Delaware Legislature Proposes Overhaul to Controller Transactions, Inspection Demands
Client Alert | February 20, 2025
The developments 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.
On February 17, 2025, amendments were introduced in the Delaware legislature intended to 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) proposes amendments to Sections 144 and 220 of the Delaware General Corporation Law (DGCL). The bill’s lead sponsor has stated publicly that the amendments would not apply retroactively.
These developments 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]
Proposed Amendments to Section 144
SB21 proposes amendments to Section 144 of the DGCL that, if adopted, would significantly change how controlling stockholder transactions are reviewed by the court.[2] The amendments also would strengthen the presumption that a public company director is disinterested and independent.
- Controller Transactions Other than Going Private Transactions. SB21 would legislatively reverse 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 Client 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 proposes the following changes to the current common law, as articulated in Match, MFW, and related cases:
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| Current Common Law | Proposed Amendments |
| 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. | The business judgment rule applies to 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 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 majority of the members of the special committee are disinterested and independent. |
| 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. |
| 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 the business judgment rule to apply to going private transactions at the pleading stage, such transactions would 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 would define “going private transaction” as a Rule 13e-3 transaction (as defined in 17 CFR § 240.13e-3(a)(3)).
- Otherwise, a “going private transaction” would be 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 propose to 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 and would be controlling.
- Otherwise, a stockholder with less than majority voting power would be 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 would exculpate controlling stockholders and members of a control group from liability for duty of care violations. The exculpation would automatically apply without any option to opt out.
- Disinterestedness and Independence of Public Company Directors. The amendments would define what it means to be “disinterested” for purposes of “disinterested” director or stockholder status. Among other things, for publicly listed companies, a director would be 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 is an independent director or satisfies the relevant criteria for determining director independence under any applicable stock exchange rule. This presumption would 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 proposed amendments. Historically, Delaware took a facts-and-circumstances approach to director conflicts (for Delaware law purposes), which introduced uncertainty around which directors would qualify as disinterested and independent under what circumstances.
- Nomination or Election by Interested Person. Under the amendments, an interested person’s nomination or election of a director to the board would 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, would not automatically be disqualified from being considered independent for Delaware law purposes.
Proposed 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 proposes amendments to Section 220 of the DGCL that would 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 would 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 would limit the period of time from which stockholders may inspect books and records to those within three years of the date of the demand.
- Demand Requirement. Under the amendments, to obtain inspection, a stockholder demand would be 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 would appear to heighten, if not outright replace, the low “credible basis” standard.
- Protections. The amendments would codify the court’s current 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 would be 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 would 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 the amendments are adopted and 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 would be 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.
- Notably, under the amendments, in the event board or committee materials do not exist or are unavailable, the court would not be permitted to order production of additional materials.
More to Come
The legislature published a Press Release about SB21 and Senate Concurrent Resolution 17 (SCR17). SCR17 also directs the Corporation Law Council to report to the governor by March 31, 2025, with recommendations for legislative action that might help balance the fee awards so that they are not overly excessive. These proposed amendments will undoubtedly be subject to public debate in the coming weeks, as some academics and plaintiffs’ firms are objecting to not only the merits of the amendments, but also the process and timing of their consideration by the CLC and Delaware legislature.
Gibson Dunn will continue monitoring these developments as they progress.
[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] SB21 also would 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 majority of the 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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