Venture capital funds and other early-stage investors often only invest in Delaware C-corporations. As a condition for receiving necessary investment capital, it is often necessary to convert high-growth companies formed in other jurisdictions or as other types of business entities to Delaware C-corporations.

Fortunately, Delaware law generally allows entities to convert to Delaware corporations. For example, Section 265 of the Delaware General Corporation Law (“DGCL”) governs the conversion of domestic or foreign entities into Delaware corporations and Section 388 of the DGCL governs the domestication of foreign entities into Delaware corporations, subject to certain conditions.

The Delaware legislature enacted amendments impacting the foregoing provisions that became effective on August 1, 2022, and apply to corporate actions taken on or after that date (the “Amendments”). Founders thinking about converting their business organization to a Delaware corporation should be aware of these changes.

Changes to Conversion

First, Section 265 of the DGCL governs the conversion of “other entities” (entities other than corporations or entities formed outside of Delaware) into Delaware corporations. The Amendments altered the timing for approving a conversion. The prior version of Section 265 required that the conversion and the related certificate of incorporation be approved before filing a certificate of conversion with the office of the Secretary of State. The Amendments allow the conversion and certificate of incorporation to be approved any time before the effective date of the certificate of conversion, which may be after the certificate of conversion is filed.

Changes to Domestication

Second, Section 388 of the DGCL governs the domestication of “non-United States entities” into Delaware corporations. Section 388 has the same general effect as Section 265. It allows the filing of a certificate of domestication before receiving corporate approval of the domestication and certificate of incorporation, so long as the necessary approval (including approvals required by any applicable law of the non-United States jurisdiction) is received before the effective date of the certificate of domestication.

The Amendments permit companies to adopt a plan of domestication setting forth:

1. the terms and conditions of the domestication;
2. the mode of carrying the same into effect;
3. a statement that the certificate of incorporation of the domesticated corporation shall be as set forth in the attachment to the plan of domestication;
4. the manner, if any, of exchanging or converting shares of stock, rights, or securities of, or interests in, the non-United States entity;
5. any corporate action to be taken by the domesticated corporation in connection with the domestication, each of which shall require approval in accordance with all applicable non-United States law;
6. any details or provisions as are deemed desirable; and
7. such other provisions or facts as shall be required to be set forth in a plan of domestication by the laws of the jurisdiction under which the non-United States entity is organized. Companies can make any terms of the plan of domestication dependent upon facts ascertainable outside of the plan, including the occurrence of any event or any determination by any person or body.

Under the revised Section 388, corporate actors can rely on the plan of domestication as authorization for their actions in connection with domestication. Section 388 now states that any corporate action to be taken by the domesticated corporation, in connection with a domestication that is set forth in a plan of domestication, that is properly approved and within the power of a corporation, is deemed authorized, adopted, and approved by the domesticated corporation and its board of directors, stockholders, and members and won’t require any further action by the board, stockholders, or members.

Bottom Line

Overall, the Delaware legislature’s updates to the conversion and domestication provisions of the Delaware General Corporate Law streamline the process and make it easier for startups to become Delaware corporations. However, conversions and domestications are technical transactions that require an understanding of both the Delaware General Corporation Law and the corporate or other entity statutes in the jurisdiction where a startup is currently formed. Founders interested in converting or domesticating their companies into Delaware corporations to attract venture investments should consult with their legal and tax advisors about how to structure the transaction and to stay apprised of further updates to the Delaware General Corporate Law.