Delaware Legislature Codifies Safe Harbors for Controller Transactions and Moderates Inspection Demands
Client Alert | March 27, 2025
Note: This updates and supersedes a prior alert (available here).
On March 25, 2025, amendments were adopted by the Delaware legislature and signed into law that both lower Delaware courts’ scrutiny of controlling stockholder transactions and moderate the scope of investors’ access to company books and records. Senate Bill 21 (SB21) amends Sections 144 and 220 of the Delaware General Corporation Law (DGCL). The amendments apply to all acts or transactions, except for litigations pending or inspection demands made on or before February 17, 2025.
These amendments follow mounting concerns in Delaware about “DExit”—the actual and potential departures of Delaware-incorporated corporations from the State for jurisdictions perceived to be more friendly to certain types of corporations.[1] By enhancing clarity and facilitating proactive evaluation of director appointments, conflicts cleansing, and transactional planning, SB21 continues Delaware’s long history of modernizing its corporate law in response to market developments.
Amendments to Section 144
Amendments to Section 144 of the DGCL significantly change how controlling stockholder transactions are reviewed by the court.[2] The amendments also strengthen the presumption that a public company director is disinterested and independent.
- Controller Transactions Other than Going Private Transactions. SB21 legislatively reverses the Delaware Supreme Court’s recent decision in In re Match Group, Inc. Derivative Litigation, 315 A.3d 446 (Del. 2024). As Gibson Dunn discussed in its April 8, 2024 Alert, Match reaffirmed that entire fairness is the default standard of review for corporate acts or transactions involving a controlling stockholder unless procedures are in place satisfying the requirements of Kahn v. M&F Worldwide Corp.,88 A.3d 635, 645 (Del. 2014) (“MFW”), and related case law; Match also held that all members of a special committee must be disinterested and independent to shift the burden or standard of review at the pleading stage. SB21 also lowers the requirements of MFW.SB21 makes the following changes to the common law, as articulated in Match, MFW, and related cases:
| Common Law | Amendments to Section 144 |
| Entire fairness applies to controller acts or transactions approved by either a special committee of independent and disinterested directors or disinterested stockholders, unless the below elements are satisfied. | A safe harbor insulates controller acts or transactions (other than going private transactions) approved by either a special committee of independent and disinterested directors or disinterested stockholders. |
| An act or transaction must be conditioned on both special committee and disinterested stockholder approval from inception, i.e. before substantive economic negotiations begin. | For disinterested stockholder approval to be effective, the act or transaction must be conditioned on such approval at or prior to the time it is submitted to stockholders. |
| All members of the special committee are disinterested and independent. | A special committee must have 2+ members, the board must determine all members are disinterested with respect to the controller, and the act or transaction must be approved by a majority of disinterested members. |
| The special committee is empowered to select and retain its own advisors. | The special committee need not be empowered to select and retain its own advisors. |
| The special committee is empowered to reject the proposed act or transaction. | The special committee is empowered to reject the proposed act or transaction (no change). |
| The special committee satisfies its duty of care in negotiating the act or transaction. | The special committee approves the act or transaction in good faith and without gross negligence. |
| The act or transaction must be approved by a majority of outstanding voting power of disinterested stockholders. | The act or transaction must be approved by a majority of votes cast by disinterested stockholders. |
| Disinterested stockholder approval must be uncoerced and fully informed. | Disinterested stockholder approval must be uncoerced and fully informed (no change). |
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- Going Private Transactions. Under the amendments, for a safe harbor to apply to going private transactions at the pleading stage, such transactions require informed, uncoerced approval by both a special committee and disinterested stockholders, subject to the other changes to MFW discussed above.
- For public companies, SB21 defines “going private transaction” as a Rule 13e-3 transaction (as defined in 17 CFR § 240.13e-3(a)(3)).
- Otherwise, a “going private transaction” is one in which all shares of capital stock held by disinterested stockholders are cancelled or acquired (other than those of the controlling stockholder).
- Definition of Controlling Stockholder. The amendments define who is a controlling stockholder to address uncertainty in Delaware law regarding who may be a “controlling stockholder.”
- A stockholder with majority voting power is controlling.
- Otherwise, a stockholder with less than majority voting power is controlling only if it has both (i) power functionally equivalent to majority voting power by virtue of one-third in voting power of the outstanding stock of the corporation entitled to vote (A) generally in the election of directors or (B) for the election of directors who have a majority in voting power of the votes of all directors on the board of directors, and (ii) power to exercise managerial authority over the business and affairs of the corporation.
- Exculpation for Controlling Stockholders. The amendments exculpate controlling stockholders and members of a control group from liability for duty of care violations. The exculpation automatically applies without any option to opt out.
- Disinterestedness and Independence of Public Company Directors. The amendments define what it means to be “disinterested” for purposes of “disinterested” director or stockholder status. Among other things, for publicly listed companies, a director is presumed to be a disinterested director with respect to an act or transaction to which he or she is not a party if the board determined that such director satisfies applicable stock exchange criteria for independence from the company and, if applicable with respect to the act or transaction, the controlling stockholder. This presumption will be more difficult to rebut at the pleading stage, because rebuttal requires “substantial and particularized facts” of a “material interest” or a “material relationship,” as defined in the amendments.
- Nomination or Election by Interested Person. Under the amendments, an interested person’s nomination or election of a director to the board does not, by itself, evidence that such director, if not a party to an act or transaction, is not a disinterested director. This means that directors designated to a board by a stockholder, for instance, are not automatically disqualified from being considered independent for Delaware law purposes.
Amendments to Section 220
Following judicial expansion of stockholder inspection rights in recent years, corporations have increasingly been subjected to invasive demands for an ever-widening range of corporate records, including director, officer, or management communications that in some cases courts have permitted for inspection. SB21 amendments to Section 220 of the DGCL narrow the scope of books and records available to stockholders and increase the burden on stockholders for obtaining such records.
- Scope of Books and Records. The amendments limit the definition of “books and records” to the certificate, bylaws, minutes and signed consents of stockholder meetings, formal communications to stockholders as a whole, minutes and resolutions of the board and committees, materials provided to the board and committees, annual financial statements, Section 122(18) (i.e., Moelis) agreements, and director independence questionnaires. Director, officer, and manager communications like emails and text messages are notably absent from this definition.
- Relevant Period. The amendments limit the period of time from which stockholders may obtain minutes and signed consents of stockholder meetings, formal communications to stockholders as a whole, and annual financial statements to those within three years of the date of the demand.
- Demand Requirement. Under the amendments, to obtain inspection, a stockholder demand is required to describe its purpose and the records it seeks with “reasonable particularity.” At least for the purpose of investigating suspected mismanagement or wrongdoing, this appears to heighten, if not outright replace, the low “credible basis” standard.
- Protections. The amendments codify the court’s practice of permitting a company to impose reasonable restrictions on confidentiality, use, and distribution of books and records, and deeming produced materials to be incorporated by reference into any complaint. The latter is important because otherwise stockholders can mislead the court by cherry-picking facts from documents in a complaint without permitting the court to consider the whole document. A company also is permitted to redact portions of documents that are not specifically related to the stockholder’s purpose.
- Court’s Discretion to Expand “Books and Records.” The amendments prohibit the court from compelling production of materials outside the defined term—e.g., director, officer, or management communications—with a few narrow exceptions. If a company does not have minutes and consents of stockholder meetings, minutes and resolutions of the board and committees, or annual financial statements (and, for public companies, director questionnaires), then the court is permitted to order production of additional records that are the “functional equivalent” of these materials and “only to the extent necessary and essential” to fulfill a proper purpose. Otherwise, the court may only compel the production of other specific records if a stockholder shows a compelling need of such records to further a proper purpose and demonstrates by clear and convincing evidence that such specific records are necessary and essential to further such purpose.
Stay Tuned
Gibson Dunn will continue monitoring these developments as they are interpreted and applied in litigation.
[1] For example, following Tesla’s reincorporation in Texas, TradeDesk reincorporated in Nevada, Dropbox filed notice that it is in the process of reincorporating in Nevada, and other controller-led companies announced they are considering reincorporation.
[2] The amendments also provide a safe harbor for an act or transaction for which a majority of directors are conflicted—for example, decisions regarding director compensation—if such act or transaction is approved by a special committee of at least two disinterested, independent directors or approved or ratified by disinterested stockholders, in each case on a fully informed basis.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following Securities Litigation, Mergers and Acquisitions, Private Equity, or Securities Regulation and Corporate Governance practice group leaders and members:
Securities Litigation:
Colin B. Davis – Orange County (+1 949.451.3993, cdavis@gibsondunn.com)
Jonathan D. Fortney – New York (+1 212.351.2386, jfortney@gibsondunn.com)
Monica K. Loseman – Denver (+1 303.298.5784, mloseman@gibsondunn.com)
Brian M. Lutz – San Francisco (+1 415.393.8379, blutz@gibsondunn.com)
Mary Beth Maloney – New York (+1 212.351.2315, mmaloney@gibsondunn.com)
Mark H. Mixon, Jr. – New York (+1 212.351.2394, mmixon@gibsondunn.com)
Craig Varnen – Los Angeles (+1 213.229.7922, cvarnen@gibsondunn.com)
Mergers and Acquisitions:
Robert B. Little – Dallas (+1 214.698.3260, rlittle@gibsondunn.com)
Saee Muzumdar – New York (+1 212.351.3966, smuzumdar@gibsondunn.com)
George Sampas – New York (+1 212.351.6300, gsampas@gibsondunn.com)
Private Equity:
Richard J. Birns – New York (+1 212.351.4032, rbirns@gibsondunn.com)
Wim De Vlieger – London (+44 20 7071 4279, wdevlieger@gibsondunn.com)
Federico Fruhbeck Jr. – London (+44 20 7071 4230, ffruhbeck@gibsondunn.com)
Ari Lanin – Los Angeles (+1 310.552.8581, alanin@gibsondunn.com)
Michael Piazza – Houston (+1 346.718.6670, mpiazza@gibsondunn.com)
John M. Pollack – New York (+1 212.351.3903, jpollack@gibsondunn.com)
Securities Regulation and Corporate Governance:
Elizabeth Ising – Washington, D.C. (+1 202.955.8287, eising@gibsondunn.com)
Julia Lapitskaya – New York (+1 212.351.2354, jlapitskaya@gibsondunn.com)
James J. Moloney – Orange County (+1 949.451.4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212.351.2309, lzyskowski@gibsondunn.com)
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