How Can I Sign Delaware Arbitration Agreement

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[Music] [Applause] please be advised that this recorded webinar has been edited from its original format which may have included a product demo to set up a live demo or to request more information please complete the form to the right or if you are currently not on csc global there is a link to the website in the description of this video thank you hello everyone and welcome to today's webinar first state update 2020 case law developments and updates to delaware general corporate corporation law my name is annie tribaletti and i will be your moderator joining us today are guest speakers roxanne hoffman christopher kelly and michael maxwell of potter anderson and karoon and with that let's welcome roxanne chris and mike thank you annie this is good morning everyone and thank you for attending this first state update webinar on delaware corporate law developments my name is chris kelly and i'm a partner in the corporate group at potter anderson caron practicing primarily corporate litigation in the delaware court of chancery and as annie mentioned i'm joined by my partners today roxanne hautman and mike maxwell roxanne is a partner in the firm's corporate group as well her practice primarily involves counseling delaware corporations on transactions and governance issues and mike is a partner in the business group at potter anderson and he primarily advises clients on delaware corporate and alternative entity law issues in transactions involving delaware entities in addition mike and i are contributors on the csc publication delaware laws governing business entities we will begin the webinar today with an overview of a few of the significant court decisions over the past year and then we'll turn to the key amendments to the delaware general corporation law we'll then have a discussion and q a section please feel free to submit questions at any time or near the end of the program our statements today are those of the speakers alone and not the views of our firm any of any other firm lawyers or any firm client with that intro out of the way let's turn to the case law developments the first case we'll discuss today is the case of in rey dell technologies inc class v stockholders litigation a decision by the court of chancery in june of this year the case involved a challenge by former holders of dell class v stock with the company's redemption of the stock according to the plaintiff's complaint the class v stock was tracking stock based on the company's 82 ownership stake in vmware the class v stock however did not track the value of vmware but rather traded at a 30 percent discount allegedly because the class b shares were subject to the company's right to forcibly convert the shares pursuant to a pricing formula in particular circumstances the dell board began exploring ways to consolidate the company's ownership of vmware and ultimately charge an existing board committee with negotiating redemption of the class v stock according to the complaint the board attempting to satisfy the mfw standard conditioned any redemption or similar transaction on both committee approval and approval by a majority of class v shareholders the company however reserved the right to bypass the mfw process by engaging in a forced conversion after identifying a potential conflict as to one of the existing committee members the board then formed a special committee that did not include that member the board again conditioned any redemption or similar transaction on compliance with mfw but again reserved the right to bypass mfw by engaging in forced conversion according to the complaint during negotiations the company allegedly repeatedly informed the committee that if they did not agree to a negotiated redemption then the company would proceed unilaterally with a forced conversion the committee ultimately agreed at the at the conclusion of the negotiations to a negotiated redemption which valued the class v shares at 21 at approximately 21.7 billion in total large stockholders objected to the deal and it appeared that the class v stockholders may not approve it rather than negotiating further with the committee the company then negotiated directly with six large class v stockholders at the same time the company allegedly took public steps to prepare for a forced conversion following negotiations the company in the large stockholder group ultimately reached an agreement on a new deal valuing the class v shares at approximately 24 billion in total the committee the special committee had not been involved in negotiations between the company and the large stockholders when the company informed the committee of the terms of the stockholder negotiated redemption the committee allegedly met for an hour and then approved it thereafter the unaffiliated class v stockholders approved the deal and it subsequently closed plaintiffs in the case were former class b stockholders and they brought suit against dell's founder and the private equity firm that together controlled the company as well as the members of the board alleging that the defendants breached their fiduciary duties when negotiating and approving the stockholder negotiated redemption on a defense motion to dismiss the court largely denied the defense motions reject primarily rejecting the defendant's pleading stage argument that msw necessarily applied because the complaint alleged alleged facts that made it reasonably conceivable that the defendants failed to comply with mfw's requirements making entire fairness the operative standard of review the court also rejected the special committee member's argument that the plaintiffs failed to plead a non-exculpated claim against them but the court did dismiss on an interlocutory basis the director who had served on the original existing board committee but who was quickly excluded from the special committee due to a potential conflict focusing on the court's mfw analysis under the supreme court's mfw decision and progeny as you may know if a corporate transaction with a controlling stockholder follows the mfw framework then the transaction will receive the benefit of the business judgment rule there are six necessary requirements for obtaining mfw cleansing one the controller must condition the transaction on the approval of both the special committee and a majority of the minority stockholders who the special committee must be independent three the special committee must be empowered to freely select its own advisors and to say no definitively the special committee must also need its duty of care in negotiating a fair price the vote of the minority must be informed and there must not be coercion of the minority the court found based on the plaintiff's complaint that there were well pled allegations that at least four of those requirements conceivably were not satisfied first the court found that the plaintiffs had adequately alleged that the mfw conditions were not properly established at the outset because according to the complaint the company excluded a forced conversion from the scope of the mfw conditions according to the court the special committee was never fully empowered to say no because the company reserves the right to engage in a forced conversion and threatened both the special committee and the company stockholders with that alternative likewise the court found that the plaintiffs had well pled that the company did not respect the mfw conditions because it bypassed the special committee by negotiating directly with the large stockholder group the court explained that mfw's dual protections contemplate that the special committee will act as the bargaining agent for the minority stockholders with the minority stockholders then rendering an up or down verdict on the committee's work the court explained that those roles are complements not substitutes second the court found that there were well flood allegations in the complaint that the special committee and the stockholders were allegedly subject to coercion by the company's alleged threat of the forced conversion the court explained that by doing so the company both undermined the special committee's ability to bargain effectively as well as the ability of the stockholders to vote down the deal third the court found that the plaintiffs had well pled that neither special committee member was independent from the company's founder and the private equity firm controllers based on the specific allegations of social connections friendships and business relationships in the case fourth the court found that the plaintiffs had sufficiently alleged that the class v stockholder vote was not informed including based on the alleged failure to disclose the price of the special committee's final proposal alleged disclosure deficiencies regarding the committee's advisors and the committee's knowledge of a prior valuation at a much different value so having summarized the case what are some of the key takeaways from it well the primary takeaway one of the primary takeaways is the scope of the special committee's mandate is critical in invoking the state harbor of mfw as the court explained the committee must be fully empowered to say no another key takeaway is that starting with a conflicted special committee is not necessarily fatal to application of the mfw safe harbor however continuing the conflicted special committee will preclude mfw from apply the court has in the past as you may know applied mfw where there was a prompt resignation of a conflicted committee member a third key takeaway is that if hoping to invoke the mfw safe harbor transaction planners should consider the operative standard for the independence of special committee members when evaluating who should serve on on a special committee are are the members sufficiently loyal to beholden to or otherwise influenced by an interested party in the transaction so as to potentially undermine the director's ability to judge the matter on its merit the court will look to social ties friendships business dealings etc and will view allegations in a complaint holistically and not individually an important point is that there has been a friend an observable trend in the past five years or so of the delaware courts looking with perhaps heightened scrutiny than in the past at such relationships when evaluating director independence another key takeaway from the case is that a controller can be found to have engaged in coercion by threatening to exercise a right it possesses thus just because the force conversion right within the company's charter that simply means that it's legally possible as the court explained it doesn't necessarily make it equitable delaware has a what's called a twice-tested paradigm fiduciary conduct faces two tests the first test is legal the second test is equitable as the supreme court has held inequitable action does not become permissible simply because it is legally possible those are just some of the key takeaways i could talk about the the dell case at length but given that we only have an hour or so we'll move on to the next case which is the mind body case that involved plan of stockholders challenged to the sale of mind body to a private equity firm in the case the plaintiffs allege that the company's ceo founder the cfo and the director appointed by the venture capital firm in that that held a large stake in the company tilted the sale process in the private equity firm buyers favor due to alleged conflicts of interest in the form of the ceo's alleged need for liquidity both the ceos and cfos allege prospect of future employment and the vc firm investors alleged desire to exit its investment according to the complaint the company had made two strategic acquisitions in 2018 that the company had touted to stockholders and analysts would yield significant growth for the company in 2019. despite the company's alleged bright financial prospects the ceo was allegedly motivated to force a sale of the company due to his personal wealth being tied up in company stock and his alleged over-extended personal finances the complaint then alleged that the vc firm investor was motivated to force a sale because its investment was held in a fixed life fund the firm had sought to exit its investment in 2018 and its board designee planned to step down from the board in 2019 and the vc firm could not easily sell its large block of stock without accepting a discount according to the complaint the ceo or founder reconnected to the private equity firm buyer through an investment banker and he attended the private equity firm's portfolio company ceo summit which allegedly had touted the enormous wealth generated for founders ceos following the pe firms take private transactions thereafter the pe firm made a direct expression of interest to acquire the company at a substantial premium to its trading price the ceo in response allegedly informed some members of senior management about the expression of interest but had allegedly instructed them not to discuss it with the board the ceo and cfo then allegedly conducted an earnings call wherein they lowered the company's guidance which allegedly was not consistent with management's actual expectations about the company's future performance and that resulted allegedly in the stock price dropping significantly soon after around that time the board formed a transaction committee chaired by the vc firms board designee for the limited purpose of reviewing the potential engagement or financial advisor to evaluate potential strategic alternatives two financial advisors then pitched the committee and the committee allegedly went with the ceo's direction to retain the financial advisor that had reintroduced him to the private equity firm buyer and had already been in discussions with the ceo regarding a sale process thereafter the board expanded the committee's mandate which initiated the sale process the ceo and the financial advisor allegedly then selected potential bidders to contact meanwhile the ceo had allegedly been in touch with the private equity firm throughout this time and had provided diligence to the private equity firm other bidders in contrast allegedly received less information and ceo declined to include certain potential bidders in the process after receiving an offer from the private equity firm at 35 a share the committee directed its financial advisors to tell all potential bidders about the competitive nature of the process the accelerated timeline and the need for prompt indications of interest the advisor then allegedly instructed two of the potential bidders to provide an indication of interest within the next 24 to 48 hours and in response to the committee's acceleration of the process all other potential bidders withdrew after the board made a counter offer of 40 a share the private equity firm buyer calendar countered at 36.50 which the board approved the ceo and cfo were then allegedly on vacation during a highly compressed go shop that began on christmas eve and the company allegedly delayed and entering into ndas and providing diligence to certain prospective bidders the company then allegedly failed to disclose its massive beat of fourth quarter uh in his fourth quarter results from the prior lowered earnings guidance that had given with the ceo and the vc firm's irrevocable proxies in favorable in favor of the merger which counted for approximately 40 percent of the company's voting power a majority of stockholders approved the transaction and thereafter closed in response to the plaintiff's stockholders complaint challenging the merger defendants had moved to dismiss arguing that corwin cleansing applied due to a fully informed stockholder vote approving the transaction on the defense motions to smith the court largely denied those motions by way of background as you may know the delaware supreme court's decision in the corwin case and it's progeny that followed hold that a irrebutable presumption of the business judgment rule arises when a transaction is approved by a fully informed uncoerced vote of the disinterested stockholders in analyzing the defense motions to smith the court first found that the plaintiffs had adequately pled a paradomatic plane under revlon due to their allegations of quote a supine board under the sway of an overleaning ceo then on a certain direction who tilted the sale process for reasons inimical to the stockholders desire for the best price the court explained that the plaintiffs had sufficiently alleged that the seat that the founder ceo breached his fiduciary duties and that he allegedly was conflicted because he had an interest in near-term liquidity and an expectation that he would receive post-merger employment accompanied by significant equity-based incentives from the pe firm buyer post-merger that he allegedly tilted the sale process by strategically driving down the company stock price and providing the private equity firm buyer with informational and timing advantages during due diligence and go shop periods and allegedly withheld material information from the board and that the board failed to adequately oversee the founder ceo the court next found that the stockholder vote was not fully informed and thus the corwin defense did not apply based on the plaintiff's allegations the court found disclosure deficiencies in the form of the allegations regarding the ceo's conflicts of interest and his efforts his alleged efforts to tilt the sale process in the p firm buyers favor including regarding post-closing employment the initial expression of interest and the p firm's timing information advantages during the sale process the court also found disclosure deficiencies in the form of the allegations made by the plaintiffs regarding the actual due for results versus the previous lowered guidance and the proxy's description of the merger price as a premium to the trading price the court explained that plaintiffs had made well-defeated allegations that the ceo allegedly drove down the stop price by lowering q4 guidance rendering it reasonably conceivable that the q4 actuals would correct them as leading impression created by the deflated stock price and the merger price premium that was based on it the court next found that the plaintiffs had well-played a fiduciary claim against the cfo finding it reasonably conceivable based on the allegations in the complaint that the cfo acted with gross negligence during the sale process due to his punitive reckless indifference to the ceo's efforts to tilt the process lastly the court dismissed the vc board designee on an interlocutory basis finding the plaintiff's allegations of a liquidity driven conflict to be unpersuasive so what are some of the takeaways from the mind body case well first a board or transaction committee should play an active and direct role in the sale process as the dollar supreme court has stated a board cannot avoid its actors in direct duty of oversight in a matter as significant as the sale of corporate control the court the dell reports have also explained relying entirely on advisers or management to conduct a sale process can potentially in certain cases taint the design and execution of the trend action part of the board's duties or transaction committee's duties is being proactive about identifying and responding to actual or potential conflicts of interest involving the directors officers or advisors second before appointing a director designee of a large stockholder to a transaction committee a board should evaluate whether the stockholder may potentially have interest that could conflict with those of the companies other stockholders a third takeaway is that if senior management is involved in the sale process a board or transaction committee should consider whether there may be any potential conflicts of interest including with respect to potential post-merger employment a final takeaway is that officers involved in the sale process and in general should understand that they owe fiduciary duties to the company in the stockholders also unlike directors corporate officers do not have the benefit of the section 102b7 exculpatory charter provision as a result a breach of the duty of care gross negligence that is could be enough to result in liability so with that i'll turn it over to mike to discuss through other cases great thanks chris so i'm next going to cover a decision from the stellar court of chancery from earlier this year in which the court addressed an attempted board coup instigated by a founder so in in this case palisades growth capital the backer a founder alex backer who had been removed as a ceo of a company called q less took advantage of two board vacancies one of which could have been filled but for inaccurate legal advice to uh the venture investors and he took advantage of these board vacancies to pass resolutions firing the new ceo and reappointing himself the founder as ceo they also stacked the board with three aligned directors and increased the quorum to three directors resolutions were passed by two one vote with the founder and his father and fellow director passing the resolutions over the objection of the third director which was elected by one of the venture investors the effect of the resolution is valid would have been to lock in the founders control over the corporation so the attempted coup took place at qles which is an early stage startup it develops and licenses a q management system for retail businesses alex backer was the founder of q less and owned a majority of the common stock he was also the ceo at one time backer's father rick carter backer is also director palisades growth capital was a principal investor and owned a majority of the series a preferred stock and although's hybrid 2 was another principal investor and owned a majority of the series a1 preferred stock so the governance scheme at q less on the whole seemed very fairly common to what you might see in a venture-backed start-up company the scheme sought to allocate control between the founder and the venture investors through separately elected directors pursuant to the certificate of incorporation and charter so the board size so as you may know under section 141 b of the ddcl unless a certificate of incorporation fixes the number of directors the number of directors is set by or in a manner provided in the bylaws cue less certificate did not fix the number of directors and its bylaws permitted the number of directors to be fixed by resolution of the board of directors or by stockholders at the annual meeting of the stockholder consistent with the bylaws the board resolution fixed the number of directors of five with respect to the director seats the certificate corporation established separately elected director seats two seats were to be filled by the holders of the common stock voting as a separate class these are the referred to as the common stock directors one director was to be elected as by the holders of the series a preferred stock voting is a separate class and these are referred to as series a director and one director elected as by the holders of the series a1 preferred stock voting to the separate class which is the series a1 director and finally one director was to be elected by all stockholders common preferred voting as a single class and this was an independent director now the certificate of incorporation the voting agreement suggested that backer and the venture investors contemplated a situation in which backer would be removed as ceo and the new ceo would be added to the board rather than immediately remove one of the two common directors to make room for the new ceo on the board the documents contemplated in 18 month transition period therefore for 18 months following backers removal from the board the board size would be increased to 6 make thereby making room for the new ceo and then at the end of the 18 month period the common stockholders voting as a separate class would only elect one director and the board would shrink back to five members now palisades altos backer and certain other stockholders also were party to a voting agreement and in that voting agreement they agreed to take certain steps that would ensure that the individuals selected by backer palisades and altos would fill the seats on the board so to that end they agreed to elect a palisades doesn't need to serve as the series a director and altos doesn't need to serve as the series a1 director to elect two people designated by the holders of a majority of the common stock to serve as the common stock directors and to elect one mutually agreeable person who satisfied certain independence criteria to serve as the independent director now in addition and consistent with the contemplative potential removal of backers ceo and the ensuing transition period in the voting agreement they also agreed to maintain the board size at five except for the 18 months following any termination backer when the board should be set at six the size would be set at six and following any termination backer to elect the company's ceo to serve as the ceo director so backer was removed as ceo in june of 2019 now while the the reasons for his removal may not be important it could be useful to understand that the removal was contentious and was not undertaken until after a special committee investigated allegations of misconduct against backer and recommended his removal so when he was removed the board had a full complement of five directors the founder alex backer and his father ricardo backer held the two common director seats palisades destiny anderson held the series a director's seat and altos destiny hodong nam held the series a1 director c and ivan markman held an independent director seat the company did not hire a new ceo until september 2019 when it hired kevin grauman with the apparent approval of backer once hired under the terms of the voting agreement drama needed to be added to the board now as a technical matter before you could be added to the board the board would need to be expanded to six directors and that expansion per the company's bylaws to only be accomplished by board resolution or action by stockholders at an annual meeting it appears that no formal action was ever taken to add grommet to the board no vote no rick consent and no resolution or stockholder action expanding the board to six so around the time grauman is hired as the new ceo the a1 director resigns so the a1 director seat is vacant after discussing the vacancy with palisades altus determined that it wants to fill the sea with a gentleman named paul d'addario now altos council sends an email to the company's council to that effect on october 28th so in the email alto's counsel states that altus would like to fill the vacancy left by nom's resignation as soon as possible and request that the company's council draft and circulate the necessary stockholder consent to elect the dario to the cue less board as they altos destiny a company's council responded and advised presumably in good faith that filling the vacancy required passage of a board resolution at the dually called meeting and and that advice uh was wasn't in inaccurate it's incorrect because the certificate incorporation allowed altos as the holder of a majority of the series a1 preferred stock to elect its designee by vote or rate consent so as a result altos could have called the meeting of the a1 preferred stockholders to elect daddario or alternatively and probably more efficiently also says the holders of the majority of the series a1 preferred stock could have executed a written consent electing to dario but altus did not do so instead in reliance on the advice of the company's council it took no further action to elect dario assuming instead that it would be addressed at a board meeting so on october 27th baca requested that the board convene for a meeting on november 15th in the email traffic regarding the scheduling of the meeting backer indicated that he assumed and requested that the board include the new ceo groman at that point however there had still been no action to increase the board to six or to elect grauban to the board on november 11th at boxer's request grommet circulated proposed resolutions for the board meeting that would if adopted appointed dario to the board and confirmed grauman as the ceo director and no one objected to the resolutions the day before the scheduled board meeting markman the independent director resigned in the opinion the court suggests that markman resigned after he spoke to backer and backer informed him that he was going to attempt to reinstate himself a ceo in language that suggests a certain degree of possibly direct or fatigue markman told the court that he resigned because he decided he just didn't have time for it anymore at the board meeting after markman resigned backers saw the opening if the board consisted of just three directors two common directors which would be bocker and his father and his father ricardo and anderson the series a preferred director he could reassert control as the court put her doctor left in the action so consulting with his own counsel bacar prepared resolutions for the presentation in a passage at the board meeting that would essentially terminate gromina's ceo and replace him with backer point bocker is the ceo director appoint patricio questra to serve as the second common stock director and amend the bylaws to require a quorum of three whenever the board had six directors essentially these resolutions would lock in bacher's control of cueless at the board meeting baca took the position that neither grauman nor dodario were directors and the board was comprised of backer his father in anderson the palisades designee lockers and and his father therefore at that point passed the resolutions over anderson's objections so in the litigation palisades initiated litigation the court of chancery avoid the actions taken at the board meeting and palisades attack on the actions took the form of as chris mentioned previously the now familiar twice tested framework which as chris explained earlier under that framework corporate conduct is tested twice first for legal compliance in other words did the actor have the legal authority to take the act and second for equitable compliance in other words in taking the action did the actor act equitably thus consistent with that framework palisades argued first that d'addario was elected to the board prior to the board meeting and as a result was improperly excluded from the meeting and second even if the board vote was legal bachelor's conduct and convening the meeting was inequitable so palisades argued dadario was elected the board in advance of the meeting because the october 28th email from altos to the company's council constituted a vote of the series a1 preferred stockholders or alternatively but the october email was a writ consent of altos the court confirmed that the holders of series a1 preferred stock had the right to fill the vacancy by vote or rate consent in lieu of a meeting but concluded the october email was neither a vote nor written consent stated that an email requesting cue less counsel to take action to facilitate a stockholder consent is not a stockholder vote under a law the dgcl is clear that stockholders vote at meetings and they request that somebody else draft a written consent under any sensible reading cannot be construed itself as a writ consent and the way i've read this case and interpret that as and what the court said essentially was that you need more affirmative language that there was not an action actually being taken it was a request for uh to draft a consent so there needs to be more affirmative language the court did however invalidate the actions taken at the board meeting on equitable grounds and so really the takeaways from this are reaffirming two basic points of law first as we talked about the twice tested framework it's a restatement of that and reaffirmation of the twice tested framework that is that it's the bedrock doctrine that this court will not sanction inequitable action by corporate fiduciaries simply because the act is legally authorized the second is that the actions are avoidable if carried out by means of deception but there must be some affirmative deception before equity will intervene so the court concluded that backer affirmatively misrepresented that he wanted gromin on the board and i think without that it would not necessarily have been enough uh t be the you know to form the affirmative deception that the court was looking for but because he indicated in the emails that he assumed groman was on the board and requested proposed resolutions placing grommet on the board and affirmatively misrepresented that he wanted him on the board the court found that to be a form of affirmative deception the court noted that had anderson known and backer's opposition he could have refused to participate defeating a quorum and thwarting the coup as anderson's presence at the meeting was secured under deliberately false pretenses any action taking at the meeting was void again uh an interesting case just demonstrating the you know twice tested framework in that just because it's something's legal doesn't mean it's equitable and both both analysis should be run through by practitioners when you're contemplating taking certain actions so the the next case we'll we'll talk about uh briefly is the salzburg fee um i'm sure i'm mispronouncing that where at issue was the validity of charter provision requiring all stockholders to file any claims arising under the securities act of 1933 in federal register court the motivation for these provisions was the united states supreme court's decision in cyan the beaver city employees retirement fund which allowed state courts to retain concurrent jurisdiction for 33 act claims so just by way of background a stockholder sued three companies that adopted a federal form charter provision before their ipos blue apron roku and stitch fix the stockholders yabakooki uh sought a declaratory judgment that the provisions were invalid the companies argued these provisions were attended to the forum selection provisions that were deemed to be valid in the boilermakers decision in 2013. that decision paved the way for charter amendments requiring stockholders to bring internal affairs suits including derivative litigation fiduciary duty claims and claims relating to the dgcl in a particular forum a vice chancellor losser declined to extend and and should mention in the lower case or the the chancery court case um of salisbury vice chancellor alastair declined to extend the boilermaker's decision to these federal forum provisions because according to the court the 33 act claims do not arise out of the corporate contract do not implicate the internal affairs of the corporation but rather arise from the investors purchase of the shares the constitutive documents of a delaware corporation cannot bind a plaintiff to a particular form when the claim does not involve rights or relationships that were established by or under delaware's corporate law so in other words a federal claim under the 33 act is a clear example of an external claim and the court of chance recited several factors to distinguish this well stating while it involves business and affairs of the corporation it doesn't follow that these matters involve internal affairs of the corporation and the plaintiff that purchased service securities and the source of the cause of action is the sale of the security that violates the federal regulatory regime defendants need not be directors or officers it can be anyone that the 33 act identifies as viable defendant the event giving rise to the claim takes place just before the plaintiff becomes a stockholder before the corporate contract applies the plaintiffs also don't need the continuous stockholders to assert a 33 act claim and the federal claim does not invoke the stockholders legal or equitable rights on a state law corporate contract now keeping in mind that the plaintiff asserted a facial challenge which required showing that the charter provisions cannot operate lawfully or equally under any circumstances the supreme court uh reversed holding that such provisions can survive a facial challenge the starting point of the supreme court's analysis was that section 102 be one of the delaware general corporation law allows companies to include in their charities any provisions for the management of the business or for the conduct and the affairs of the corporation or creating defining limiting and regulating the power of the corporation the directors and the stockholders earning class of stockholders if such provisions are not contrary to delaware law so noting statistics on the number of multi-jurisdictional 33 act lawsuits filed since the client case the court suggested that a federal foreign provision could be justified on efficiency grounds and would not violate the policies or laws of delaware it rejected a number of statutory construction arguments that the 2015 amendments to the dgcl which had added section 115 had narrowed what 102b1 permits the court disagreed with the vice chancellor's limiting construction of internal affairs and the notion that the delaware's interest went no further than internal affairs properly defined and the court instead held that there is an outer ban of intra-corporate affairs as to which that sorry that the an outer bound of venture corporate affairs as to which the contractual ordering under 102b1 also is permissible and that federal foreign provisions at least fell within this outer ban and the court in its case uh inserted a something of a diagram showing you know various levels and scopes and and finding that there's this outer band of inter-corporate affairs so the court held that such provisions uh that is the federal forum collection provision for 33 act litigation do not violate any federal law or policy and also noting that the u.s supreme court had decades ago upheld arbitration provisions precluding state court litigation of 33 act claims and that both the federal and delaware approach to form selection provisions uh holds those provisions to be presumptively valid and enforceable so a couple of takeaways from this case uh again salzburg was a facial challenge the opinion doesn't say that a federal forum provision will be upheld in every situation the court did spend some time discussing that um you know the enforceability of those provisions uh but but without determining that at the in this instance now the charter and bylaw provisions the court said charter by law provisions that may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose uh the other takeaway is the provisions here were in the certification corporation and stockholders had approved them before the companies went public now there's certainly arguments why these would be valid if placed in bylaws or and had not been approved by stockholders or added after an initial public offering but you can't be sure that those arguments would work and so the language and the opinion stresses contractual setting of these provisions and suggesting that a provision unilaterally created by a board after public offering may be viewed a little bit differently good morning everyone uh this is roxanne heltman i am going to briefly cover a couple of the more notable amendments uh to the dgcl that were enacted over the summer the first provision i'm going to cover is section 110 this provision authorizes boards of directors to adopt bylaws during emergency conditions and provides for the exercise of certain enumerated emergency powers um in preparing for this uh webinar i was thinking back over the last 15 years as to whether or not um i have really worked on a matter that had implicated 110 and i could only recall one time uh that i had even sort of looked at this by law or this this provision of the statute it's a an often overlooked provision but uh with 2020 being what it what it has brought about obviously this provision came into unique focus uh the the changes this year largely fall into two buckets um first there were some changes to section 110a that really relate to how do we define an emergency condition and how do we adapt bylaws and then the second set of changes that i'll cover um is is found in a new section subsection i which adds two additional emergency powers the necessity for which became apparent earlier this year so first of all in section 110a the the first change really clarifies that epidemics pandemics and a declaration of a national emergency are among the types of events that may give rise to the exercise of these emergency powers and the authority of the board to adopt emergency bylaws this provision previously did just did not include reference to these types of events this was a provision that was adopted in 1962 so it includes reference to atomic and nuclear disasters but now it includes reference to to epidemics and pandemics the second preliminary change that i'll note here in 110a is that there's been a slight modification to the manner in which these types of emergency bylaws may be adopted um we've basically made clear now that they can be adopted by a board or in the event that a quorum cannot be convened for a meeting then by a majority of the directors present at that meeting as i mentioned that the second bucket of changes really relates to some additional emergency powers um that have been added in new subsection i um as state and local governments began implementing lockdowns um in march and april corporations determined that it wasn't feasible or advisable or in some instances legally permissible to hold in-person annual meetings which i think as we all know springtime is sort of prime stockholder meeting season and so that was really a problem for companies who had already noticed an in-person meeting they were really forced to scramble to sort of figure out how to change the meeting to a virtual setting um other companies were questioning you know is there a means to adjourn or postpone the meeting which was problematic in instances where the company wasn't able to even access the meeting site on the date of the scheduled meeting so all of this led to a bunch of questions as to whether or not companies were required to send out new new notices for either a now virtual meeting or a later meeting led to questions about whether or not the record date would be lost or whether you have to bring that forward um all of which has significant cost consequences for the company which in the middle of a pandemic is the last thing that any company wants to hear now governor carney in his tenth executive order did relax some of the notice requirements for public companies seeking to switch to in-person seeking to switch their in-person meeting to virtual meetings but but the order was fairly narrow in scope and duration um and so that was sort of the first issue that that came up in in the springtime the second issue uh which is also sort of very common to the spring season related to dividends that had been declared pre-pandemic uh once the scope of the health crisis really became clear if companies were asking questions about what options did they have with respect to these pre-pandemic declared dividends um who were now in a situation where they wanted to consider what options were available to them in order to conserve cash pay their their rent to continue to pay their employees etc so new subsection i really was intended to address these two separate issues as amended as newly added during an emergency condition the board or majority of the directors president of a quorum is not there may take any action that they determined to be practical and necessary to address the circumstances of emergency with respect to stockholder meetings this one might include postponements um moving the the meeting to a virtual setting it allows companies to preserve their record date and it also allows public companies to notify stockholders of postposements or changes in the meeting solely by means of a public filing another change that was added in section subsection i addresses the dividend issue that i referred to earlier during an emergency condition the board may change the record date and the payment date of any dividend that has been declared but whose record date has not yet occurred the payment date can't however be more than 60 days after the record date and in all events notice of the change must be given to stockholders as promptly as practical and again in the case of public corporations that notice may be given solely by means of a public filing one last point i'll make on on this section 110 these amendments were made retroactive to january 1st 2020 which is somewhat unusual for for changes to the dgcl however uh i believe this decision was made in recognition of the very unique circumstances presented by 2020. the next uh amendment that i'll briefly review relates to indemnification in section 145. um 145c provides that to the extent that a current or former director or officer is successful on the merits in the defense of a proceeding that falls within 145a and 145b that director or officer is entitled to be indemnified it's a mandatory indemnification by statutes irrespective of whether or not that director officer has rights to indemnification under the company's charter of bylaws and irrespective as to whether or not that director officer has met the applicable standard of copper prior to the 2020 amendments 145c did not define the officers quote unquote that would be entitled to this mandatory statutory indemnification and questions were raised as to whether the term officer includes employees that hold an officer-like title for example many companies have hundreds of vice presidents they're employees with an officer-like title but they're not you know viewed as as part of the company's officers as we think about them um in terms of sort of the companies c-suite as referenced in the bylaws but it created confusion because they have an officer-like title so this year the changes to 145 the first change is to provide that with respect to any after omission that occurs after december 31st 2020 references in 145 c only uh to officer will mean only those persons who are deemed to have consented to service of process pursuant to 3114 of title 10. so practically speaking what this means is that the the officers who are going to be entitled to mandatory indemnification pursuant to 145c will be limited to the company's president ceo cfo chief legal officer controller and the treasurer or chief accounting officer it'll also cover any individual that's identified in a company's public filings as being among the highly compensated officers of the company and any other individual who's consented in writing to be an officer for purposes of 3114b that litany of officers if you need to refer back to it can be found in section 3114 b of title 10. however uh in addition to the changes that were made to 145 students we added a new section 145 c2 and what this does is it allows corporations to provide this same type of mandatory indemnification to any other person um even if they're not and what we'll refer to as sort of a 3114 b officer um so third so 145 c2 specifically provides that a corporation may extend this mandatory right to indemnification to any other person what this means for for all of us now is is if you're a delaware corporation or your client's delaware corporation it might be a good idea to review their organizational documents to ensure the desired indemnification scheme if a corporation's indemnification bylaws or a provision in the charter broadly provides for mandatory indemnification of directors and officers and there's no right definition or reference to what an officer might mean and that indemnification is is mandatory to the full extent permitted by law or specifically in instances where a director or officer undefined is successful on the merits then it's entirely possible that the corporation may be obligated to indemnify non-3114b officers irrespective of whether or not the standard of conduct has been met that may or may not be okay with the company um i've seen in many instances people are okay with that um but it's worth a second look it's worth looking at it to make sure that you're comfortable that your indemnification scheme works for you uh the next section i'm going to cover relates to public benefit corporations um over the last few years there's been increased investor focus on things like sustainability social responsibility esg um along with significant commentary on the purpose and role of the c rporation in society we've seen this with the now well-known business roundtable statement on the purpose of a corporation um we've also seen this in the multitude of companies that have publicly announced their commitment to their respective constituencies and stakeholders and not just their stockholders the pvc corporate forum and i apologize pbc public benefit corporation i'm going to refer just to them as pvcs this corporate forum was introduced in delaware on august 1 2013 uh with the adoption of subchapter 15 of the dgcl the statute establishes pbcs as for profit entities that are intended to produce a public benefit and to operate in a responsible and sustainable manner directors of a public benefit corporation are required to balance three things one the pecuniary interest of stockholders to the best interest of those materially affected by the pbc's conduct and three the specific public benefit that is identified in the company's charter which is a condition to becoming a ppc given the material differences between a traditional corporation or a conventional corporation and pbcs when the statute was first enacted in 2013 um it it required corporations electing to opt into or out of the pbc corporate form to obtain the approval of 90 of the outstanding shares of each class of stock whether or not voting an incredibly high voting standard that was only applicable um in the statute in this instance no other stats no other sort of similar similar instance where you have such a high voting standard um that voting standard was relaxed in 2015 in part to overcome um some concerns that have been raised regarding the corporation's ability to secure such a high vote and i think more generally a desire to more broadly enable use of the pbc corporate form in 2020 we further relax this voting standard um which i think between 2015 and 2020 um had become viewed by some not all but but some as being a a potential barrier for corporations that may be desiring to make use of the pbc forum but couldn't get you know super majority vote so immediately prior to the the amendments this year in 2020 um 363 a of the dgcl provided that the approval of two-thirds of the outstanding stock was required in order for a conventional or traditional corporation to amend its charter to convert into and opt-in to the pbc form or to become a pbc by merger likewise uh 363c uh prohibited uh similar types of amendments to opt out of the pvc corporate forum or whether through charter amendment or or by merger without the same two-thirds vote um in addition 363c required um certain amendments to the charter um specifically provisions relating to the periodic statements and third-party certifications that are unique to a pbc um prior to this year those amendments required a two-thirds vote 363-a and 360cc skip 363c have been eliminated in holes as a result where we stand now is that subject to any greater or additional vote that may be required by the charter the stockholder approval that's necessary to convert into or out of a pbc whether through charter amendment or by merger um and any other sort of amendment to the pbc charter will be the default statutory vote that's required under 242 or the applicable merger statutes in other words it's a majority of the outstanding staff in in large part i think that these amendments more closely align pdc's with traditional corporations insofar as it relates to stockholder approvals on charter amendments and the like the next sort of material or key change that was made in the public benefit corporation statutes relates to appraisal um which i think was viewed by many as uh another potential barrier to corporations and in particular private companies that were intending or desiring to make use of the ppc corporate form before 2020 amendments uh 363 b uh granted appraisal rights to stockholders effectively if you were a stockholder of the corporation uh immediately before the traditional corporation converted to a pbc through charter amendment or merger you were entitled to appraisal rights not so you know not such a surprise as it pertains to the merger conversion um but this is the only instance in the statute where a stockholder was entitled to appraisal rates in connection with the charter amendment uh that however has been completely eliminated with the 2020 amendments and more particularly by the elimination of section 363-b um as a result statutory appraisal rights will no longer be available to stockholders of a conventional corporation that converts to a pbc through a charter amendment and of course you know any merger involving a pbc in a conventional corporation the appraisal rights will be as otherwise available under under section 262 which is delaware's appraisal statute um and just note that there had been a couple of clean up changes to the appraisal statute consistent with the deletion of 363 big uh and then lastly there's been a couple other uh minor amendments to i don't say minor but there's been a couple other amendments to subchapter 15 uh relating to pbcs just quickly uh before getting into them a bit of background on the the statutory regime for pbcs uh as noted earlier directors of a pvc are required under 365a to balance uh the interest of the financial interest of the stockholders the best interest of those affected by the public company's conduct and the benefit that's stated in the company's charter 365 b provides that for any decision that implicates that that balancing requirement the director will be deemed to have satisfied his or her fiduciary duties if the decision was informed and disinterested before the 2020 amendment 365c allowed pbcs to include in their charter an express provision that stated that any disinterested failure to satisfy the requirements of 365 will not for purposes of 102 b7 constitute an after emission not in good phase or breach of the duty of loyalty in effect you had to affirmatively opt in by including a provision to that effect in your charter so here's what's changed first 365c has been amended to make clear that with respect to any decision that implicates this tripartite balancing requirement the director will not be deemed interested based solely on his or her ownership of stock except to the extent that it would create a conflict of interest if the company was not a pvc this effectively limits arguments that a director who happens to be a stockholder gave undue weight to the pecuniary interest of the staff holders in these types of balancing decisions second 365c has been amended to eliminate the need to affirmatively include an express provision in your charter by making what was 365c effectively the statutory default so um in the absence of a conflict of interest by statute no failure to satisfy the balancing requirements will constitute an act or a mission not in good faith for purposes of 102 b7 unless the charter provides otherwise so we've effectively slipped the default on its head and then finally one last point on on pvcs um there was a quick amendment to 367 there was a question before 2020 as to whether or not um direct or individual suits were falling within um the thresholds described in 367 so there's been a clarifying amendment to 367 to clarify that any suit individual direct derivative or any other type of action uh to enforce the balancing requirements must be brought by plaintiffs that own at least two percent of the outstanding shares or shares of the value of at least two million dollars uh all right one last set of amendments um look i i focused on sort of what i viewed to be three of the more critical more notable types of amendments there's like a handful of other ones i'll touch on a couple briefly um first section 1 and 2b7 the sculptory provision there was a clarification made that the provision has the effect of eliminating or eliminating or limiting liability for monetary damages for any act or omission occurring while the provision is in effect unless the charter provides otherwise at the time of the after omission any future amendment repeal or elimination will not revoke the elimination or limitation of liability put a different way most companies had already included language in their 102 v7 charter provision that made clear that if the charter is later amended to eliminate the protection available to directors then the amendment would not apply to any previously occurring acts or emissions so as a result this change really just codifies the long-standing common practice next couple of sets of amendments um as many of you may know in 2019 there were some fairly significant amendments relating to the addition of provisions that provided for the use of electronic signatures and electronic delivery of documents last year section 116 was added to the dgcl that established a non-exclusive safe harbor method to reduce certain acts or transactions to written or electronic documents and to sign and deliver documents electronically with 216 sorry when 116a was adopted certain corporate transactions could be documented signed and delivered through docusign or other electronic means 116b however last year expressly excluded incorporator board and stockholder consents from the list of documents that fall within 116a safe harbor that's been reversed this year so in 2020 we've amended 116b to eliminate these express carve outs for incorporator board and stockholder consent and so as a result companies now may rely on 116a as a basis for using electronic transmissions to document these types of consent in addition to the amendments to 116b there's been some conforming changes made to um the provisions as shown on the screen which which really go back to the provisions where you can find information relating to the incorporated board and stockholder consent uh there's also been a minor clarification to 145 f um this now clarifies that the prohibition on eliminating or impairing a right to indemnification after the occurrence of an act of omission applies not only in the case of an amendment but also in the case of repeal or elimination um this sort of more now closely tracks 102 b7 and finally in the holding company organization merger statute 251 g there's been an amendment to eliminate the requirement that the organizational documents of the survivor entity contain provisions that are identical to the certificate of incorporation of the constituent corporation immediately prior to the merger i think there was a recognition that this requirement was somewhat onerous and so it's been relaxed a little bit