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A New Era for Microcap Companies: The Impact of the 2023 Amendments to the Delaware General Corporation Law on Stock Splits

The proposed 2023 amendments to the Delaware General Corporation Law (DGCL) are poised to revolutionize the corporate landscape, particularly for microcap companies. These amendments, which aim to streamline corporate processes and facilitate certain corporate actions, will have a profound impact on how microcap companies manage their stock. This article will delve into the implications of these amendments, focusing primarily on their impact on stock splits and changes in the number of a corporation's authorized shares. We will also briefly touch on the proposed changes to the ratification of defective corporate acts and dispositions of pledged assets.

1. Revolutionizing Stock Splits: A Game Changer for Microcap Companies

Perhaps the most significant change proposed in the 2023 amendments is the elimination or reduction of the stockholder approval requirement to effect certain stock splits and changes in the number of a corporation’s authorized shares. This change will have a profound impact on how corporations, especially microcap companies, manage their stock and could potentially streamline public offerings and other corporate actions.

1.1 Forward Stock Splits and Related Increases in the Number of Authorized Shares

The proposed amendments introduce a new Section 242(d) that eliminates the requirement for stockholder approval to amend the certificate of incorporation to effect forward stock splits, provided the corporation only has one class of stock outstanding that is not subdivided into series. This amendment will also allow the certificate of incorporation to be amended without stockholder approval to increase the number of authorized shares of the same class of stock, up to an amount proportionate to the stock split ratio.

For microcap companies, this amendment could be a game-changer. These companies often struggle to attract investors due to their low stock prices. By making it easier to implement forward stock splits, these companies can increase their number of outstanding shares, potentially making their stock more attractive to investors. Furthermore, the ability to increase the number of authorized shares without stockholder approval provides microcap companies with greater flexibility to manage their capital structure.

1.2 Reverse Stock Splits and Other Changes to the Number of Authorized Shares

Section 242(d) also modifies the stockholder voting requirement to amend the certificate of incorporation to effect a reverse stock split or to increase or decrease the number of authorized shares of a class. This amendment addresses the increasing challenges faced by many corporations in obtaining stockholder approval by a majority of outstanding shares, particularly in light of recent trends relating to broker non-votes.

For microcap companies, this amendment could provide a lifeline. These companies often face the risk of being delisted from stock exchanges due to their low stock prices. By making it easier to implement reverse stock splits, these companies can increase their stock price, potentially avoiding delisting. Furthermore, the ability to increase or decrease the number of authorized shares without stockholder approval provides microcap companies with greater flexibility to manage their capital structure in response to market conditions.

2. Other Noteworthy Amendments: Ratification of Defective Corporate Acts and Dispositions of Pledged Assets

While the focus of this article is on the impact of the proposed amendments on stock splits, it is worth noting that the amendments also aim to streamline the ratification of defective corporate acts and provide a safe harbor for certain dispositions of pledged assets. These changes, while not as directly impactful to microcap companies as the changes to stock splits, are nonetheless important developments in corporate law that could have indirect effects on microcap companies.

Conclusion

The proposed amendments to the DGCL represent a significant shift in corporate governance. They aim to streamline corporate processes, provide clarity on contentious issues, and facilitate corporate actions. As these changes are expected to come into effect on August 1,

2023, microcap companies and their legal counsel must stay updated and understand the implications of these amendments on their operations and corporate governance practices. These changes could provide microcap companies with the tools they need to attract investors, manage their capital structure, and navigate the challenges of the stock market.