On March 25, Substitute 1 to Senate Bill 21 (SB21), which amends the Delaware General Corporation Law (DGCL), was signed into law by Delaware Governor Matt Meyer. SB21 has been described as a rebalancing of the interests of stockholders and corporate directors and officers and a move toward ensuring clarity and predictability. It makes significant changes to the safe harbors for conflict transactions — including transactions with controlling stockholders — under Section 144 of the DGCL and narrows stockholder inspection rights under Section 220. These amendments overturn several Delaware case law precedents. They reflect Delaware's attempt to address complaints made by Delaware corporations that Delaware has become too plaintiff friendly, leading to unnecessary costs and expenses, and thereby reaffirm its status as the leading jurisdiction for corporations to incorporate.
Section 144
The amendments to Section 144(a) of the DGCL expand the safe harbor protections for transactions involving interested directors and officers. Under Section 144(a), acts or transactions involving interested directors and officers will not be subject to actions for equitable relief or an award of damages if the act or transaction is approved in good faith and without gross negligence by a fully informed majority of the disinterested directors then serving on the board or an applicable committee (even if fewer than a quorum) (or, if a majority of the directors are not disinterested, by a committee consisting of at least two disinterested directors) or by a fully informed, uncoerced vote of a majority of the disinterested stockholders. If an act or transaction is not approved by the disinterested directors or disinterested stockholders in accordance with these requirements, it must be fair to the corporation and its stockholders. Prior to the latest amendments to Section 144, approval by disinterested stockholders or directors would shift the standard of review from the entire fairness standard to the less stringent business judgment standard, but could still lead to equitable relief or an award of damages if a breach of fiduciary duty was found. Under the latest amendments to Section 144(a), equitable relief and damages for interested party transactions are precluded where the statutory approval requirements are satisfied.
In addition to enhancing protections for interested director and officer transactions, SB21 also introduces and codifies safe harbors for controlling stockholder transactions. Similar to the approval requirements for interested officer and director transactions, Section 144(b) of the DGCL, as amended, provides that a transaction involving controlling stockholders (other than "going private transactions") will not be subject to actions for equitable relief or an award of damages if the controlling stockholder transaction is approved in good faith and without gross negligence by a fully informed and independent committee of the board that is expressly authorized to negotiate and reject the transaction, or by a fully informed, uncoerced vote of a majority of the disinterested stockholders. If a controlling stockholder transaction constitutes a "going private transaction," then it must be approved by both the disinterested directors and the disinterested stockholders. If a controlling stockholder transaction is not approved by the disinterested directors or disinterested stockholders in accordance with these requirements, it must be fair to the corporation and its stockholders. Moreover, the addition of Section 144(b) reverses the Delaware Supreme Court's decision in In re Match Group Inc., Derivative Litig., 315 A.3d 446 (Del. 2024), with respect to controlling stockholder transactions that are not going-private transactions. Under Section 144(b), such transactions need only be authorized by either committee approval or a disinterested stockholder vote to meet the safe harbor requirements, with the transaction conditioned on a disinterested stockholder vote at the time it is submitted for approval, eliminating the dual approval and the ab initio approval requirements.
In order to maximize the benefits of the changes made to Section 144(a) and Section 144(b), it will become increasingly important for the corporation to appropriately document that the disinterested directors were fully informed as to the director's or officer's relationship or interest in the act or transaction, including any involvement in the initiation, negotiation, or approval of the transaction.
Revised Section 144 also includes definitions for critical terms, including "controlling stockholder" and "disinterested director," establishing bright-line rules for concepts previously undefined. Previously, there was no bright-line rule for determining whether a minority stockholder would be considered a controlling stockholder (thus triggering the onerous approval procedures required by Kahn v. M&F Worldwide Corp. (MWF) and its progeny with respect to controlling stockholder transactions). Under revised Section 144, a "controlling stockholder" is defined as a stockholder who (1) owns or controls a majority of the voting stock of the corporation entitled to vote in the election of directors, or (2) has the power functionally equivalent to that of a majority stockholder by virtue of (a) owning or controlling at least one-third of the voting stock entitled to vote in the election of directors, and (b) having the power to exercise managerial control over the business and affairs of the corporation. Similarly, a "disinterested director" is defined as a director who is not a party to the act or transaction, lacks a material interest in the act or transaction, and does not have a material relationship with anyone who has a material interest in the act or transaction. Revised Section 144 also clarifies that a "going private transaction" includes both public-company transactions (i.e., going private transactions described in Rule 13e-3) and private-company transactions pursuant to which all, or substantially all, of the shares of the corporation's capital stock held by disinterested stockholders — but not those of the controlling stockholder or control group — are cancelled, converted, purchased, or otherwise acquired or cease to be outstanding (e.g., squeeze-out mergers).
The addition of these definitions reinforces SB21's goals of predictability and clarity with respect to controlling stockholder transactions.
Section 220
SB21 also amends Section 220 of the DGCL, which governs stockholders' rights to inspect books and records. The amendment to Section 220 is in response to a growing volume of books and records demands and concurrent litigation. It narrows the scope of permissible inspections and makes it more challenging for stockholders to obtain evidence for director and corporate governance claims.
Under Section 220(a)(1), "Books and Records" is defined more narrowly and with specificity. It includes the corporation's: (1) current certificate of incorporation; (2) current bylaws; (3) past three years of stockholder minutes; (4) written and electronic communications to stockholders generally within the past three years; (5) board minutes and records of actions taken by the board and committees of the board; (6) materials provided to the board in connection with a board or committee action; (7) annual financial statements for the preceding three years; (8) certain contracts with stockholders and beneficial owners of the corporation's capital stock; and (9) independence questionnaires. The previous definition included a catch-all category of "other books and records," which often forced corporations to disclose a substantial number of documents. The new definition provides a narrow and exhaustive list that limits the number of disclosures required by corporations. Courts may order the production of additional records under Section 220(g). However, stockholders must show a "compelling need" that is "demonstrated by clear and convincing evidence" that such records are "necessary and essential" to achieve the proper purpose. This reverses the "credible basis" standard, which was more lenient than the current "compelling need" standard now applied by courts. Nvidia Corp. v. City of Westland Police & Fire Ret. Sys., 282 A.3d 1 (Del. 2022).
Additionally, Section 220(b)(2) sets forth procedural requirements for inspection. To inspect books and records, a stockholder must (1) make a demand in good faith and for a proper purpose; (2) describe with reasonable particularity the purpose and the specific books and records sought; and (3) demonstrate that the requested documents are specifically related to the stated purpose. These requirements aim to prevent broad or unfocused requests and ensure that inspections are conducted for legitimate reasons.
Corporations can now reasonably restrict the disclosure, use, and distribution of their books and records under Section 220(b)(3). This section also allows corporations to redact portions of books and records that are not specifically related to the stockholders' purpose. Additionally, any information obtained through a Section 220 demand is deemed incorporated by reference into any subsequent complaint filed by the stockholder related to the subject matter.
Overall, the amendments to the DGCL introduced by SB21 aim to make transactions more efficient by providing a predictable path for interested director and officer transactions and controlling stockholder transactions, and by reducing potential inspections that could lead to litigation. Notwithstanding these changes, gaps remain, leaving room for minority stockholder disputes, and the determination of whether a board or committee action was taken in good faith or whether stockholders were fully informed or uncoerced. While SB21 offers a more structured framework, it continues to rely on courts to flesh out the details of these statutory standards.
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