U.S. M&A Newsletter — March 27, 2025
Delaware Adopts Significant Corporate Law Changes
On March 26, 2025, Delaware Governor Matt Meyer signed into law amendments to the General Corporation Law of the State of Delaware (the “DGCL”) as proposed in Senate Bill No. 21 (the “Amendments”) following fast-tracked approval by the Delaware legislature.
Effective upon enactment, the Amendments substantially revise DGCL Sections 144 and 220 and were proposed following a series of high-profile Delaware court cases challenging conflicted director and controlling stockholder transactions, as well as increased stockholder demands for inspection of corporate books and records.
The Amendments have retroactive effect but will not apply to any court proceeding completed or pending, or any demand to inspect books and records made, on or before February 17, 2025.
A summary of the key DGCL changes is set out below:
1. DGCL § 144: Safe Harbors for Interested Transactions
The former version of Section 144 primarily provided against invalidation of interested director transactions due solely to the involvement of such interested director in voting on or being counted for quorum purposes with respect to such transactions.
In building upon the framework set out in prior Delaware judicial decisions, including Corwin and MFW, the Amendments codify safe harbor procedures that will shield directors, officers and controlling stockholders from claims for damages or equitable relief in connection with the following three categories of interested transactions:
1.1 Transactions with Directors or Officers
Section 144(a) provides that for an act or transaction between a corporation (or one of its subsidiaries) and a director or officer or an entity in which a director or officer has a financial interest, and the director or officer faces potential liability due to (a) the foregoing circumstances, (b) the receipt of any benefit from the act or transaction, or (c) being present at or participating in the board or committee meeting that authorizes the act or transaction, or being involved in the initiation, negotiation or approval of the act or transaction, the safe harbor is available if either:
- following disclosure of the material facts of the director’s or officer’s relationship or interest, the board or board committee authorizes the act or transaction in good faith and without gross negligence by the affirmative vote of a majority of the disinterested directors then serving on the board or such committee (“Disinterested Director Approval”); or
- the act or transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders (“Disinterested Stockholder Approval”).
If the board is majority-conflicted, satisfying the Disinterested Director Approval prong would require the creation of and approval by a board committee that consists of two or more disinterested directors.
1.2 Transactions with a Controlling Stockholder (Other Than Going Private Transactions)
Section 144(b) provides that other than for a going private transaction, for any act or transaction between the corporation (or one of its subsidiaries) and a controlling stockholder or a control group, or an act or transaction from which a controlling stockholder or a control group receives a financial or other benefit not shared with other stockholders generally (a “controlling stockholder transaction”), and a director or officer or controlling stockholder faces potential fiduciary duty liability, the safe harbor is available if either:
- following disclosure of the material facts of the transaction including the controlling stockholder’s interest, a majority of the disinterested directors serving on the relevant board committee (required to comprise two or more disinterested directors) approves in good faith and without gross negligence such transaction (“Board Committee Approval”); or
- such transaction is conditioned on obtaining Disinterested Stockholder Approval at the time of submission to stockholders for approval or ratification, and Disinterested Stockholders Approval is then obtained.
1.3 Going Private Transactions with a Controlling Stockholder
Section 144(c) provides that for a controlling stockholder transaction constituting a going private transaction, the safe harbor is available if both:
- Board Committee Approval is received pursuant to Section 1.2(i) above; and
- Disinterested Stockholders Approval is received pursuant to Section 1.2(ii) above.
1.4 Who is “Disinterested”?
Under the Amendments, a disinterested director is 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 any person that has a “material interest” in the act or transaction. A rebuttable presumption of disinterestedness exists for a director of a publicly listed corporation if the director is not a party to the act or transaction and is determined by the board to satisfy the applicable national stock exchange’s director independence criteria.
The Amendments define a disinterested stockholder as any stockholder that does not have a “material interest” in the act or transaction at issue or a “material relationship” with the controlling stockholder or other member of the control group, or any other person that has a “material interest” in the act or transaction.
1.5 Who is a “Controlling Stockholder”?
Prior to the Amendments, Delaware case law did not establish a bright-line ownership rule for actual control and a minority stockholder could be determined to be a controlling stockholder if found to be exercising managerial control over a corporation.
Section 144(e)(2) now defines “controlling stockholder” to be a person (together with their affiliates and associates) that:
- owns or controls majority voting power of the outstanding voting stock entitled to vote generally in the election of directors or in the election of directors who have majority voting power of the votes of all board directors;
- has the right, by contract or otherwise, to cause the election of nominees selected at their discretion and who constitute either a majority of the board or of directors entitled to cast majority voting power of the votes of all board directors; or
- has the power (1) functionally equivalent to a stockholder that owns or controls majority voting power of the outstanding stock entitled to vote generally in the election of directors by virtue of ownership or control of at least one-third in voting power of the outstanding stock entitled to vote generally in the election of directors or in the election of directors who have majority voting power of the votes of all board directors and (2) to exercise managerial authority over the business and affairs of the corporation.
Scope of Controlling Stockholder’s Fiduciary Duties
In a recent Delaware Chancery Court decision, the court held that when exercising stockholder-level voting power to alter the status quo of a corporation, alongside a duty of good faith, a controller owed a duty of care that demands the controller not harm the corporation or its minority stockholders through grossly negligent action. In re Sears Hometown & Outlet Stores, Inc. Stockholder, 2024 Del. Ch. LEXIS 12, at *4 (Del. Ch. Jan. 24, 2024).
The Amendments limit the scope of controlling stockholders’ fiduciary duty liability and provide that a controlling stockholder cannot be liable for damages for breach of the duty of care and can only be liable for damages for:
- a breach of the duty of loyalty to the corporation or the other stockholders;
- acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or
- any transaction from which the person derived an improper personal benefit.
2. Application of Entire Fairness Review if Procedural Safe Harbors are not Available
If the conditions for a safe harbor as provided by Sections 144(a)-(c) described above are not satisfied, transactions involving interested directors, officers, or controlling stockholders will continue to be subject to entire fairness review consistent with applicable Delaware common law. If the act or transaction in question is determined to be fair to the corporation and its stockholders, equitable relief or claim for damages in connection with such act or transaction will be barred.
3. DGCL § 220: Inspection of Books and Records
The Amendments also modify and supplement rules applicable to stockholder inspections of books and records under Section 220, including requiring an inspection demand to describe with reasonable particularity the stockholder’s purpose. Under revised § 220(a)(1), the term “books and records” available for inspection is now an exhaustive list and includes:
- the certificate of incorporation;
- bylaws;
- the following documents covering the three-year period preceding the date of the demand:
- stockholder meeting minutes and signed consents evidencing all stockholder action taken without a meeting;
- all written or electronic communications to stockholders generally; and
- annual financial statements;
- minutes of any board or board committee meeting and records of any action of the board or any such committee;
- materials provided to the board or any board committee in connection with actions taken by the board or any such committee;
- stockholder agreements; and
- director and officer independence questionnaires.
The Amendments also now permit the Delaware Chancery Court to order a corporation to produce specified and/or additional records if not already available in response to a stockholder’s proper inspection demand if it is found necessary and essential to fulfill the stockholders’ proper purpose.
4. Our Take
The Amendments have been passed amidst vigorous debate between the legislation’s proponents, who have emphasized the bill’s balancing impact in providing legal certainty and predictability following recent court decisions and the need to preempt the feared exodus of corporations from Delaware, and its detractors, who have warned against the potential increased harm minority stockholders may now face with the overturn of Delaware judicial precedent.
The short- and long-term impacts of this significant milestone in the development of Delaware corporate law will remain to be seen, particularly upon the application and testing of the Amendments in future lawsuits challenging controlling stockholder and interested director and officer transactions.
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