DExit ramp: A guide to Delaware’s corporate law overhaul

Last month, Delaware Governor Matt Meyer signed into law a corporate law overhaul (Senate Bill 21 or SB 21) aimed at preserving Delaware’s reputation as the preeminent state for incorporation. 

Approximately two-thirds of the US’s Fortune 500 companies are chartered in Delaware, and many other states have modeled their laws on Delaware’s and consult Delaware decisions for guidance on novel issues of corporate law. But recent court decisions have drawn the ire of prominent voices in the corporate world, and states like Texas and Nevada are jockeying to position themselves as more business-friendly alternatives.

In response, the Delaware General Assembly amended the Delaware General Corporation Law ("DGCL") to limit liability for controlling stockholders and for directors who approve certain conflicted corporate acts and to install more guardrails around stockholder books-and-records requests. Companies incorporated in Delaware should carefully consider how these amendments may reduce liability risks or limit legal costs associated with these events.

Background

SB 21 overrules In re Match Group, 315 A.3d 446 (Del. 2024), in which the Delaware Supreme Court held that all transactions with controlling shareholders are subject to entire fairness review unless: (i) negotiated by a fully-functioning special committee comprised entirely of independent directors and (ii) approved by holders of a majority of shares not affiliated with the controller in a fully-informed, non-coerced vote.¹ The impetus for SB 21 also stems from recent announcements that certain large corporations would be reincorporated in Nevada and Texas, sparking concerns of a corporate exodus from Delaware (a so-called DExit).

SB 21 marks the second reactive amendment to Delaware’s corporate law in recent years. In 2024, the Delaware General Assembly enacted SB 313 to authorize certain stockholder agreements and merger-related practices, overruling two decisions from the Delaware Court of Chancery that critics said cast a pall of uncertainty over an array of routine corporate actions (West Palm Beach Firefighters Pension Fund v. Moelis & Co., 311 A.3d 809 (Del. Ch. 2024) and Sjunde AP-Fonden v. Activision Blizzard, 2024 WL 863290 (Del. Ch. 2024)).

What’s new

SB 21 amends Sections 144 and 220 of the DGCL, which cover conflicted transactions and stockholders’ rights to inspect corporations’ books and records.

The new Section 144

The new Section 144 expands the statutory “safe harbor” for conflicted transactions to bar damages and equitable relief if the safe harbor conditions are met. Previously, the safe harbor merely provided that certain types of conflicted transactions “shall [not] be void or voidable” and so did not preclude plaintiffs from obtaining damages or equitable relief. The new Section 144 also expressly encompasses controlling shareholder transactions and clarifies the conditions for insulating a conflicted transaction from liability as described below.

Conflicted transactions (No controlling stockholder) (Section 144(a))

In conflicted transactions without a controlling stockholder, the new Section 144(a) provides three paths to the safe harbor:

1. fully informed, good faith and non-grossly negligent approval by a majority of the disinterested board members or by a majority of disinterested directors on a special committee;
2. fully informed and uncoerced approval by a majority of the votes cast by disinterested stockholders; or
3. the transaction is fair to the corporation and its stockholders.

Key points:

• The statute makes clear that the directors’ approval must be fully informed and made by disinterested directors.
• The statute recites the categories of material facts that, at minimum, must be disclosed or known to the directors to be fully informed—the material facts as to the interested director’s or officer’s relationship or interest and as to the act or transaction (including any involvement in the initiation, negotiation or approval of the act or transaction).
• The statute requires approval by a special committee of disinterested directors when a majority of the directors are not disinterested.
• The statute imposes a lower stockholder vote threshold than in the past—a majority of the shares voted rather than a majority of the shares outstanding.
• The statute’s drafters confirmed in the bill synopsis that the third path (for example, fair to the corporation and its stockholders) is “intended to be consistent with the entire fairness doctrine developed in the common law.”

Controlling stockholder transactions (not going private) (Section 144(b))

In conflicted transactions involving a controlling stockholder (but not going private), the new Section 144(b) provides three paths to the safe harbor:

1. fully informed, good faith and non-grossly negligent approval by a majority vote of a properly empowered special committee that is comprised of disinterested directors;
2. the transaction is conditioned, when submitted to stockholders, on the approval of the disinterested stockholders and (b) the transaction is approved by a fully informed and uncoerced vote of a majority of the votes cast by disinterested stockholders; or
3. the transaction is fair to the corporation and its stockholders.

Key points (in addition to those for Section 144(a) above):

• Match Group required both of the conditions in (1) and (2) above (for example, special committee approval and majority-of-the-minority approval) and required that the controlling stockholder put both conditions in place “ab initio” (for example, the transaction proposal must include the conditions before substantive negotiations commence). The new Section 144(b) changes both of those requirements:
  • The new Section 144(b) permits either special committee approval or minority-of-the-minority approval to achieve the safe harbor;
  • The new Section 144(b) requires that the transaction be conditioned only on majority-of-the-minority approval (for example, special committee approval need not be a condition of the proposal); and
  • The new Section 144(b) requires only that the transaction be “conditioned, by its terms, as in effect at the time it is submitted to stockholders,” on majority-of-the-minority approval.
• There is arguably some ambiguity on the timing of the majority-of-the-minority condition in the new Section 144(b). Some have read the statutory text to do away with the ab initio requirement, while others have suggested that the language “as in effect at the time” speaks only to the terms of the transaction and not the imposition of the condition, which still could be required at the start of negotiations as a means of self-disabling. There will likely be litigation over this point.
• The special committee must be empowered to negotiate (or oversee the negotiation of) and reject or modify the transaction.

Controlling stockholder transactions (going private) (Section 144(c))

In conflicted “going private” transactions involving a controlling stockholder, the new Section 144(b) provides two paths to the safe harbor:

1. the requirements in both of the first two paths in the new Section 144(b) are met (for example, a) approval by a properly empowered special committee and (b) the deal is conditioned on majority-of-the-minority approval and that approval is secured); or
2. the transaction is fair to the corporation and its stockholders.

Key points (in addition to those for Sections 144(a) and (b) above):

• The new Section 144(c) is effectively a modified version of the Match Group standard, reserved for transactions that historically have received stricter judicial scrutiny.
• A “going private transaction” is defined in the new Section 144(e)(6) to reach both public and non-public companies.

Independence and control (Section 144(d))

The new Section 144 also includes important provisions governing director independence and the standard for qualifying as a controlling stockholder.

In terms of independence, the new Section 144(d)(2) strengthens the presumption of independence for directors who are deemed independent from management and controlling stockholders under stock exchange rules (for example, NYSE or NASDAQ rules). That presumption is rebuttable only by “substantial and particularized facts” showing a “material interest” in the act or transaction or a “material relationship” with a person with such a material interest. The new Section 144(d)(3) also establishes that the mere fact that a director owes his or her board seat to the vote of an interested stockholder does not per se make the director interested—a disputed issue often briefed on motions to dismiss.

Importantly, the new Section 144(e) defines each of the terms governing independence: “disinterested director,” “disinterested stockholder,” “material interest” and “material relationship.” While these definitions are drawn from case law, their codification provides clarity on how companies and stockholders can structure their operations and their conduct to take advantage of the safe harbors.

In terms of control, the new Section 144(e) defines both “controlling stockholder” and “control group,” setting forth clear standards for who qualifies:

• A “controlling stockholder” is any stockholder that, together with its affiliates and associates:
  • Owns or controls majority voting power;
  • Has the right to cause the election of a majority of directors; or
  • Owns or controls at least one-third voting power and has power to exercise managerial authority over the company’s business and affairs.
• A “control group” is two or more persons that are not controlling stockholders but that constitute a controlling stockholder by virtue of an agreement or arrangement.

These new standards, marked by hard numerical thresholds, settle a question that has been hotly contested in Delaware’s courts—when a minority stockholder may be a controlling stockholder.² Litigation will now likely shift to the question of when a stockholder has the “power to exercise managerial authority over the business and affairs of the corporation” under new Section 144(e)(2)(c).

Another important feature of the new Section 144 is the new Section 144(d)(5), which exculpates controlling stockholders and control groups from liability for breach of the duty of care. This statutory exemption places controllers on safer footing than directors and officers, who must be affirmatively exculpated via a corporate charter provision adopted in accordance with Section 102(b)(7).

Limitations

While the safe harbors in the new Section 144 provide additional protection, they do not eliminate all liability for control groups or foreclose relief for stockholder plaintiffs. 

If an act or transaction does not meet all elements of the safe harbor or is contrary to the corporation’s own governance structure, or if it violates a government order or agreement, stockholders can still sue to enjoin it under the new Section 144(d)(6)(a). This may prove to be a new battleground—actions for equitable relief premised on the failure of safe harbor conditions or violations of the corporation’s organizational documents. Additionally, the new Section 144(d)(6)(b) and (c) preserve judicial relief for efforts to deter, delay or preclude changes of control and for aiding and abetting breaches of fiduciary duty.   

The new Section 220

The new Section 220 changes the law of stockholder inspection rights in several important ways. SB 21 makes clear that these changes apply to any action filed or books-and-records demand made after February 17, 2025, even if the acts or transactions at issue predated the law’s enactment.

First, the new Section 220(a)(1) defines “books and records” to mean a narrow universe of nine specific categories of documents: certificates of incorporation, bylaws, stockholder meeting minutes, communications to stockholders, board minutes, board materials, annual financial statements (for the past three years), any agreements under Section 122(18) and independence questionnaires. The definition notably omits email correspondence, which shareholders have increasingly sought in books and records actions.

Second, the new Section 220(b)(2) requires stockholders to describe the “proper purpose” of their request with “reasonable particularity” in their demand and show that the books and records sought are “specifically related” to that purpose.

Third, the new Section 220(b)(3) expressly allows corporations to condition their productions on the stockholders’ agreement that “any information included in the corporation’s books and records is deemed incorporated by reference in any complaint” that the stockholders subsequently file. This effectively enables corporations to expand the record on a motion to dismiss a complaint filed in the wake of a Section 220 production by preventing stockholder plaintiffs from selectively quoting materials in the pleadings and objecting to the consideration of other information. This is particularly important in oversight (Caremark) cases, where the existence of board-level monitoring systems, the information provided to the board and the actions taken by the board are critical issues. The new Section 220(b)(3) also expressly allows corporations to redact portions of any produced records “to the extent the portions so redacted are not specifically related to the stockholder’s purpose.” Although corporations routinely sought to impose these types of conditions on Section 220 productions, stockholder plaintiffs would not always agree, and the matter would be left to the court. New Section 220(b)(3) ends the debate. Nonetheless, companies should exercise judgment when redacting board records, as Delaware courts have criticized companies for making excessive redactions in situations where having a more robust board record may have assisted the defendants in seeking dismissal.

Fourth, the new Section 220(e) places similar limits on the scope of Section 220 productions ordered by the Court of Chancery. In brief, subject to narrow exceptions in new Sections 220(f) and (g), the court can only order a corporation to produce the nine categories of books and records outlined in Section 220(a)(1). Under Section 220(g), the court can order production of “other specific records” of the company “only if and to the extent” that a stockholder makes a showing of a “compelling need” and demonstrates by “clear and convincing evidence that such specific records are necessary and essential to further [the stockholder’s proper] purpose.”

Reception

SB 21 has engendered debate among legal scholars, institutional investors and members of the corporate bar. Critics argue that SB 21 disrupts Delaware’s balance of fiduciary principles and judicial oversight by imposing rigid statutory rules and potentially undermining the flexibility that makes Delaware attractive to corporations. Opponents of the legislation also argue that these amendments threaten decades of precedent, while others disagree, pointing to the drafters’ comments in the bill synopsis that the new law would not “displace the common law requirements regarding core fiduciary conduct.”

In any event, the landscape is in flux. A lawsuit challenging the law’s constitutionality has already been filed in the Delaware Court of Chancery,³ a prominent public company (Roblox Corp.) proposed reincorporation from Delaware to Nevada in preliminary proxy materials filed just days after SB 21 was signed into law,⁴ and Texas and Nevada have already introduced legislation modeled on SB 21 to keep pace with Delaware (as we explored in our recent post, "Senate Bill 29 on track to further Texas’ push as business hub").⁵

Conclusion

Companies should carefully study SB 21 and should monitor how Delaware courts interpret these provisions going forward. As noted above, the amended provisions should strengthen the hands of directors and management in defeating challenges to interested-party transactions and limiting the cost of books and records demands. But while the Delaware legislature has now spoken, it remains to be seen how strictly Delaware courts will construe these provisions and whether shareholder plaintiffs will be able to mount successful challenges to special committee approvals and other procedural protections.