Delaware Governor Matt Meyer signed Senate Bill 21 into law on March 26 this year. Setting aside the polarized rhetoric that occasioned the Bill’s proposal and journey through the approval process, it is significant – and changes Delaware law – in several material respects, particularly but not exclusively with respect to transactions involving controlling stockholders. This brief note highlights certain of the more notable features of the amendments to 8 Del. C. §§ 144 (previously, “Interested directors; quorum,” now “Interested directors and officers; controlling stockholder transactions; quorum”) and 220 (“Inspection of books and records”).
DGCL Section 144
An understanding of what Section 144 was is critical to appreciating the scope of the 2025 amendments. Before Section 144 of the Delaware General Corporation Law was enacted, a transaction in which a majority of voting directors or officers had an interest generally was void or voidable under the common law. Section 144, known to Delaware practitioners as the “safe harbor provision,” was adopted in 1967 for the limited purpose of insulating transactions involving conflicted directors and officers from this per se voidability where: all material facts regarding the director or officer’s conflict were disclosed and (1) a majority of disinterested directors on the board (or board committee) approved the transaction or (2) a majority of the corporation’s informed, disinterested, uncoerced stockholders approved or ratified the transaction. Compliance with the requirements of Section 144 as initially conceived was not intended to shield transactions from judicial review for breach of fiduciary duty under Delaware’s common law entire fairness standard, leaving open the prospect of injunctive or monetary relief even where the transaction was insulated from voidability ab initio.
The amendments to Section 144 expand the provision’s protections considerably, transforming Section 144 from a “voidability shield” to a “liability shield.” It now extends protection to controlling stockholders and provides process enhancements (in some ways freed from the rigorous requirements imposed under common law) which, if deployed, will bar liability and corresponding equitable and monetary relief. In doing so, the amendments legislatively overturn at least 25 opinions of the Delaware Supreme Court, and thus are rightly considered a “big deal.”
Breaking the amendments into transactional “buckets,” some of the more noteworthy changes include the following:
Bucket One: INTERESTED DIRECTOR AND OFFICER TRANSACTIONS
- As noted, the amendments fundamentally change the protection accorded to conflicted director or officer transactions by precluding equitable relief and money damages altogether if (1) a board or special committee in good faith and without gross negligence authorizes the transaction by an affirmative vote of the disinterested directors or members of the committee or (2) the transaction is approved or ratified by an informed, uncoerced, affirmative vote of the majority of the votes cast by the disinterested stockholders. If neither enhancement is employed, the deal proponents will be called upon to prove that the transaction is “fair” to the corporation and its stockholders. 8 Del. C. § 144(a).
Bucket Two: CONTROLLING STOCKHOLDER TRANSACTIONS
- This is where things get particularly interesting. Amendments to DGCL § 144(b) extend the safe harbor to controlling stockholder transactions (transactions with a controller or in which a controller receives a benefit not shared by minority stockholders) other than “going private” transactions (defined as transactions in which either a 13e-3 filing is required or all of the shares of the minority stockholders are cancelled or acquired). Like the amended Section 144(a), Section 144(b) bars actions for equitable relief and damages so long as the controlling stockholder transaction is approved in good faith by a special committee (i) that has express authority to negotiate and reject the transaction and (ii) has been informed of or knows all material facts regarding the controlling stockholder transaction. Contrary to prior law, the special committee need not consist entirely of disinterested directors; only a majority need to be disinterested, meaning interested or controlled directors may serve on the special committee. This diminishes the possibility that the constituency of the special committee will be challenged. Additionally, it appears as though deal contours can now be negotiated before the special committee is convened.
- Alternatively, the safe harbor will apply if all material facts regarding the controlling stockholder transaction are disclosed or known to stockholders entitled to vote on the transaction and the transaction is approved or ratified by a majority of votes from informed, disinterested, uncoerced stockholders. Contrary to prior law, only stockholder votes actually cast are counted; thus, abstentions no longer effectively act as opposition votes. Likewise, the transaction no longer needs to be conditioned at the outset on a majority of the minority vote.
- If either of these process enhancements are faithfully deployed, both equitable and monetary relief are barred, as under Section 144(a). This overturns significant Delaware precedent requiring the utilization of both processes to cleanse a controller transaction.
- More subtly but equally significant, the amended Section 144 contains definitions which materially modify certain definitions and concepts developed in the common law. For example, whereas courts historically determined whether a stockholder was exercising control over the enterprise or with respect to a challenged transaction by considering a virtually unlimited array of nuanced circumstances,[1] Section 144 now offers a more mechanical and narrowly-tailored definition of “controlling stockholder.” Among other things, where a stockholder owns less than a majority of voting shares, a finding of “effective control” is now conditioned on ownership or control of at least one-third of the voting shares and power to exercise managerial authority over the business and affairs of the corporation. Previously, there was no minimum ownership requirement for a finding of effective control, and again the aggregate circumstances under which effective control could be found were virtually limitless. 8 Del. C. § 144(e)(2).
- The amendment likewise more narrowly tailors the inquiry into director disinterest in publicly-traded corporations by creating a “heightened” presumption of disinterest where the board has determined that the director satisfies the applicable criteria of the exchange upon which the corporation’s shares are listed. This heightened presumption may be rebutted only by “substantial and particularized facts” demonstrating that the director has a material interest in the transaction or a material relationship with a person with a material interest in the transaction. 8 Del. C. § 144(d)(2).
Bucket Three: CONTROLLING STOCKHOLDER “GOING PRIVATE’ TRANSACTIONS
- New subsection 144(c) forecloses equitable relief and damages for freeze-out transactions with a controller only if both sanitizing processes described above – as loosened by the amendments – are employed. If either is not satisfied, the transaction would be subject to entire fairness review. Accordingly, controlling stockholder going private transactions are, under the new regime, the only controller transactions subject to the dual requirements of a majority of the minority vote and a special committee process.
DGCL Section 220
Under pre-amendment Section 220, stockholders and directors had qualified rights to inspect the books and records of Delaware corporations for a “proper purpose”— one “reasonably related to the stockholder’s interests as a stockholder.” Courts recognized a long list of “proper purposes,” including investigating possible wrongdoing, pursuing a proxy contest, and valuing stock shares. Where a proper purpose was established, the requesting stockholder was entitled to inspect those books and records deemed “necessary and essential” to achieving the stated proper purpose.
What books and records were deemed “necessary and essential” depended on the facts and circumstances surrounding the stockholder demand. In recent years, the scope of books and records deemed “necessary and essential” was expanded through case law to potentially include records outside formal board materials and minutes, extending, for example, to communications transmitted by e-mail, text messaging, and chats.
The amendments to Section 220 rein in the judicial expansion of the scope of books and records available through Section 220 by defining “books and records” to mean what past case law has referred to as “board-level materials” (e.g., minutes within the last three years, board presentations, director independence questionnaires, minutes of stockholder meetings and communications with stockholders within the last three years). 8 Del. C. § 220(a)(1) and (b)(1).
While stockholders may continue to request additional materials beyond those identified by statute (including, for example, e-mails and text messages), the amendments now condition stockholder access on demonstration of a “compelling need” for those materials, supported by “clear and convincing evidence” that the materials are “necessary and essential.”
The amendment also requires that the stockholder describe the proper purpose and records sought with “reasonable particularity,” and that the records sought be “specifically related” to the proper purpose. Commentators have noted that the amendment’s new terminology appears to heighten the showing required for access.
In addition, prior to the amendment corporations could seek to protect confidential information through confidentiality agreements and by redacting confidential or nonresponsive information, but recent judicial decisions have rejected such protective measures under certain circumstances.
The amendments to Section 220 impose greater certainty for corporations by explicitly (1) allowing corporations to impose reasonable restrictions on the confidentiality, use, or distribution of books and records and condition the inspection of books and records on a confidentiality agreement between the stockholder and corporation and (2) allowing corporations to redact portions of the books and records that are not specifically related to the stockholder’s proper purpose. 8 Del. C. § 220(b)(3).
Key Takeaways:
- The ability to challenge controlling stockholder transactions not involving a minority freeze-out has been materially limited. The dual-cleansing mechanisms by which such transactions were protected from entire fairness review are now available in the alternative: that is, a controlling stockholder transaction can be cleansed by either a special committee process or (not and) a fully informed, uncoerced vote of the disinterested stockholders. Neither of these mechanisms must be in place before deal contours are explored or negotiated.
- The requirements for each of the cleansing procedural safeguards (such as special committee constituency and how stockholder votes are counted) have been relaxed in certain respects, meaning that viable technical challenges to the process giving rise to a transaction involving conflicted directors, officers or a controlling stockholder will be less likely to materialize.
- Stockholder records inspection rights have been narrowed, and are subject to more stringent showings. Certain of the terminology used in connection with the requisite showings is not defined in the amended statute, and will need to be developed through judicial interpretation. It will be more difficult for stockholders to access records not among the formal corporate records delineated in the amendment, meaning that informal, “off-record” communications such as e-mails and text messages (which figure prominently in several landmark fiduciary duty decisions) may be, for practical purposes, beyond reach under Section 220.
As always, summary reports of this nature are not a suitable substitute for a careful review of the amended statutes themselves. The amended Sections 144 and 220 are, as should be clear, worth a closer look.
