The E-Sign Act and Recent Technology Changes in the Delaware Corporate Law
November 2000
Significant and exciting changes in corporate law are reshaping the way corporations function as well as the manner in which business is conducted throughout the United States.
In an effort to keep the law up to speed with the ever-changing world of e-commerce and electronic record keeping, Congress recently passed the Electronic Signatures in Global and National Commerce Act, better known as the E-Sign Act (the "Act"). The Act, effective October 1, 2000, has two major purposes: (1) to remove barriers in order to facilitate the continued growth of Internet commerce by authorizing the use of electronic signatures, thereby providing legal credence to contracts, purchase orders and other documents that are completed online without handwritten signatures and (2) to empower and encourage businesses to make the transition from the antiquated methods associated with warehousing paper records to using electronic records.
The Act promotes consumer confidence in the integrity and reliability of online commerce. In addition to giving legal effect to electronic signatures, the Act alleviates consumers' fears concerning the safety of conducting e-commerce. As a result, it provides the consumer with the same protection that is regularly found in paper contracts and transactions. For instance, under the Act the consumer must consent to the use of the electronic format. He or she must also be offered the option to obtain a non-electronic record of the contract or transaction. Moreover, businesses must provide the consumer with the proper hardware and software specifications that are needed to access and retain the electronic record.
Additionally, businesses may now store records in an electronic format. The Act permits businesses to maintain electronic records as a way of complying with statutory and regulatory record retainment requirements for contracts or records relating to transactions that affect interstate or foreign commerce.
Congress has not been the only legislative body busy making changes to corporate law that reflects the trend to use new technologies and advances in communications. The Delaware General Assembly addressed these issues in the newly adopted amendments to the Delaware General Corporation Law, which became effective July 1, 2000.
Stockholder Meetings
Under the new amendments, directors, at their discretion, may authorize stockholders to be present and to vote "by means of remote communication," which includes electronic communications. For example, a business could have its annual meeting in an Internet chat room. This is attractive to stockholders because it removes the physical and cost-related barriers to the free exercise of the stockholders' franchise. Moreover, it allows a corporation to tell its "story" to a larger group of stockholders. However, such presence and voting is permitted only if the corporation implements reasonable measures in order to verify that (1) the persons deemed present and voting at a meeting are in fact stockholders or proxyholders, (2) such stockholders are offered a reasonable opportunity to participate in the meeting and vote and (3) such persons are afforded an opportunity to read or hear the proceedings of the meeting while that meeting is ongoing. Additionally, the corporation must retain a record of the remote votes.
The longstanding requirements that forced a corporation to make a stock list available during the 10 days prior to a stockholder meeting have been amended. The Act now requires that the list be made available at either the principal place of business or by a posting it on an electronic network. As a result, a corporation does not have to find a place to deposit its stockholder list when the meeting is held in a place where its headquarters are not located.
Director Action
Directors' actions by consent and resignations may now be taken by an electronic transmission. An "electronic transmission" is defined to include forms of communication that (1) do not involve the physical transmission of paper, (2) create a record and (3) may be automatically reproduced in paper form. A common example of an electronic transmission is e-mail.
Stockholder Action by Written Consent
Electronic transmissions may now be used to effectuate a stockholder's consent to corporate actions. Prior to this amendment, a stockholder had to deliver their written consent either to the corporation's registered agent in Delaware, its principal place of business or its corporate officer in charge of the corporate minutes books. The electronic transmission, however, must be reproduced in paper form and delivered in that form¾ unless the corporation's board of directors provides otherwise. For instance, a stockholder may consent to a corporate action by sending an e-mail to a proxy solicitor. But generally, the e-mail must be printed out before it is actually considered delivered.
Notice
Corporations may now deliver notice to a stockholder by electronic transmission if the stockholder consented to delivery of the notice in such form. There are a number of rules, however, which govern when a notice will be deemed given and when consent to such delivery will be deemed revoked. In particular, notices delivered to stockholders by telecopy or e-mail are deemed given when "directed" to the proper phone number or e-mail address. These new amendments apply to non-stock corporations as well and permit them to provide notice to their members by electronic transmission on the same basis as stock corporations. Finally, the new amendments also permit electronic waivers of notice.
In addition to the great strides taken to modernize the Delaware General Corporate Law, the amendments also include a significant change to the corporate opportunity doctrine. A corporation can now renounce, either in the certificate of incorporation or by action of its board of directors, its interest or expectancy in specified business opportunities or classes of business opportunities presented to the corporation or its officers, directors or stockholders.
This new amendment could be quite advantageous to a corporation. For example, the amendment may be used as a tool to retain talented executives in a day and age where start-up Internet and high-tech companies use lucrative stock option plans to lure away these employees from both the public and private sectors. Prior to the new amendment, a corporation was limited in the actions they could take to stave off high-tech raids on its employees. Now, however, a corporation has the flexibility, by prior arrangement, to permit directors, officers and controlling stockholders to pursue business opportunities in which the corporation itself might have an interest, without first offering those opportunities to the corporation. The amendment, in another instance, may be utilized in a parent-subsidiary relationship. A corporation could establish a subsidiary with a charter provision permitting the parent to take corporate opportunities that might be of interest to the subsidiary without first offering them to the subsidiary.
