On Feb. 17, 2025, a bipartisan group of Delaware legislators introduced a bill ("SB 21") proposing a set of significant amendments to the Delaware General Corporation Law ("DGCL") that, if approved, would dramatically limit stockholders' ability to access corporate books and records and reduce Delaware courts' scrutiny of transactions with conflicted controlling stockholders. While ostensibly aimed at increasing clarity and predictability for transactional planners, the proposed amendments likely will create new areas of uncertainty that boards may exploit to avoid accountability to stockholders and remove a potent tool used by activists to uncover board wrongdoings.
Proposed Amendments to DGCL § 220 (Books and Records Demands)
Section 220 of the DGCL grants stockholders the right to inspect corporate books and records and is an important tool for stockholders both in activist campaigns and in investigating wrongdoing by a board. If enacted, SB 21 would significantly curtail this stockholder right by amending Section 220 to, among other things, (1) impose a higher procedural standard for demands, (2) limit documents available through a demand to a specified list of formal corporate records enumerated in Section 220, (3) permit companies to condition the provision of books and records on entry into an confidentiality agreement, and (4) permit a corporation to redact its books and records for relevance.
1. New Procedural Standard for Stockholder Demands Under Section 220
SB 21 proposes that in order for a stockholder to receive and inspect copies of a corporation's books and records under Section 220, the stockholder must make a demand that meets enumerated procedural requirements. These requirements are that the demand is made in "good faith and for a proper purpose," "describes with reasonable particularity the stockholder's purpose and the books and records the stockholder seeks to inspect," and that the "books and records sought are specifically related to the stockholder's purpose." While most demands drafted by sophisticated counsel already meet these requirements, which are largely contained in existing case law, their inclusion in the statutory text will encourage corporate boards to find new bases to refuse to produce documents in response to the demand. The inclusion of the requirement of "good faith," in particular, appears ripe for abuse, as it ostensibly permits boards to reject a demand simply because the board arbitrarily determines that it was not made in "good faith" by the stockholder, even if the demand otherwise meets all of the procedural requirements of Section 220.
2. Stockholder Demands Under Section 220 Would Be Limited to Certain Formal Records
Under existing Delaware case law, it is possible for stockholders making a demand under Section 220 to obtain both formal corporate board records and informal records and communications, including text messages and e-mails. For stockholders investigating wrongdoing, access to such informal records and communications is a powerful investigatory tool. SB 21 proposes that the documents available to demanding stockholders be limited to an enumerated list of formal board materials and financial statements, including the certificate of incorporation, bylaws, minutes of stockholder meetings, minutes of board or committee meetings, materials provided to the board or any committee, and annual financial statements for three years preceding the date of the stockholder demand.
On March 10, 2025, the Delaware State Bar Association's Corporation Law Section approved minor revisions to SB 21. Most notably, the revisions included a limited failsafe whereby a court may order production of "other specific records of the corporation," but only if the stockholder (i) makes a showing of a "compelling need for an inspection of such records to further the stockholder's proper purpose" and (ii)demonstrates by "clear and convincing evidence" that those records are necessary and essential to further the stockholder's proper purpose. The "compelling need" standard is significantly harder for a stockholder to meet than the lenient "credible basis" standard courts currently apply. As a result, if this legislation is enacted, stockholders' Section 220 demands will put less pressure on boards and stockholder investigations of potential wrongdoing will be less effective, as stockholders will lose the ability to obtain emails, text messages, and/or other informal board communications absent an evidentiary showing of compelling circumstances — instead, they will be limited to documents that are typically prepared by counsel and sterilized of pertinent information.
3. Conditioning Production on NDAs
SB 21 would permit corporations to impose restrictions on the confidentiality, use, or distribution of corporate books and records. While Non-Disclosure Agreements ("NDAs") are customary with respect to stockholders' Section 220 demands, the proposed amendment opens the door for corporations to both insist on an NDA and require more restrictive NDAs that would require lengthy negotiations amongst counsel, which could allow corporations to push back the timeline for production and increase costs to stockholders.
4. Permitted Redactions of Corporate Books and Records
SB 21 expressly permits corporations to redact portions of any of the books and records it produces to the extent that the redacted material is not specifically related to the purpose of the stockholder's demand. The proposed amendment does not provide any guidance on how to identify corporate material that is not "specifically related" to the stockholder's purpose, and will, as a result, likely incentivize corporations to broadly redact otherwise relevant information.
Proposed Amendments to DGCL § 144 – (Controller Transactions)
Consistent with Delaware's traditional concern for protection of minority investor rights, existing Delaware case law provides for exacting scrutiny by a court for "controller transactions," i.e., transactions in which a controller of a company receives a benefit not shared generally among all stockholders. Unlike most transactions, which are subject to a deferential business judgment review, controller transactions are subject to "entire fairness" review, in which a court determines whether the transaction was objectively fair to the company, in terms of both process and price. A controller may only avoid entire fairness review if the transaction follows strict procedural safe harbor requirements, including the use of an independent special committee and approval by a majority of the corporation's minority stockholders, as the Delaware Supreme Court recently re-affirmed in In re Match Group., Inc. Deriv. Litig., 315 A.3d 446 (Del. 2024).
SB 21 effectively overturns Match Group and relaxes the procedural requirements that must be met for a controller transaction to avoid entire fairness review. In addition, SB 21 significantly limits who constitutes a controller and introduces a presumption that a director is not interested in a transaction merely because a board determined such director is independent under stock exchange rules. If enacted, the proposed legislation will reduce Delaware courts' scrutiny of controlling stockholder transactions and will make it more challenging to bring suit and recover damages suffered by stockholders as a result of a controlling stockholder transaction.
Moving Forward
While thisAlertis not an exhaustive list of the amendments proposed to Sections 144 and 220 of the DGCL, it is intended to highlight key provisions should SB 21 be approved and become law, which we expect may happen as early as this month.
The full text of SB 21 is available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
