Several changes to the Delaware General Corporation Law (DGCL) took effect on August 1, 2023. While perhaps less significant than the 2022 amendments to the DGCL and Delaware Statutory Trust Act, which permitted exculpation of executive officers for violations of the duty of care and mandated that Delaware closed-end mutual funds be covered by a control share acquisition statute, respectively, a few of the 2023 changes are likely to have an impact on shareholder meetings in 2024 and beyond.
The most important amendments this year are to the vote requirements for forward and reverse stock splits. Going forward, Delaware companies will not be required to seek shareholder approval for any forward stock split, as long as the class of stock being split is the only class issued by the company. Reverse stock splits and increases or decreases in the number of authorized shares will now require approval by a majority of votes cast, rather than a majority of shares outstanding; provided that the class of stock in question is listed on a national securities exchange and the company would continue to meet listing requirements as to the minimum number of holders following the reverse split. Companies can choose to maintain the higher vote standards if they affirmatively opt out of the new provisions by specifying in the charter that forward or reverse splits require approval by a majority of outstanding shares.
Forward stock splits are typically carried out by relatively large companies, which tend to have high levels of institutional ownership, and such companies rarely have difficulty in obtaining approval for a forward split. By contrast, reverse stock splits are most often employed by microcap companies as a way to raise the share price and thereby avoid delisting for failure to meet the stock exchange minimum bid price requirement. Despite the obvious benefits to shareholders of maintaining the company’s listing, and the lack of any significant active opposition to a reverse split proposal, many such companies have struggled to obtain the necessary approval, due to low turnout by retail investors that has prevented them from garnering the affirmative vote of a majority of the voting power of outstanding shares. Over the past year and a half, more than 50 such companies – mostly incorporated in Delaware – have issued preferred shares with enhanced voting rights applicable only to a reverse split proposal, as a way to clear the hurdle imposed by the previous vote standard. Such workarounds should no longer be necessary at Delaware companies thanks to the change in the vote requirement.
Other changes to the DGCL effective on August 1 streamline the procedures needed to ratify a defective corporate act, and reduce the required vote for a domestication, transfer or continuance of a Delaware corporation in a non-U.S. jurisdiction from a unanimous shareholder vote to a majority of outstanding shares entitled to vote on such transaction. Shareholders will be entitled to seek a judicial appraisal of the fair value of their shares in connection with such transfer, continuance or domestication.
Nearly simultaneously with the Delaware law changes, Nasdaq has proposed an amendment to its listing rules related to disclosure of reverse stock splits. The proposed new rule, which was filed with the SEC on July 28, would require a company carrying out a reverse split to notify Nasdaq at least five business days in advance of the effective date, and make public disclosure at least two business days in advance. Current Nasdaq rules require public disclosure of a reverse split only one business day before the effective date. Although reverse splits will continue to be a voting item at Delaware companies, the change in the vote standard means that companies are less likely to undertake special solicitation efforts in connection with a reverse split, and the companies in question are typically not widely covered by analysts or the financial media; raising the possibility that a reverse split could escape shareholders’ attention. Moreover, most companies seeking shareholder approval for a reverse split present a range of possible ratios, and shareholders do not know what ratio the board will select at the time they vote. The new Nasdaq rule would ensure that shareholders are able to be aware of the reverse split and the ratio two business days prior to the effective date, reducing the likelihood that market participants would continue to accept orders at the pre-split price.
Authored by:
Marc Goldstein, U.S. Research, ISS Governance
