By: Scott Bleier
In connection with a merger/acquisition transaction, signatures to transaction documents are typically collected from parties in advance of closing and held in escrow prior to being released at the effective time of the transaction. Despite this common practice – and although the General Corporation Law of the State of Delaware (the “DGCL”) provides that any action required or permitted to be taken at a meeting of the Board of Directors may be taken without the necessity of a meeting if all of the members of the Board consent in writing – Delaware law provides that when an individual executes a written consent prior to actually joining a Board of Directors, the consent is invalid as a matter of law. This was underscored most notably in AGR Halifax Fund, Inc. v. Fiscina (743 A.2d 1188 (Del. Ch. 1999)) in which the Delaware Court of Chancery held that only a lawfully appointed director is empowered to consent to Board action and that an individual that has not yet been officially appointed to the Board cannot act in a director’s capacity.
The holding in Halifax has been a practical thorn in the side of dealmakers and practitioners, especially in the context of transactions where the purchase price for the target company is financed by a third-party lender. In virtually all merger/acquisition transactions, the Board of the target company resigns and a new Board is appointed effective upon closing. In an acquisition financing transaction, this creates logistical complications as the lender typically requires the formal approval of the target company’s Board to the financing but the soon-to-be-resigning Board will not be keen to accept any responsibility for the financing package. And, under Halifax, the soon-to-be-appointed Board cannot consent to the financing in advance as a matter of law.
In response to the practical concerns raised by Halifax, new legislation has recently been proposed that would amend Section 141(f) of the DGCL to clarify that an individual, whether or not then a director, may consent to Board action at a future time (including upon the occurrence of an event) no later than 60 days after the consent is given. If enacted, the proposed amendment would become effective on August 1, 2014 and would allow a soon-to-be-appointed director to consent to a future action of the Board and place the consent in escrow, such consent to become effective upon the closing of a transaction (provided that the closing does not occur more than 60 days after the consent was provided and placed in escrow).
Concurrent with this proposed legislation, the Delaware legislature has also proposed a similar amendment to Section 228(c) of the DGCL that would specifically permit the escrowing of stockholder consents. Note that this amendment would not impact the statutory requirement under Delaware law that a stockholder consent must include the actual date on which the consent is signed.
Links to the text of the proposed newly-proposed legislation can be found here.