The Situation: In response in part to the COVID-19 pandemic, the Delaware legislature amended the Delaware General Corporation Law to address emergency bylaws and related powers exercised by a corporation's board of directors, as well as with regard to dividends. Additionally, amendments were made to clarify certain provisions regarding indemnification.
The Result: The newly enacted amendments to the Delaware General Corporation Law provide additional clarity to Delaware corporations as to their emergency powers during crises and mandatory indemnification of officers.
Looking Ahead: Delaware corporations and their boards should carefully consider these amendments to ensure they understand the scope of the board's emergency powers, options for dividends, and the impact of the amendments on existing indemnification provisions.
The 2020 Amendments
The Delaware legislature amended the Delaware General Corporation Law ("DGCL"); the amendments became effective in July 2020. Among the key changes were amendments to emergency bylaws and powers, dividends, and indemnification.
Emergency Bylaws and Emergency Powers. The new amendments authorize boards of directors to adopt emergency bylaws during certain crises under Section 110 of the DGCL, even where not permitted to do so by the company's certificate of incorporation or its bylaws. These amendments provide directors of Delaware corporations with specific ways to address identified crises, which now expressly include "an epidemic or pandemic, and a declaration of a national emergency by the United States government," but do not limit the board's authority to take other actions that may be practical and necessary under the circumstances. The amendments permit not only a quorum of the board to adopt emergency bylaws, but also a majority of directors present when a quorum cannot be readily convened. Such emergency bylaws remain subject to repeal or action by the stockholders.
Additionally, the amendments allow boards to postpone stockholder meetings to a later time, notwithstanding that Delaware law requires a corporation to hold its stockholder meeting annually. The amendments also provide that a failure to make the stocklist (the list of stockholders entitled to vote at the meeting) available due to impracticability will not give rise to liability and will not require that a stockholder meeting be postponed or that the results be voided.
Dividends. The amendments also authorize a board of the directors to change the record date and payment date of a previously declared dividend, but only if the record date has not yet passed. If the record date is changed, the new payment date must be no more than 60 days after the new record date. Delaware companies must provide notice to stockholders if they are changing the record or payment dates of dividends (or if they are postponing their annual meetings or holding them virtually as discussed above). The amendments specify that reporting companies may provide notice by a filing with the Securities and Exchange Commission in accordance with applicable federal law.
Indemnification. Section 145 of the DGCL now clarifies that only certain specified officers are entitled to mandatory indemnification, whereas previously "officers" was undefined. Specifically, the parties entitled to mandatory indemnification include a corporation's president, CEO, COO, CFO, chief legal officer, controller, treasurer or chief accounting officer, individuals otherwise identified in public filings as one of the most highly compensated officers, and individuals who have consented to be identified as an "officer" by written agreement. Thus, officers who are not included in the aforementioned group of covered personnel will not be entitled to mandatory indemnification under Section 145. Note that this amendment will apply only to conduct occurring after December 31, 2020.
Four Key Takeaways
- During the current pandemic, boards of directors are expressly authorized to invoke their powers under Section 110 to adopt emergency bylaws that are practical and necessary under the circumstances.
- In response to COVID-19 and other crises, a board may adopt emergency bylaws by a majority of directors present when a quorum cannot readily be convened.
- Directors of a Delaware corporation with a declared dividend should carefully consider whether it is in the best interest of the corporation and its stockholders to postpone the record date or payment date, so long as the record date has not already passed.
- Corporations should review their existing organizational documents to ensure their officers and directors have the desired treatment for indemnification under Delaware law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.