On July 17, 2023, the Governor of the state of Delaware signed Senate Bill 1141 amending the General Corporation Law of the State of Delaware (DGCL), which will become effective on August 1, 2023. Among other things, the amendments to the DGCL from Senate Bill 114 make effecting stock splits and increasing authorized shares easier by reducing the stockholder voting thresholds for certain corporations needed to effect such corporate actions, as further explained below.
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Old DGCL Section 242 |
Amended DGCL Section 242 |
| Reverse Stock Split |
In order to amend the certificate of incorporation to effect a reverse stock split, a majority of outstanding shares is required. |
A majority of the votes cast of the stockholders entitled to vote thereon, voting as a single class, is required to amend the certificate of incorporation to effect a reverse stock split. This means that the proposal will pass if the votes cast for the reverse stock split proposal exceed the votes cast against such proposal.* |
| Forward Stock Split |
In order to amend the certificate of incorporation to effect a forward stock split, a majority of outstanding shares is required. |
No stockholder approval is required in order to effect forward stock splits provided the corporation has only one class of stock outstanding and such class is not divided into series (unless stockholder approval is expressly required by the certificate of incorporation). |
| Increase of Authorized Shares |
Increasing or decreasing the number of authorized shares of a class of stock requires a majority of outstanding shares entitled to vote thereon and a separate class vote of the holders of that class of stock, whether or not they are entitled to vote thereon by the certificate of incorporation. |
If solely to increase or decrease the number of authorized shares of a class (and the corporation’s certificate of incorporation has not opted out of the separate class vote requirement under Section 242(b)(2)), the majority of the votes cast by holders of such class of stock, voting as a separate class, is required in order to amend the certificate of incorporation to increase or decrease the number of authorized shares of a class of capital stock.*
If the increase in the number of authorized shares is in connection with a forward stock split (up to an amount proportionate to the subdivision), no stockholder approval is required provided the corporation only has one class of stock outstanding and such class is not divided into series (unless stockholder approval is expressly required by the certificate of incorporation). |
*This reduced vote only applies to stock listed on a national securities exchange and would continue to meet the listing requirement of the exchange immediately after effecting the reverse stock split. Thus, the amendments do not apply to companies whose stock is not listed on a national stock exchange.
Stock splits and increases of authorized shares are often needed by corporations, especially public companies, in connection with financings or public offerings or to maintain compliance with exchange listing rules. Notably, small- and mid-cap public companies have increased their usage of reverse stock splits in 2023 as compared with 2022. The DGCL amendments are in line with this trend.
Things to Note When Effecting Reverse Stock Splits
In terms of reverse stock splits, while the amended Delaware law lowers the stockholder approval threshold for Delaware incorporated public companies, the intricacies of effecting reverse stock splits do not end there. Public companies should also note the following when effecting reverse stock splits.
Nasdaq Excessive Reverse Stock Splits Rule
Pursuant to Nasdaq Listing Rule 5810(c)(3)(A)(iv), if a company’s security fails to meet Nasdaq’s continued listing requirement of a minimum bid price of $1 and the company has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to 1, the company will not be eligible for an automatic 180-day grace compliance period and the Nasdaq Listing Qualifications Department is obligated to immediately issue a delisting determination. However, the company is still eligible to request a hearing before the Nasdaq Hearings Panel to present its plan for regaining and sustaining compliance with Nasdaq rules.
Timing and Planning
In addition to holding a meeting to seek stockholder approval of a reverse stock split, public companies should also be aware of the timing and advance notices required by different entities, such as the stock exchanges and the Depository Trust Company (DTC). For example, NYSE (under NYSE Listed Company Manual Section 204.12) requires at least ten days’ advance notice prior to effecting a reverse stock split, and Nasdaq (as explained under Nasdaq Listing FAQ Identification Number 317) requires companies to fill out its Company Event Notification form at least fifteen calendar days prior to the reverse stock split effective date. DTC usually requires at least five days’ advance notice before effecting a reverse stock split. Furthermore, DTC will put an automatic “chill” on the company’s old CUSIP number once it is notified of the reverse stock split. Therefore, companies need to prearrange any pending stock transactions before notifying DTC about the reverse stock split. Public companies also need to pay attention to coordinate the timing for a press release and Form 8-K filing, and the stock exchanges may impose specific timing requirements for such public announcements.
Fractional Shares
Public companies should also consider how to handle any fractional shares that may result from reverse stock splits. Under DGCL Section 155, a company can issue fractional shares; however, bylaws may prohibit a company from issuing fractional shares. Instead of issuing fractional shares, a company can pay for the fair value of the fractional shares in cash, arrange for disposition of fractional shares from the affected stockholders, or issue scrip or warrants that would entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. Some companies may also choose to round up fractional shares to the next whole share.
Other Amendments
The DGCL amendments from Senate Bill 114 also made other changes, including but not limited to (1) reducing the stockholder vote required to consummate a domestication, transfer or continuance of a Delaware corporation to a non-U.S. entity; (2) allowing stockholders to have appraisal rights in connection with a transfer, continuance or domestication of a Delaware corporation to a non-U.S. entity; (3) eliminating the stockholder approval requirement in a sale, lease, or exchange of all or substantially all of a corporation’s assets securing a mortgage or pledge under certain conditions; (4) clarifying the requirement for the creation and issuance of stock and rights and options to purchase stock; (5) confirming the authority of a corporation following a merger, consolidation, conversion, or domestication to issue bonds, other obligations, shares of its capital stock and other securities and to mortgage its franchise, rights, privileges and property, in connection with such merger, consolidation, conversion or domestication; (6) confirming the notice requirement for stockholder or member consent to action without a meeting; and (7) simplifying the procedures for ratifying defective corporate acts.
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Our team is here to help public companies navigate this complex process of effecting reverse stock splits or implement other corporate acts under the amendments. Please contact the authors if you have questions.
1 The Delaware Senate Bill 114 is available at https://legis.delaware.gov/BillDetail?legislationId=130325.