Synopsis
This Amendment conforms the language that Senate Bill No. 114 adds to § 242 of Title 8 to its stated intent, which is to allow companies facing a threat of delisting to engage in a reverse split by meeting a lower threshold for the required stockholder vote. As is fully explained below, this Amendment prevents SB 114 from creating an indirect method for a corporation to free up more authorized shares that can be dilutive to existing stockholders. This Amendment also corrects an instance of the word “affects” to “effects” and makes corresponding changes to the internal designations within § 242(d)(2) of Title 8. “Shares outstanding” are the total number of shares held by all stockholders. A stockholder’s ownership in the corporation is a fraction reflected by the number of shares held divided by the number of shares outstanding. If a stockholder owns 100 shares and there are 1,000 shares outstanding, then the stockholder owns one tenth of the corporation. “Authorized shares” are the number of shares that a corporation can issue. A corporation that has 10,000 authorized shares and 1,000 shares outstanding can issue another 9,000 shares. “Headroom” is the difference between the shares outstanding and the authorized shares. Existing stockholders care about headroom because the issuance of more shares dilutes their ownership. If the corporation with 1,000 shares outstanding issues another 1,000 shares, then the stockholder who owns 100 shares (which previously represented 10% of the shares outstanding) will continue to own 100 shares; however, because of the additional issued shares, the stockholder's proportionate ownership of the corporation has been reduced (now represents 5% of the shares outstanding). If the corporation issued shares as part of a transaction that increased its overall value, then the stockholder may now own a 5% stake that is worth more and may have come out ahead. If not, then the stockholder has lost value, so the stockholder’s stake has been diluted. The more headroom that a corporation has, the greater the risk of dilution is for stockholders. Due to the significance of authorized shares, Delaware has always required the vote of a majority of the outstanding shares to increase the authorized shares. A corporation must ask all of its stockholders for permission to create more headroom, since it can be used to dilute the stockholder’s shares. Under SB 114, § 242 will allow a corporation to engage in a reverse split that reduces the number of its issued shares by a majority vote of the stockholders who participate in person or by proxy at a meeting. That standard is known as a majority of a quorum. For a public company, the number of stockholders who participate in person or by proxy at a meeting is always less than the outstanding shares. At most, only 80-85% of outstanding shares participate in person or by proxy at a meeting. SB 114 thus permits a reverse split by a majority of a quorum rather than a majority of the shares outstanding. SB 114 is intended to address a problem that some corporations have faced when they risk delisting because their stock price is too low. To increase their stock price, they wish to engage in a reverse split, but cannot get the votes necessary to approve a reverse split by a majority of the shares outstanding. Under SB 114, § 242 allows a corporation to engage in a reverse split with a majority of a quorum. However, as provided under SB 114, § 242 is not limited to only situations when a corporation is at risk of delisting because of a low stock price. As such, under SB 114, § 242 also enables a corporation to use a reverse split approved by a majority of the quorum to create headroom. For example, if a corporation has 400 million issued shares and 500 million authorized shares, then a corporation has 100 million shares of headroom, equal to 25% of the outstanding shares. Existing stockholders can be diluted by another 25%. Under SB 114, the corpo