law, and the rules under the Securities Exchange Act. Among the most significant changes in this edition are the 2023 amendments to Sections 242 and 272 of the Delaware General Corporation Law. Section 242 governs charter amendments.
New Section 242(d) allows corporations with only one class of stock and no series divisions to modify their charters for a forward stock split without needing shareholder approval. Additionally, this section eases the voting requirements for public companies looking to amend their charters for increasing or decreasing authorized shares or for executing a reverse stock split. The amendment must receive more votes in favor than against, and the company must satisfy the post-amendment listing criteria, including the minimum number of shareholders. If the amendment alters the number of authorized shares, a separate vote by each class of shareholders is mandatory, except if the charter waives this need under Section 242(b)(2).
Furthermore, Section 242(a)(3) has been updated to specify that stock splits should affect all issued shares, encompassing both the shares currently in circulation and those held in the company's treasury.
Section 272 has been updated to allow corporations to mortgage or pledge their properties and assets without needing shareholder approval. It includes a new provision creating a safe harbor for secured creditors, enabling them to sell, lease, or exchange mortgaged or pledged assets without shareholder consent. While Section 271 typically mandates shareholder approval for the sale, lease, or exchange of significant corporate assets, the amendment to Section 272 specifies that such approval is not necessary when a secured party exercises their rights under laws like Article 9 of the UCC, even without the corporation's agreement.
Furthermore, the new subsection 272(b) states that the board may, without a shareholder vote, approve the sale, lease, or exchange of pledged or mortgaged assets to lessen or clear the corporation's debt to the secured party. This is permissible if the assets' value is equal to or less than the liability being reduced (the Asset Value Test), and if the transaction is legally allowed under the mortgage or pledge laws. Once completed, these transactions are irreversible, even if the Asset Value Test is not met, provided the transferee contributed value and acted in good faith. However, this doesn't prevent lawsuits to stop an ongoing transaction or claims related to fiduciary duties.
Lastly, any charter rule enacted after August 1, 2023, requiring shareholder approval for asset transactions won't affect transactions permitted by Section 272(b), unless the rule explicitly states otherwise. See more
New Section 242(d) allows corporations with only one class of stock and no series divisions to modify their charters for a forward stock split without needing shareholder approval. Additionally, this section eases the voting requirements for public companies looking to amend their charters for increasing or decreasing authorized shares or for executing a reverse stock split. The amendment must receive more votes in favor than against, and the company must satisfy the post-amendment listing criteria, including the minimum number of shareholders. If the amendment alters the number of authorized shares, a separate vote by each class of shareholders is mandatory, except if the charter waives this need under Section 242(b)(2).
Furthermore, Section 242(a)(3) has been updated to specify that stock splits should affect all issued shares, encompassing both the shares currently in circulation and those held in the company's treasury.
Section 272 has been updated to allow corporations to mortgage or pledge their properties and assets without needing shareholder approval. It includes a new provision creating a safe harbor for secured creditors, enabling them to sell, lease, or exchange mortgaged or pledged assets without shareholder consent. While Section 271 typically mandates shareholder approval for the sale, lease, or exchange of significant corporate assets, the amendment to Section 272 specifies that such approval is not necessary when a secured party exercises their rights under laws like Article 9 of the UCC, even without the corporation's agreement.
Furthermore, the new subsection 272(b) states that the board may, without a shareholder vote, approve the sale, lease, or exchange of pledged or mortgaged assets to lessen or clear the corporation's debt to the secured party. This is permissible if the assets' value is equal to or less than the liability being reduced (the Asset Value Test), and if the transaction is legally allowed under the mortgage or pledge laws. Once completed, these transactions are irreversible, even if the Asset Value Test is not met, provided the transferee contributed value and acted in good faith. However, this doesn't prevent lawsuits to stop an ongoing transaction or claims related to fiduciary duties.
Lastly, any charter rule enacted after August 1, 2023, requiring shareholder approval for asset transactions won't affect transactions permitted by Section 272(b), unless the rule explicitly states otherwise. See more
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