In August 2010, Delaware enacted several amendments to the Delaware General Corporation Law (“DGCL”) in connection with nonstock corporations. Prior to these 2010 amendments, the DGCL lacked a comprehensive approach to nonstock corporations. Today, there are between 15,000 and 20,000 nonstock corporations registered in Delaware, many of which are not-for-profit corporations, organized to comply with Section 501(c)(3) of the Internal Revenue Code. Additionally, many nonstock corporations registered in Delaware are “for-profit” business entities.
As part of a comprehensive revision of the DGCL to clarify its applicability to nonstock corporations generally, Section 114 was added to the DGCL in August 2010 to provide further clarity of the rules governing nonstock corporations. Notable revisions that have been made through these 2010 amendments are as follows:
- The provisions of the DGCL that address stockholders and boards of directors shall also be equally applicable to the ‘‘members’’ and ‘‘governing bodies’’ of nonstock corporations.
- Nonstock corporations are now required to have members pursuant to an amendment to Section 102 of the DGCL. Further, the members are deemed to be whoever is entitled to vote for the election of the corporation’s governing body, if members are not provided for in the corporation’s bylaws of certificate of incorporation.
- The inclusion of a savings clause in Section 102(a)(4), which provides that neither a nonstock corporation’s existence nor any of its actions will be invalidated by virtue of its failure to have members and where the certificate of incorporation and bylaws are silent regarding the requirements for membership, the persons who are entitled to elect the governing body will be deemed to be the nonstock corporation’s members.
- Members of a not-for-profit nonstock corporation cannot take an equity interest in the corporation.
These amendments will help provide guidance and clarity to the governance and management of nonstock corporations that are registered in Delaware, and should be considered by any entity or individual seeking to form a nonstock corporation in this state.