By Elliot Weiss
The level of approval needed to convert a Delaware corporation into another type of entity has recently changed—this pursuant to a 2022 amendment of Section 266 of the Delaware General Corporations Laws (DGCL).
Previously, approval of all stockholders—regardless of voting rights—was needed to authorize a conversion of a Delaware corporation. The idea was that a unanimous all stock voting requirement protected stockholders who might be negatively impacted if a company was converted into an entity having different governance and ownership rights. Section 266 in its original form also removed the need to extend appraisal rights in the context of a conversion.
The problem with the unanimous all stock requirement was that it created roadblocks for companies looking to utilize Delaware’s conversion statutes to convert into a foreign entity and, in certain cases, required domestic corporations to rely upon DGCL merger statutes to achieve redomestication—a solution that could be rather complex, costly and time consuming.
Consequently, the statute was amended last year. Under Section 266(b) as revised, any board of a Delaware corporation seeking conversion is now required to adopt a resolution approving the change. That resolution must (1) specify the type of entity that the domestic corporation is to be converted into and (2) recommend that the stockholders of the company approve the conversion. There is more. The amendment additionally mandates stockholder approval of the conversion, but not by unanimous all stock vote. Rather, a simple majority of the outstanding shares entitled to vote are needed to adopt the resolution and authorize conversion.
Significantly, the following stockholder protections apply to conversions under the amendment to Section 266(b):
1. If a corporation is converting into a partnership having one or more general partners, then in addition to the requisite stockholder approval, authorization of the proposed conversion also requires the approval of each stockholder slated to become a general partner;
2. In the event a certificate of incorporation or voting agreement dated (or effective) before August 1, 2022 restricts or places conditions upon a merger or consolidation, the same restrictions or conditions will apply to an approved conversion unless the certificate of incorporation or voting agreement expressly provides otherwise; and
3. Statutory appraisal rights of stockholders under Section 262 apply in the context of the conversion of a Delaware corporation.
The change to Section 266—from requiring unanimity to now just a simple majority of outstanding shares entitled to vote to adopt a resolution and authorize conversion—should increase the use of the DGCL conversion statutes and expedite the process and timeline by which boards can expect to complete statutory conversions while at the same time maintaining appropriate protections and safeguards for the benefit of stockholders.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.