Just Passed: Senate Bill Significantly Amends Delaware General Corporation Law

On March 25, 2025, Senate Bill 21, which significantly amends the Delaware General Corporation Law (DGCL), passed the Delaware General Assembly and was signed into law by Governor Matt Meyer.

Below we provide a high-level summary of the major amendments, key takeaways, and considerations for companies that may be impacted by the new provisions of DGCL §§ 144 and 220.

For deeper insight on these major changes, join us for our upcoming webinar and additional LawFlashes addressing the effects of these amendments on stockholder litigation.

KEY TAKEAWAYS

• Inclusion of a safe harbor for transactions involving interested directors and officers
• Inclusion of a safe harbor for transactions involving controlling stockholders
• Defining “controlling stockholders” with brightline requirements of a minimum percentage of voting stock ownership and managerial authority
• Books and records subject to stockholder inspection presumptively limited to formal board materials
• Corporations entitled to impose reasonable conditions on production, including confidentiality

These amendments apply retroactively unless (1) an action concerning the act or transaction is already pending or (2) the Section 220 demand was made on or before February 17, 2025.

STRENGTHENED SAFE HARBOR FOR INTERESTED DIRECTOR AND OFFICER TRANSACTIONS

Before the amendments, DGCL § 144(a) offered a safe harbor for interested director transactions, providing that interested director transactions would not be deemed void or voidable solely because of director conflicts of interest if all material facts regarding the director or officer’s conflict are disclosed, including all involvement in the act or transaction, and (1) a majority of disinterested directors on the board (or board committee) approve the transaction, regardless of whether the disinterested directors are less than a quorum, or (2) a majority of votes from informed, disinterested, uncoerced stockholders approve or ratify the transaction.

If neither of these protections are satisfied, the transaction would need to be “fair as to the corporation and the corporation’s stockholders” for the safe harbor to apply, which means it would need to satisfy the entire fairness doctrine.[1] While DGCL § 144(a) previously only prevented such transactions from being deemed void or voidable solely on the grounds of director interest, those transactions could still be the subject of litigation for breach of fiduciary duties. 

The amendments expand the protection offered by compliance with the safe harbor provisions, now precluding equitable relief and money damages altogether.

SAFE HARBOR FOR CONTROLLING STOCKHOLDER TRANSACTIONS

Amendments to DGCL § 144(b) provide a safe harbor for transactions involving controlling stockholders in transactions other than “going private” transactions (discussed further below). Similar to the safe harbor amendments to Section 144(a), the Section 144(b) safe harbor bars actions for equitable relief and damages so long as the controlling stockholder transaction is approved in good faith by a special committee that has express authority to negotiate and reject the transaction.[2]

All material facts regarding the controlling stockholder transaction must be disclosed or known to the special committee that consists of a majority of disinterested directors and does not include the controlling stockholders. Alternatively, the safe harbor will apply if all material facts regarding the controlling stockholder transaction are disclosed or known to stockholders entitled to vote on the transaction and the transaction is approved or ratified by a majority of votes from informed, disinterested, uncoerced stockholders. If neither of the above conditions are satisfied, the transaction would need to satisfy the entire fairness doctrine.

As noted above, controlling stockholder “going private” transactions do not have the same disjunctive standard described above. New subsection 144(c) provides a safe harbor that prevents equitable relief and damages, provided that all material facts regarding the controlling stockholder transaction are disclosed or known to (1) stockholders entitled to vote on the transaction, and the transaction is approved or ratified by a majority of votes from informed, disinterested, uncoerced stockholders, and (2) a special committee that has express authority to negotiate and reject the transaction, consists of a majority of disinterested directors, does not include the controlling stockholder, and approves the transaction in good faith. If either of the above conditions are not satisfied, the transaction would need to satisfy the entire fairness doctrine.

The above framework rolls back jurisprudence expanding the application of the MFW Doctrine. In Kahn v. M & F Worldwide Corp., the Delaware Supreme Court held that—in the context of a squeeze-out merger—a controlling stockholder transaction, which would typically be subject to entire fairness review, will be subject to the business judgment rule only if the transaction is conditioned, ab initio, on approval by both (1) an independent, fully functioning special committee of independent directors and (2) a majority of disinterested stockholders.[3]

The Delaware Supreme Court confirmed the expansion of the MFW Doctrine to all controlling stockholder transactions that provide a non-ratable benefit to the controller less than a year ago in In re Match Group, Inc. Derivative Litigation (Match Group II). The new amendments to DGCL § 144 confirm that the proper scope of the full MFW Doctrine is “going private” transactions, with business judgment review now obtainable regarding other controller transactions by compliance with either of the MFW procedural mechanisms, not both.

DEFINITION OF CONTROLLING STOCKHOLDER

A new subsection, DGCL § 144(e), provides definitions and more clarity for stockholders and directors with particular ownership and relationship interests. These new defined terms include “control group,” “controlling stockholder,” “controlling stockholder transaction,” “disinterested director,” “disinterested stockholder,” “going private transaction,” “material interest,” and “material relationship.”

Of particular note, the defined term “controlling stockholder” imposes a minimum voting threshold that a stockholder must own or control to be a “controlling stockholder.”

The amendments define a “controlling stockholder” as one who (1) “owns or controls a majority [of the corporation’s] voting power” in director elections, (2) “[h]as the right, by contract or otherwise,” to elect nominees selected at their discretion and constitute a majority of the directors or the majority of voting directors, or (3) has “power functionally equivalent to that of a stockholder that owns or controls a majority [of a corporation’s] voting power” in director elections through owning “at least one-third in voting power” in addition to the “power to exercise managerial authority over the business and affairs of the corporation.”

LIMITATIONS ON THE SCOPE OF BOOKS AND RECORDS INSPECTIONS 

DGCL § 220 provides stockholders and directors qualified rights to inspect the books and records of Delaware corporations for a “proper purpose”—one “reasonably related to the stockholder’s interests as a stockholder.”[4] Courts have recognized a long list of purposes as “proper purposes,” including investigating possible wrongdoing, pursuing a proxy contest, and valuing stock shares.[5] If a proper purpose is established, Delaware jurisprudence provides that the requesting stockholder is entitled to inspect those books and records deemed “necessary and essential” to achieving the proper purpose of inspection.  

What books and records are deemed “necessary and essential” has depended on the facts and circumstances surrounding the stockholder’s demand. In recent years, the scope of books and records deemed “necessary and essential” has expanded through case law to potentially include records far beyond board materials and minutes, extending to electronic discovery categories such as emails, texts, and chats.[6] 

The amendments to Section 220 curtail the judicial expansion of the scope of books and records available through Section 220 and codify protections to corporations by defining “books and records” to mean what past case law has referred to as “board-level materials,”[7] e.g., minutes within the last three years, board presentations, director independence questionnaires, minutes of stockholder meetings and communications with stockholders within the last three years.

While stockholders may continue to request additional materials beyond those identified by statute (including, for example, emails and text messages), the amendments now require that the stockholder demonstrate a “compelling need” for those materials and provide “clear and convincing evidence” that the materials are “necessary and essential.” 

In addition, corporations in practice were typically safe to assume they could protect confidential information within the books and records provided to stockholders through confidentiality agreements and otherwise limit the information provided to that which is truly “necessary and essential” by redacting nonresponsive information. In recent years, even those protections have been challenged in judicial decisions denying such protections depending on the circumstances. [8]  

The amendments impose greater certainty for corporations by (1) allowing corporations to impose reasonable restrictions on the confidentiality, use, or distribution of books and records and condition the inspection of books and records on a confidentiality agreement between the stockholder and corporation; and (2) allowing corporations to redact portions of the books and records that are not specifically related to the stockholder’s purpose.[9]

ADDITIONAL AMENDMENTS TO DGCL BEING CONSIDERED

The Delaware State Senate has indicated that it may not be done amending the DGCL. Additional amendments may include limitations on awards of attorney fees in certain corporate litigation cases.[10]

Stay tuned for forthcoming Morgan Lewis LawFlashes addressing these potential amendments as well as their effects on stockholder litigation.