On February 17, 2025, Senate Bill No. 21 was introduced in the Delaware State Senate to amend the Delaware General Corporation Law (DGCL). The Delaware governor had previously signaled that changes would be forthcoming to address certain concerns raised by Delaware corporations, resulting from recent Delaware Court of Chancery decisions, leading some companies (particularly those with controlling stockholders) to reincorporate or consider reincorporating in other states, a phenomenon being referred to as the “Delaware Exit” or “DExit.” Notably, the bill was not drafted by the state's bar association, which typically oversees changes to the DGCL.
Section 1 of the Senate Bill No. 21 would amend § 144 of the DGCL to provide safe harbor protections for certain acts and transactions involving “interested” directors, officers, controlling stockholders and members of control groups. Currently, § 144 of the DGCL only speaks to whether an “interested” transaction would be void or voidable. If enacted, new § 144 would provide safe harbor protection from injunctions or damages awards for acts or transactions in which directors, officers, or controlling stockholders may have an interest, so long as the corporation complies with the procedures set forth in the statute or otherwise if the transaction is “fair as to the corporation.”
Section 2 of the bill would amend § 220 of the DGCL to, among other things, define the materials that a stockholder may demand to inspect pursuant to a request for books and records of the corporation, and provide certain conditions that a stockholder must satisfy in order to make an inspection of books and records.
The Delaware Senate also adopted Senate Concurrent Resolution No. 17, which formally requests that the Council of the Corporation Law Section of the Delaware State Bar Association study and report on the topic of plaintiffs’ fees in corporate litigation.
Changes to § 144(a) – “Interested” Transactions with Officers and Directors
Under revised § 144(a), certain acts or transactions involving directors or officers will be protected if:
As is currently the case, the material facts as to the director’s or officer’s relationship or interest and as to the act or transaction must be disclosed or known to the board or committee or stockholders, as the case may be.
The proposed amendments now also provide that any involvement by the interested director or officer in the initiation, negotiation, or approval of the act or transaction must be disclosed, and that the stockholder vote must be “uncoerced.” Additionally, under the proposed amendments, the stockholder vote will now only require the affirmative vote of a majority of the votes cast (as opposed to requiring a majority of the total voting power, which is the current requirement).
The proposed amendments also delete the current requirement that the transaction be fair “as of the time it is authorized, approved or ratified,” and define what “fair as to the corporation” means (which is not defined under the current statute).
If one of the three conditions described above is satisfied, then the act or transaction at issue may not be the subject to equitable relief, or give rise to an award of damages or other sanction against a director or officer of the corporation, because of the foregoing circumstances or the receipt of any benefit by any such director, officer, or entity or because the director or officer is present at or participates in the meeting of the board of committee which authorizes the act or transaction, or was involved in the initiation, negotiation, or approval of the act or transaction (including by virtue of a director’s vote being counted for such purpose).
Important New Defined Terms
The amendments also provide the following important defined terms, which are lacking from the current § 144.
“Disinterested director” is defined as a director who is not a party to the act or transaction and does not have a “material interest” in the act or transaction or a material relationship with a person that has a “material interest” in the act or transaction.
“Disinterested stockholder” is defined as a stockholder that does not have a material interest in the act or transaction at issue or a material relationship with any person that has a material interest in the act or transaction.
“Fair as to the corporation” means that the act or transaction at issue, as a whole, is beneficial to the corporation, or its stockholders in their capacity as such, given the consideration paid to or received by the corporation or its stockholders or other benefit conferred on the corporation or its stockholders and taking into appropriate account whether the act or transaction (1) is fair in terms of the fiduciary’s dealings with the corporation, and (2) is comparable to that which might have been obtained in an arm’s length transaction available to the corporation.
“Material interest” is defined as an actual or potential benefit, including the avoidance of a detriment, other than one which would devolve on the corporation or the stockholders generally, that (1) in the case of a director, would reasonably be expected to impair the objectivity of the director’s judgement when participating in the authorization or approval of the act or transaction at issue and (2) in the case of a stockholder or any other person (other than a director), would be material to such stockholder or such person.
“Material relationship” is defined as a familial, financial, professional, employment, or other relationship that (1) in the case of a director, would reasonably be expected to impair the objectivity of the director’s judgement when participating in the authorization or approval of the act or transaction at issue and (2) in the case of a stockholder, would be material to such stockholder.
New § 144(b) – “Interested” Transactions with Controlling Stockholders (Other than a Going Private Transaction)
Under new § 144(b), a “controlling stockholder transaction” (other than a going private transaction) will be protected if:
The material facts as to the controlling stockholder transaction must be disclosed or known to the committee or the stockholders, as the case may be.
If one of the three conditions is satisfied, the controlling stockholder transaction at issue may not be the subject of equitable relief, or give rise to an award of damages or other sanction against a director or officer of the corporation or any controlling stockholder or member of a control group by reason of a breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group.
“Controlling stockholder transaction” is defined as an act or transaction between the corporation or one or more of its subsidiaries, on the one hand, and a controlling stockholder or a “control group,” on the other hand, or an act or transaction from which a controlling stockholder or a control group receives a financial or other benefit not shared with the corporation’s stockholders generally.
“Controlling stockholder” is defined as a person that, together with such person’s affiliates and associates: (1) owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors, or (2) has the power functionally equivalent to that of the person describe in (1) by virtue of ownership or control of at least one-third in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors or for the election of directors who have a majority in voting power of the votes of all directors on the board of directors and power to exercise managerial authority over the business and affairs of the corporation.
Notably, Delaware courts have, in some instances, found controller status where a stockholder holds less than one-third in voting power but exerts “actual control.” The proposed amendments would provide a bright-line rule that only stockholders who own a majority of the voting power or at least one-third of the voting power together with the power to exercise managerial authority will be deemed “controlling stockholders.”
“Control group” means two or more persons that are not controlling stockholders that, by virtue of an agreement, arrangement, or understanding between or among such persons, constitute a controlling stockholder.
New § 144(b), if adopted, would represent a major departure from the Delaware Supreme Court’s decision in In re Match Group, Inc., where the Court held that where a controlling stockholder stands on both sides of a transaction with a controlled corporation and receives a non-ratable benefit (which must be material according to the Court’s decision in Maffei v. Palkon), the transaction will be subject to the entire fairness standard of review, unless the corporation implements the six procedural protections set forth in its 2014 Kahn v. M&F Worldwide opinion (the MFW Doctrine), including approval of the transaction by (1) a special committee of independent directors AND (2) disinterested stockholders, in order to avoid the default entire fairness rule. Additionally, the proposed amendments would eliminate the MFW requirement that a controlling stockholder transaction must be conditioned on the approval of both an MFW-compliant special committee of independent directors and a majority-of-the-minority stockholder vote before economic negotiations begin.
Under the proposed amendments, a transaction involving a controlling stockholder (other than a going private transaction) will receive the safe harbor protection so long as it is approved by a committee of the board that meets the conditions described in the statute or the corporation’s disinterested uncoerced stockholders (no need for both).
Additionally, the special committee approving the transaction (or recommending the transaction for approval) would not have to be fully independent (as was required under the MFW Doctrine), only “majority disinterested,” and for the stockholder vote, a majority of the votes cast will suffice (as opposed to requiring the higher standard of the affirmative vote of a majority of the total voting power).
New § 144(c) – “Interested” Transactions with Controlling Stockholders in a Going Private Transaction
Under new § 144(c), a controlling stockholder transaction constituting a going private transaction (as defined in the amendments) will be protected if:
The approval mechanism being proposed for going private transactions with a controlling stockholder would generally mirror the Court’s original application of the MFW Doctrine in Kahn, which involved a going private transaction, but, as noted above, the special committee approving the transaction (or recommending the transaction for approval) would not need to be fully independent (as was required under the MFW Doctrine), only “majority disinterested,” and for the stockholder vote, a majority of the votes cast will suffice (as opposed to requiring the higher standard of the affirmative vote of a majority of the total voting power).
The proposed amendments define “going private transaction” as (1) for a corporation that is registered under § 12(d) or 15(g) of the Securities Exchange Act of 1934 or listed on a national securities exchange, a Rule 13e-3 transaction; and (2) for any other corporation, any controlling stockholder transaction, whether by merger, consolidation, amendment, tender or exchange offer, conversion, transfer, domestication or continuance, pursuant to which all or substantially all of the shares of capital stock held by the disinterested stockholders (but not those of the controlling stockholder or control group) are cancelled or acquired.
If one of the two conditions is satisfied, the transaction at issue may not be the subject of equitable relief, or give rise to an award of damages or other sanction against a director or officer of the corporation or any controlling stockholder or member of a control group by reason of a breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group.
Presumption of Director Disinterestedness for Independent Public Company Directors
The proposed amendments specify that any director of a corporation that has a class of stock listed on a national securities exchange will be presumed to be a disinterested director with respect to an act or transaction to which such director is not a party if the board of directors has determined that such director is an independent director or satisfies the relevant criteria for determining director independence under any rule promulgated by such exchange.
This presumption will be heightened and may only be rebutted by substantial and particularized facts that such director has a material interest in such act or transaction or has a material relationship with a person with a material interest in such act or transaction.
The proposed amendments also clarify that the nomination or election of a director to the board of directors by any person that has a material interest in an act or transaction will not, of itself, be evidence that a director is not a disinterested director with respect to an act or transaction to which such director is not a party.
If approved, these changes would make it hard to challenge director independence and would negate cases like Goldstein v. Denner, where a director was found to be non-independent based on the fact that such director was nominated by a controlling stockholder, or potentially aspects of Tornetta v. Musk, where various claims of non-independence that were supported by the Delaware Court of Chancery.
Limitation on Controller Liability for Monetary Damagers
The proposed amendments provide that no person who is a controlling stockholder or member of a control group will be liable in such capacity to a corporation or its stockholders for monetary damages for breach of fiduciary duty other than:
As the Synopsis to the proposed amendments notes, under the proposed amendments, controlling stockholders and control groups, in their capacity as such, may not be held liable for monetary damages for breach of the duty of care.
However, notwithstanding (1) or (2) above, any person may still seek equitable relief on the grounds that an act or transaction, involving a controlling stockholder transaction:
Furthermore, nothing in (1) or (2) will limit judicial review for purposes of injunctive relief of provisions or devices designed to deter, delay or preclude a change of control or other transaction involving the corporation or a change in the composition of the board of directors.
Proposed Amendments to DGCL § 220
The proposed amendments to § 220 of the DGCL would now limit the specific materials that a stockholder could demand to inspect pursuant to a request for books and records of a corporation to the following exclusive list (in some cases limiting the requests to the last three years), which would include all the following:
Notably, the list does not include emails, text messages, or informal board communications.
The proposed amendments also impose stricter procedural requirements. A stockholder will only be entitled to inspect and copy books and records if: (1) his or her demand is in good faith and for a proper purpose, (2) the demand describes with reasonable particularity the stockholder’s purpose and the books and records sought for inspection, and (3) the books and records sought must be specifically related to the stockholder’s purpose. These procedural requirements may make it easier for some corporations to argue that a stockholder request is not narrowly tailored or does not meet the heightened standard.
The proposed amendments will also allow the corporation to impose reasonable restrictions on the confidentiality, use, or distribution of books and records. The corporation may require, as a condition to producing books and records, that the stockholder agree that any information included in the corporation’s books and records is deemed incorporated by reference in any complaint filed by or at the director of the stockholder in relation to the subject matter referenced in the demand. The corporation may also redact portions of any books and records produced to the extent the redacted portions are not specifically related to the stockholder’s purpose.
As noted in the Synopsis, new § 220(b)(4) preserves whatever independent rights of inspection exist under the referenced sources and does not create any rights, either expressly or by implication. New § 220(f) provides that if the corporation does not have specified books and records, including minutes of board and committee meetings, actions of board or any committee, financial statements and director and officer independence questionnaires, the Delaware Court of Chancery may order the production of additional corporate records necessary and essential for the stockholder’s proper purpose.
The proposed amendments have triggered a range of responses. While some view the amendments as a much-needed rebalancing of shareholder and management rights, others view them as a direct rebuke of the Delaware judiciary and an attack on the rights of minority investors.
That said, companies considering reincorporation may wish to consider the potential benefits of the proposed amendments to the DGCL and their progress toward adoption as well as other pending developments, including the appeal of Tornetta v. Musk that is currently before the Delaware Supreme Court, which collectively may materially alter the balance of considerations involved.