Delaware has long been the principal forum for incorporation in the United States due, in large part, to the extensive body of case law that has been developed over the course of decades. In the past year, however, some Delaware legislators believed that the Delaware courts were “getting it wrong”. A series of cases involving high profile companies that lost court battles with stockholders resulted in some of those companies (and others) leaving Delaware. To avoid a feared exodus of corporations from Delaware, on February 17, 2025, Delaware legislators introduced Senate Bill 21 in an effort to amend the Delaware General Corporation Law (“DGCL”) to “undo” some of Delaware’s recent case law.
Among other things, the bill, which was enacted on March 25, 2025, clarifies the rules for determining whether a director is “interested” and “independent”, whether a significant stockholder can be considered a “controller”, and what procedural safeguards are required when a corporation engages in a transaction with a controlling stockholder. The act also created limitations on what “books and records” Delaware corporations are required to provide to stockholders. These changes are discussed in more detail below.
Transactions Between a Corporation and its Directors and Officers
The amendments to the DGCL clarify that a director or officer, or an entity in which they are involved, that engages in a transaction with the corporation they serve is not able to be sued for damages if:
- All material facts regarding the director’s or officer’s involvement or interest in the transaction are disclosed, and the transaction is approved, in good faith and without gross negligence by a majority of the disinterested directors or, if a committee has been appointed to take action, by a majority of the disinterested directors of the committee; or
- The transaction is approved or ratified by an informed, uncoerced vote of a majority of the votes cast by disinterested stockholders; or
- The transaction is fair as to the corporation and the corporation’s stockholders.
Prior to the passage of the amendments, Delaware law required approval of such a transaction by the holders of a majority of all the outstanding disinterested shares, which effectively counts any shares that are not voted at all as though they were cast against the transaction.
Composition of Special Committees
Special committees, when properly formed, are a vehicle by which a corporation can approve transactions with an interested shareholder or by which a corporation can effectively determine whether stockholders can sue the corporation. Prior to the amendment of the DGCL, a special committee could only be comprised of disinterested and independent directors. As amended, the DGCL will only require that a majority of the members of a special committee be disinterested and independent, and a controlling stockholder interested in the transaction cannot be on the committee.
Transactions Involving Controlling Stockholders
Delaware courts have long held that a transaction between the corporation and a controlling stockholder required the highest level of review by courts, making such transactions very difficult, in practical terms, to achieve corporate and stockholder approvals that were acceptable. The amendments to the DGCL have provided more clarity – and except in the case of a “going private transaction” – an easier procedure to achieve acceptable corporate and stockholder approval.
As a result of the amendments, directors, officers, controlling stockholders and control groups are insulated from claims of breach of fiduciary duty with respect to a transaction between the controlling stockholder and the corporation if the transaction is approved in any one of the following three ways:
- All material factors regarding the transaction are disclosed to a special committee consisting of at least two disinterested directors (and the committee otherwise meets the requirements for special committee membership discussed above). The special committee has been given full authority to negotiate, accept or reject the transaction, and a majority of the disinterested directors on the committee approved the transaction in good faith and without gross negligence; or
- The transaction is conditioned on, and receives, approval or ratification by the uncoerced affirmative vote of the holders of a majority of the votes cast by the disinterested stockholders; or
- The transaction is fair as to the corporation and the corporation’s shareholders.
This change is significant because, prior to the amendments, a corporation was required to obtain both special committee and disinterested stockholder approval for all transactions between the corporation and the controlling stockholder. For “going private” transactions involving a controlling stockholder, however, the DGCL specifies that, in order to avoid claims of breach of fiduciary duty, the transaction must be approved by both a special committee and disinterested stockholder approval, as described above. Otherwise, the transaction must be fair to the corporation and its stockholders. For public companies, a going private transaction means a transaction that results in the company no longer being subject to SEC reporting obligations or being listed on a national securities exchange. For any other corporation, a going private transaction means a transaction in which “all or substantially all of the shares” held by the disinterested stockholders (but not the controller) are canceled or acquired.
Fiduciary Duties of Controlling Stockholders and Control Groups
Many people do not realize that controlling stockholders of a Delaware corporation owe fiduciary duties to the corporation and to the minority shareholders of the corporation. The nature and extent of those duties have, until now, been difficult to pin down. The DGCL amendments clarify that controlling stockholders and control groups do not have a duty of care, but they do have a duty of loyalty. They may also be liable for acts not taken in good faith or that involve intentional misconduct or knowing violation of law or for transactions from which they derive an improper personal benefit.
Who is a controlling stockholder or control group?
A “Control Group” is defined by the amendments to mean two (2) or more persons who are not controlling stockholders that, by virtue of an agreement, arrangement or understanding, constitute a controlling stockholder. Voting agreements, for example, might create a control group.The definition of “Controlling Stockholder” significantly clarifies existing case law attempting to address that subject by providing more of a “brightline” approach. There are essentially three categories of Controlling Stockholders:
- A person who, together with their affiliates and associates, owns or controls a majority of a corporation’s stock that is entitled to vote generally in the election of directors or in the election of directors who have a majority of the board’s voting power;
- A person having the right, by contract or otherwise, to nominate and elect, in their discretion, either a majority of the directors or directors having a majority of the board’s voting power; or
- Owns at least 1/3 of the stock entitled to vote generally in the election of directors or in the election of directors having a majority of the board’s voting power AND the power to exercise managerial authority over the business and affairs of the corporation.
Stockholder Access Rights
Before the amendments to the DGCL, stockholders could seek to review a corporation’s books and records upon a minimal showing of a credible basis to suspect wrongdoing – largely considered one of the lowest standards under Delaware law. In addition, the scope of books and records that could be obtained by a stockholder was largely developed by common law and courts had allowed stockholders to obtain “informal documents” such as emails, text messages, and other forms of electronic communication. These extensive requests and the low standard for stockholders to meet made these kinds of requests extremely burdensome on Delaware corporations.
With the DGCL amendments, Delaware has clarified that a stockholder may only inspect and copy the corporation’s books and records if they make that request in good faith for a proper purpose that is described in reasonable detail, they describe in reasonable detail the books and records they want to see, and those records are specifically related to the request. In addition, the kinds of books and records stockholders may request are now expressly described by statute to include the certificate of incorporation, bylaws, minutes of stockholder and director or committee meetings and any actions taken by consent of stockholders or directors (or any committee of directors) without a meeting limited, as to stockholder minutes and consents, to those taken within in the past three years, all corporate communications with stockholders within the past three years, the annual financial statements of the corporation for the past three years, any agreement entered into between the corporation and current or prospective stockholders granting rights to such stockholders or reflecting the corporation’s agreement to take or not take actions, and any director and officer independence questionnaires.
Importantly, the corporation may now impose reasonable confidentiality requirements on these documents when disclosed. Prior to the amendments, Delaware corporations were not permitted to impose confidentiality obligations on documents provided to stockholders through exercise of their stockholder access rights.
Effective Date
The amendments were signed by Delaware’s governor on March 25, 2025, and they immediately took effect.
If you have any questions regarding the recent changes to the Delaware General Corporation Law and their potential impact on your business, please reach out to partner Kim Decker, attorney Caitlin Long or any member of Barley Snyder’s Business Practice Group.
