At A Glance
On March 25, Delaware Governor Matt Meyer enacted a sweeping reform of the state's corporate law, signing Senate Bill 21 into effect. The bill, which received bipartisan support in the legislature, aims to attract and retain businesses by simplifying and clarifying the rules for transactions involving directors, officers, and controlling stockholders, and by restricting shareholders' access to corporate records. We examine the amendments in this Legal Update.
On March 25, 2025, Delaware Governor Matt Meyer enacted a sweeping reform of the state's corporate law, signing Senate Bill 21 (SB 21) into effect. The bill, which received bipartisan support in the legislature, aims to attract and retain businesses by simplifying and clarifying the rules for transactions involving directors, officers, and controlling stockholders, and by restricting shareholders' access to corporate records. Governor Meyer argued the bill will protect Delaware's status as "the best place in the world to incorporate your business" by "ensuring clarity and predictability, balancing the interests of stockholders and corporate boards."
SB 21 amends two key sections of the Delaware General Corporation Law (DGCL): (1) Section 144, which governs transactions involving interested directors, officers and controlling stockholders; and (2) Section 220, which grants shareholders the right to inspect corporate books and records. The bill aims to clarify some ambiguity in the scope of the provisions and define terms that were previously undefined.
Changes to DGCL Section 144: Section 144 provides a "safe harbor" for transactions involving conflicted directors or officers. In particular, if such transactions are approved by either: (i) an informed majority of the corporation's disinterested directors acting in good faith; or (ii) an informed majority of the corporation's disinterested stockholders, courts will evaluate the fairness of the transaction under the business judgment rule (as opposed to the more exacting "entire fairness" standard). Prior to SB 21, it was unclear whether Section 144's safe harbor applied to transactions involving controlling stockholders, and Delaware case law provided that controlling stockholder transactions would only enjoy business judgment deference if they satisfied both prongs of the safe harbor.1 SB 21 clarifies that Section 144's safe harbor does extend to transactions involving controlling stockholders, assuming one of the "cleansing mechanisms" in the safe harbor is satisfied. SB 21 also expands the safe harbor for interested directors to cover equitable challenges, such as fiduciary duty claims, if either the material facts regarding the director's interest are disclosed and the action is ratified, or the action is fair to the corporation.
The bill further defines who constitutes a "disinterested stockholder" or "disinterested director" within the meaning of the safe harbor and creates a presumption of independence for public company directors that can only be rebutted with "substantial and particularized facts" that a director has a material interest in a transaction.
SB 21 also includes a definition of "controlling stockholder" and limits the liability of such shareholders to breaches of loyalty, bad faith, and cases involving the derivation of an improper personal benefit.
Changes to DGCL Section 220: SB 21 amends Section 220 of the DGCL, which grants shareholders the right to inspect corporate books and records if they have a "proper purpose" for doing so. Section 220 did not specifically define or enumerate the categories of documents that could be properly requested as part of a books and record demand. SB 21 limits the scope of "books and records" to formal corporate documents and board materials, and excludes director, officer and manager communications, such as emails and texts. SB 21 also imposes a higher standard of particularity for shareholders to state their purpose and the records they seek, and allows corporations to impose reasonable restrictions on the use and distribution of the records. Finally, the bill provides that all books and records are incorporated by reference into shareholder complaints, and thus can be considered at the motion to dismiss stage.
Supporters of SB 21 contend that the bill is a necessary and incremental adjustment to Delaware law, which restores the balance between corporate officers and directors acting in good faith and the rights of shareholders. The bill may also discourage meritless stockholder litigation, or allow corporations to defeat such litigation at the pleadings stage. Critics argue SB 21 gives too much power to corporate boards and controlling stockholders, undermining the role of the courts in protecting shareholder rights. Opponents also question the process and timing of the bill, which bypassed the usual recommendation by the Corporation Law Section of the Delaware State Bar Association.
Now that SB 21 is effective, Delaware corporations should familiarize themselves with the bill, and contact counsel to ensure compliance with the changing legal landscape and to understand the extent to which SB 21 may affect the application of existing Delaware case law.
Footnote
1 See Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).
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