Introduction and Background
On March 25, 2025, the Delaware Governor Matt Meyer signed into law amendments to the state's General Corporation Law (DGCL) that are intended to reinforce Delaware's long-standing dominance in the market for corporate charters and to address frustrations of corporate directors, corporate management and investors that have been simmering in response to certain lines of case law that had been emanating from the state's courts. Proponents of the legislation believe the amendments will provide a renewed level of stability and predictability to the interpretation and enforcement of the state's laws governing corporations—particularly relating to controlling stockholder transactions. Before addressing the amendments, it is critical to understand the two primary concerns the legislation is intended to address.
The first concern is the growing body of case law regarding transactions with, or involving, controlling stockholders. Litigation filed by stockholders challenging such transactions have historically been fraught with thorny issues like how to identify a controlling stockholder and what processes can be implemented such that companies can avoid the "entire fairness" standard of review—cases that are notoriously difficult to get dismissed at the pleadings stage. Over time, the courts of Delaware had developed common law doctrines that provided pathways back to a "business judgment" standard of review depending on (a) approval by a disinterested committee of the board of directors and/or (b) the informed approval of the transaction by a "majority of the minority" shares. These doctrines have been the source of much litigation—and many pages of written decisions by the courts.
The second concern is a perceived creep in the type and scope of the books and records stockholders have been permitted to inspect when exercising their statutory rights to such an inspection under Section 220 of the DGCL. In recent years, stockholders of Delaware corporations have taken to heart the Supreme Court's admonition to use the "tools at hand"—that is, Section 220—to engage in a pre-suit investigation before drafting and filing litigation. Litigation seeking to enforce those inspection rights has proliferated, and with that the courts have issued decisions that have broadened the definition of what records are "necessary and sufficient" for the purposes stated for the inspection to include more voluminous records like emails, texts and other electronically stored information that goes beyond more traditional records such as minutes, board presentations, financial statements and governance documents.
To address these concerns, Delaware has adopted amendments to both Sections 144 and 220 of the DGCL. The amendments to Section 144 provide more certainty and clarity to transactional planners in navigating pathways that provide statutory safe harbors for such transactions, and the amendments to Section 220 provide new limits on scope of statutory inspections of corporate books and records.
Amendments to Section 144
The following amendments to Section 144 are intended to provide statutory safe harbors from liability attendant to acts or transactions involving directors, officers or controlling stockholders.
Section 144(a)—Acts or Transactions Involving Directors or Officers
Prior to the amendments, Section 144(a) simply provided that transactions between the company and its officers and directors were not void or voidable as a matter of course, but they could be subject to the entire fairness standard of review. As amended, now Section 144(a) provides a statutory safe harbor where such transactions may not be subject to equitable relief (for instance, an injunction) nor may monetary damages be awarded against officers or directors if any of the following are present:
- The material facts of any director or officer's interest in the transaction are disclosed to the board of directors (or a committee of the board), and such transaction is approved by a majority of the disinterested directors or a majority of the committee members (with that committee having at least two disinterested directors);
- The act or transaction is ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or
- The act or transaction is fair to the corporation and the corporation's stockholders.
Accordingly, for transactions involving officers or directors, the safe harbor is available if the transaction employs either (a) the vote of the disinterested directors or a committee or (b) an informed vote of the disinterested stockholders. Otherwise, the transaction will need to be fair to the company, as previously contemplated in the "entire fairness" standard of review.
Section 144(b)—Controlling Stockholder Transactions—Non-Going-Private
A replaced Section 144(b) now provides a statutory safe harbor similar to that for officer and director transactions but for non-going-private transactions involving controlling stockholders—again providing that officers, directors and controlling stockholders (or members of a control group) shall not be subject to equitable relief or awards of money damages for claims that any such persons or controlling stockholders breached their fiduciary duties if they utilize at least one of the following cleansing mechanisms:
- The negotiation and approval of any such transaction is delegated to an informed committee of disinterested directors, and such transaction is approved in good faith and without gross negligence by a majority vote of such committee;
- The controlling stockholder transaction is conditioned, by its terms as in effect at the time submitted for ratification, on the approval or ratification by an informed, uncoerced, affirmative vote of a majority of votes cast by the disinterested stockholders; or
- The controlling stockholder transaction is fair to the corporation and the corporation's stockholders.
It is important to note here that for controlling stockholder transactions outside the realm of going private transactions: (a) the safe harbor is accessed via either a disinterested committee of the board approval or an informed, uncoerced vote of the disinterested stockholders, (b) the vote by the disinterested director committee need not be unanimous (as had been previously required by certain decisional law), and (c) the requirement that the transaction be conditioned on a "majority of the minority" vote need not be a condition "ab initio" and is satisfied by the affirmative vote of the stockholders actually voting—that is, abstentions are not the equivalent of "no" votes.
Section 144(c)—Controlling Stockholder Going-Private Transactions
For going-private transactions involving a controlling stockholder, the same safe harbor is available as for other controlling stockholder transactions, but the transaction must be approved by both the disinterested committee and the informed, uncoerced vote of the disinterested stockholders. This safe harbor cannot be used unless both are present. But, consistent with other types of controlling stockholder transactions, here, too, the previous, common law requirement that such conditions be in place "ab initio" has been legislatively removed.
Section 144(d) and 144(e)—Definitions of Disinterested Directors and Controlling Stockholders
New Sections 144(d) and 144(e) provide some statutory bright lines for who will be deemed either a disinterested director or a controlling stockholder for purposes of Section 144.
For directors, they will now be deemed (but with a rebuttable presumption) to be disinterested if the company is publicly listed and the director qualifies as independent under the rules of the applicable exchange. That presumption may only be displaced by "substantial and particularized facts" that the director has a material interest in the transaction or act or has a material relationship with someone with such an interest. For nonlisted companies, a director will not be deemed interested solely because they have been nominated or elected to the board by a person with a material interest in the act or transaction.
These subsections also seek to quell many of the disputes that have cropped up over what defines a "controlling stockholder" or a "control group." The amendments now codify a definition for a controlling stockholder. The amendments provide that a controlling stockholder is one who (i) owns or controls a majority of the corporation's voting power, (ii) has the right, by contract or otherwise, to elect a majority of the board, or (iii) has over one-third of the voting power—and (a) has "power functionally equivalent to that of a stockholder that owns or controls a majority" of the voting power and (b) has the "power to exercise managerial authority over the business and affairs of the corporation."
Finally, these sections also define a "going-private transaction" as those transactions that:
- For a publicly listed corporation, a transaction is subject to Rule 13e-3 (as defined in 17 CFR § 240.13e-3(a)(3) or any successor provision); or
- For all other corporations, any "controlling stockholder transaction" (as defined in the amendments) "including a merger, recapitalization, share purchase, consolidation, amendment to the certificate of incorporation, tender or exchange offer, conversion, transfer, domestication or continuance, pursuant to which all or substantially all of the corporation's capital stock held by the disinterested stockholders (but not those of the controlling stockholder or control group) are cancelled, converted, purchased, or otherwise acquired or cease to be outstanding."
Amendments to Section 220
The amendments to Section 220 of the DGCL, which permits stockholders to inspect certain books and records of the company, were primarily aimed at providing statutorily enforced rigor to limit what had been perceived as an expanding and burdensome scope to such inspections. To that end, Section 220 now defines "books and records" to include:
- The certificate of incorporation and bylaws (including copies of any documents incorporated by reference);
- Minutes of stockholder meetings for the prior three years;
- Communications generally with stockholders in the prior three years;
- Minutes of board or board committee meetings and materials provided in connection with such meetings; and
- Financial statements from the last three years.
For a public company, the only category of records that would not be readily available through SEC filings are the minutes of board or committee meetings and supporting materials. To inspect books and records beyond those in this defined list, the stockholder must show that such records are not available and must show a compelling need—by clear and convincing evidence—that such other records (like emails or texts) are necessary and essential to the stockholder's stated purpose(s) for the demanded inspection.
Retroactive Application of the Amendments
These amendments took effect upon the governor's signature on March 25, 2025, but they apply to all acts or transactions, whether occurring before or after that date. They do not apply to or affect any claims or actions that had been filed, were pending or were completed (or to any Section 220 demands made) before February 17, 2025.
About Duane Morris
Duane Morris lawyers in our Corporate Practice Group and corporate governance professionals in our Delaware office have kept close tabs on the lead-up to and enactment of these amendments and stand ready to answer any questions clients may have about structuring transactions to take advantage of these new safe harbors or addressing stockholder demands to inspect corporate books and records.
For More Information
If you have any questions about this Alert, please contact Richard L. Renck, Rebecca A. Guzman, Darrick M. Mix, Richard A. Silfen, any of the attorneys in our Corporate Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
