Delaware continues to be the dominant jurisdiction for the formation of business entities in the United States. Nearly 300,000 entities were formed in Delaware in 2023 alone, bringing the total number of Delaware companies and partnerships to over two million1. However, as some high-profile companies (including Tesla, Dropbox and Meta) either reincorporate outside Delaware or announce that they are considering doing so, states such as Texas and Nevada adopted legislative reforms to emulate and compete with Delaware's pro-business corporate laws. In this article, we discuss legislative developments intended to reinforce Delaware as the preferred corporate jurisdiction, as well as cases with key implications for investors in Delaware entities.
New safe harbors for approving related party transactions and limitations on books and records demands
As of March 2025, p 144 of the Delaware General Corporation Law (DGCL) now provides procedural "safe harbors" for approving take-private transactions and other related party transactions between Delaware corporations and their directors, officers and controlling stockholders (which we reviewed in "Delaware amends laws related to interested directors and officers, controlling stockholders, and books and records demands"). Related party transactions will generally be shielded from liability if they are (1) approved by either disinterested directors or an informed and uncoerced majority of disinterested stockholders or (2) fair as to the corporation and its stockholders, except that going-private transactions with controlling stockholders require both disinterested director and stockholder approval, or must be fair as to the corporation and its stockholders. These safe harbors, if complied with, are expected to significantly raise the bar for stockholder litigation challenging take-privates and other related party transactions.
The amendments also provide a statutory definition of "controlling stockholder", which replaces what had been an unpredictable facts and circumstances determination under recent case law. Minority investors now know that they will be deemed to possess "control" if they (1) own or control enough stock to elect a majority of the board, (2) have the right, by contract or otherwise, to cause the election of a majority of the board, or (3) are functionally equivalent to prong (1) by owning or controlling at least one-third of a corporation's voting stock and having managerial authority over the corporation.
The amendments also limit the scope of books and records that stockholders may obtain from Delaware corporations under p 220 of the DGCL. Absent a "compelling need", informal records such as emails, text messages and the like will not be available for inspection—a change that will protect Delaware corporations and their directors and officers against wide-ranging stockholder information requests that have become increasingly common.
Recent Delaware cases affirming judicial deference to board decisions and written contracts
Maffei v. Palkon: judicial deference for reincorporation
In a decision that will make it easier for controlling investors and boards to reincorporate Delaware corporations to take advantage of more deferential laws in other states, the Supreme Court of Delaware held that Tripadvisor's proposed reincorporation in Nevada was subject to judicial review under the deferential "business judgment rule" rather than the stricter "entire fairness" standard. Plaintiff stockholders had argued that the decision to reincorporate was subject to "entire fairness" review by the Court on the basis that it would provide a "non-ratable benefit" to the controlling stockholder and the board in the form of reduced liability exposure under Nevada's more deferential corporate law. In denying the defendants' motion to dismiss, the Delaware Court of Chancery agreed that entire fairness applied.
In reversing the Delaware Court of Chancery's decision, the Supreme Court of Delaware found that, given that the reincorporation decision was not made to avoid any existing or threatened litigation or in contemplation of a particular transaction, "the hypothetical and contingent impact of Nevada law" on unspecified future corporate actions is not a material non-ratable benefit triggering entire fairness review.
Manti Holdings, LLC et al. v. The Carlyle Group Inc. et al.: upholding a private equity-led sale process
In this case, minority stockholders of a private equity fund's portfolio company sued the private equity fund following the arm's-length sale of the portfolio company, arguing that the transaction was subject to "entire fairness" review because the private equity fund was a controlling stockholder and extracted a unique benefit—a timely exit—which caused it to conduct a sale process that was unfair to stockholders.
The Delaware Court of Chancery found that the mere fact that the private equity fund had an interest in exiting its investments within its 10-year fund life (but no contractual or urgent need to do so) was not evidence that it had a conflict of interest with minority stockholders. The private equity fund had the same interest as the minority stockholders: to maximize the value of its investment. Accordingly, the business judgment rule applied.
Khan, et al. v. Warburg Pincus, LLC, et al.: implied covenant of good faith and fair dealing does not override contract language
In this decision (which we covered in "Delaware Court clarifies that implied covenant of good faith and fair dealing does not override terms of a contract"), the Delaware Court of Chancery clarified that the "implied covenant of good faith and fair dealing" does not create substitute fiduciary duties where such duties have been expressly waived in an LLC or limited partnership agreement. When fiduciary duties are expressly waived, the implied covenant will not prevent controlling investors from acting within the four corners of the limited liability company agreement or limited partnership agreement. Minority investors should, therefore, ensure that LLCAs and LPAs explicitly provide for their substantive economic, governance and liquidity rights, and appropriate controls over amendments.
Footnote
1. Government of Canada, The Canadian Critical Minerals Strategy: From Exploration to Recycling – Powering the Green and Digital Economy for Canada and the World, September, 2023.
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