What stockholder approval is necessary to sell a company?

Takeaway: Completing an acquisition requires the consent of stockholders under both Delaware and California law. Startups should consult legal counsel to ensure they are able to obtain the requisite stockholder consent to complete their acquisition.

Whether you have incorporated your startup in Delaware or California, one common element you will need to navigate during the sale of your company is stockholder approval. The legal requirements for stockholder approval, however, differ somewhat between these two jurisdictions. Let’s discuss the key factors involved.

Delaware Corporation

Delaware is one of the most popular states for incorporation, largely due to its well-established body of corporate law. For the sale of a Delaware corporation, both the board of directors and the majority of the stockholders must approve the transaction.

Firstly, the board of directors is responsible for negotiating the sale terms. Once they approve the deal, the next step is to secure stockholder approval. Under the Delaware General Corporation Law, the approval of the majority of the outstanding shares entitled to vote is generally required. This approval can be acquired either via written consent or at a meeting of stockholders. If you have preferred stockholders, their approval is also likely to be necessary too.

So, in general, in order to approve an acquisition, Delaware law requires the consent of (i) a majority of all shares, (ii) any other consent required by the company’s certificate of incorporation, which often includes a majority of the preferred stock, and (iii) any other consent requirement required by the buyer.

California Corporation

California law also requires the board's and stockholders’ approval for the sale of the company. However, it is stricter when it comes to minority stockholders’ rights.

Unlike Delaware, where a majority of outstanding shares suffices, California law generally requires approval of a majority of each class of shares (common and preferred) voting separately. This means that even if you have majority approval overall, if a majority of a particular class of stockholders disapproves, the transaction cannot go ahead. This is one of the reasons investors prefer Delaware corporations.

So, in general, in order to approve an acquisition, California law requires the consent of (i) a majority of the common stock, (ii) a majority of the preferred stock, (iii) any other consent required by the company’s certificate of incorporation, which often includes a majority of the preferred stock, and (iv) any other consent requirement required by the buyer.

Drag-Along Rights

Companies cannot contract out of the consent requirements under Delaware and California law and acquirors often ask for consent from a high percentage of the stockholders (such as 90%). To help meet these high thresholds, investors often require a drag-along provision implemented when they invest, which requires stockholders to vote in favor of a sale under certain conditions. For example, many drag-along provisions require stockholders to vote in favor of sales that are approved by the company’s board of directors, a majority of the preferred stock, and a majority of the common stock.

Conclusion

While both states require the approval of the board of directors and the stockholders, the requirements for stockholder approval are stricter in California than in Delaware. This can make the sale of a California corporation more complex and time-consuming, especially if the corporation has multiple classes of stock or dissenting stockholders. Investors and startups often use drag-along provisions to facilitate collecting stockholder votes.