Delaware has long been the preferred home for American corporations. In recent years, however, Delaware’s position at the center of corporate jurisprudence has come under fire, driven in large part by a perceived shift toward stockholder-friendly policies and an increased willingness to impose liability on corporate fiduciaries and controlling stockholders. In response to these developments, Delaware corporations have begun to consider moves to other states (most notably, Nevada and Texas), with newly formed corporations also considering incorporation outside Delaware.
Last week, Delaware legislators took action to respond to these perceived threats by introducing Senate Bill 21 (SB 21), which would install a number of heightened statutory protections for corporations and their directors, officers, and controlling stockholders, particularly for transactions that involve purported conflicts of interest. The bill proposes amendments to DGCL § 144, which governs “interested” transactions, and DGCL § 220, which governs stockholder inspection rights. The most noteworthy of these proposed amendments are briefly summarized below.
- Heightened Protections for Interested D&O Transactions. SB 21 proposes to limit the relief available to stockholders when challenging “interested” director and officer (D&O) transactions. Currently, Section 144 prevents courts from “voiding” transactions based on a conflicting interest when certain disclosure and disinterested director/stockholder approval prerequisites are met. SB 21 extends these protections to equitable relief, monetary damages, and other sanctions.
- Relaxed Standard for Cleansing Controlling Stockholder Transactions. SB 21 proposes to relax the procedures for cleansing “controlling stockholder” transactions, which today are governed by the court-imposed standards set forth in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (MFW) following the Delaware Supreme Court’s decision in In re Match Group Inc. Derivative Litigation, 315 A.3d 446 (Del. 2024). SB 21 alters the MFW standards by: (1) permitting special committee or stockholder approval for non-going-private transactions (MFW requires both), whereas both requirements would continue to be applicable to going-private transactions; (2) requiring only a majority of special committee members to be disinterested (MFW requires all special committee members to be disinterested); (3) replacing the “duty of care” standard with a more lenient “good faith” standard (under MFW, special committees must satisfy their “duty of care” when negotiating an interested transaction); (4) removing the “ab initio” requirement (under MFW, interested transactions must be conditioned on special committee and stockholder approval at the “outset” of the transaction process); and (5) conditioning stockholder approval on a majority of disinterested votes cast (MFW requires approval by a majority of disinterested votes outstanding).
- “Controlling Stockholder” Defined. SB 21 proposes to codify the definition of “controlling stockholder” as any person who, together with such person’s affiliates and associates: (1) owns or controls a majority of the corporation’s voting power; or (2) has power functionally equivalent to owning or controlling a majority of the voting power, owns or controls at least one-third of the voting power, and has the power to exercise managerial authority over the business and affairs of the corporation. Currently, stockholders who own or control less than one-third of the voting power may be considered “controlling” stockholders under certain circumstances.
- Presumed Director Disinterestedness. SB 21 proposes to create a rebuttable presumption of disinterestedness for directors who have satisfied NYSE and Nasdaq independence standards. The presumption could be rebutted only by “substantial and particularized” facts that such directors have a material interest in a transaction or have a material relationship with a person with a material interest in the transaction.
- “Entire Fairness” Defined. SB 21 proposes to define and relax the standard by which courts must assess the “fairness” of an interested transaction. The current “entire fairness” standard is a court-imposed inquiry requiring proof that a transaction was both “fair in process” and “fair in price.” Under SB 21, the definition of “fairness” is expanded to those transactions that are “beneficial” to the corporation or its stockholders, that are fair in terms of the fiduciary’s dealings with the corporation, and that are comparable to what might have been obtained in an arm’s-length transaction.
- Automatic Controlling Stockholder Exculpation. SB 21 proposes to extend to controlling stockholders and members of a control group the protections against personal liability traditionally afforded only to corporate directors and officers, and only then if specifically set forth in a corporation’s certificate of incorporation. Under SB 21, controlling stockholders would be subject to personal liability only for breach of loyalty violations, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or any transaction from which the controlling stockholder derived an improper personal benefit. Under this new proposed standard, duty of care violations (including action or inaction amounting to gross negligence) would be exculpated. Further, these protections would apply automatically and to both direct and derivative stockholder claims.
- Limitations on Stockholder Information Rights. SB 21 proposes to restrict the rights of stockholders to request corporate books and records under Section 220 by limiting inspection rights to the following specified categories of documents, many of which are limited to records created within the past three years: certificates of incorporation, bylaws, stockholder meeting minutes, stockholder communications, board and committee meeting minutes and materials, annual financial statements, stockholder agreements, and D&O independence questionnaires. SB 21 also allows corporations to impose confidentiality restrictions on produced records and to redact portions of produced records not specifically related to the stockholder’s purpose. Currently, no such limitations are imposed by statute, and under certain circumstances, Delaware courts have expanded the scope of stockholder inspection rights to internal communications, such as emails and text messages. SB 21 also provides that a production under Section 220 will be deemed incorporated by reference into any complaint filed by or at the direction of a stockholder on the basis of the information obtained through a books and records demand.
If enacted, SB 21 would usher in extensive changes to Delaware corporate law that would extend enhanced protections to Delaware corporations, their fiduciaries, and controlling stockholders. We anticipate that SB 21 will attract fierce resistance from the Delaware plaintiffs’ bar and other stockholder interest groups and could undergo multiple rounds of revision (or face opposition from competing bills) designed to address potential procedural loopholes and the broader perceived permissiveness of the proposed amendments. Although SB 21 will face challenges before it becomes binding law, this is a development that all corporations (not just those incorporated in Delaware) and their legal counsel should keep a close eye on moving forward. With many jurisdictions looking to Delaware for guidance on issues involving corporate law, SB 21 has the potential to influence how courts throughout the country respond to lawsuits challenging interested director, officer, and controlling stockholder transactions.
We at Alston & Bird will continue to monitor SB 21 as it winds its way through the Delaware legislature and report on significant developments as they occur.
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If you have any questions, or would like additional information, please contact one of the attorneys on our Securities Litigation team or one of the attorneys on our Capital Markets & Securities team.