The Delaware Legislature Proposes Sweeping Amendments to the DGCL

On February 17, 2025, a bipartisan group of legislators seeking to “promote clarity and balance in Delaware’s corporate law” introduced Senate Bill 21 (the “Bill”) to amend the Delaware General Corporation Law (“DGCL”).  If enacted, the Bill will be the most significant single-year revision of Delaware’s corporate code since at least 1967, potentially reshaping everything from how controlling stockholders negotiate major transactions to the mechanics of derivative litigation.  In a move that signaled additional change, the Delaware Senate also adopted Senate Concurrent Resolution No. 17, which formally requests that the Delaware Bar’s Corporation Law Council study, and report on, the topic of plaintiffs’ fees in corporate litigation.

While reforms of the magnitude proposed in the Bill generally proceed through a lengthy consensus-driven process, these recently proposed amendments may take effect in the very near term.  The reason for this legislative alacrity is simple:  Delaware courts, long a bastion of “business-friendly” jurisprudence, have issued a slew of legal decisions in recent years appearing to favor minority stockholders.  In response, several companies have re-incorporated in other states, and other corporations appear poised to make similar moves.  The legislature’s initiative aims to stem this corporate exodus by making it more difficult for minority stockholders to prove that a transaction in which a director, officer, or controlling stockholder has a financial interest was not “entirely fair.”  It also meaningfully limits the categories of books and records a minority stockholder may inspect prior to litigation, thereby scaling back an onslaught of recent litigation seeking to convert pre-litigation demands into plenary discovery. 

DGCL Section 144 Amendments. 

Current Section 144 of the DGCL, which governs “conflicted” transactions, provides that corporate acts or transactions involving interested directors are not “void or voidable” solely because of an interested director’s involvement.  While this language, on its face, appears to provide a safe harbor insulating “conflicted” transactions from equitable review, in practice, it only eliminates the specter of voidability.  The Bill, however, proposes several reforms aimed at providing more robust safe harbors for transactions involving interested parties. 

Defining Independence and “Control”

The Bill provides clarity on director independence—a concept that has long been the subject of litigation delving into the intricacies of directors’ personal and professional relationships.  To curtail what are often frivolous challenges to director independence, the Bill creates a rebuttable presumption of disinterestedness if a board explicitly finds a director independent or if the director satisfies NYSE or NASDAQ independence standards. This presumption can only be rebutted with “substantial and particularized facts” of a materially disabling interest or relationship.  Notably, the revisions make clear that a director’s nomination by a person with “a material interest” in a challenged transaction is not, alone, “evidence that a director is not disinterested.”  See Proposed § 144(d)(2)-(3). 

In reaction to Delaware court decisions finding “controller” status when a stockholder possesses less than one-third of voting power, the Bill also provides bright-line standards for “controlling stockholders” and “control groups.” It defines “controlling stockholder” as any person and his or her affiliates that: (i) owns or controls a majority in voting power for the election of directors; or (ii) has the “power functionally equivalent” to the foregoing by owning or controlling at least one-third of the voting power for the election of directors “and power to exercise managerial authority over the business and affairs of the corporation.”  New Section 144(e)(1) defines a “control group” as two or more persons that are not individually controlling stockholders, but that, by virtue of an “agreement, arrangement, or understanding” between them, collectively meet the statutory definition of a “controlling stockholder.”  See Proposed § 144(e)(1)-(2). 

Notably, the Bill contains an exculpatory provision for controlling stockholders that would eliminate liability for monetary damages for breaches of the duty of care.   Controlling stockholders would remain liable for breaches of the duty of loyalty, acts or omissions in bad faith or which involve intentional misconduct or a knowing violation of law, or transactions from which the controllers derive an improper personal benefit.  See Proposed § 144(d)(5).  This change essentially aligns the protections afforded to controlling stockholders with those presently available to officers and directors under DGCL § 102(b)(7).

Transactions Involving Officers and Directors

In recent years, litigation involving “conflicted” fiduciaries has taken center stage, resulting in decisions that have muddied, rather than clarified, the proverbial waters.  Revised Section 144(a) would bar attack against a potentially conflicted director involved in a corporate action if any of the following conditions are met: (i) the director discloses the material facts regarding his or her “relationship,” “interest” or “involvement”; or (ii) the action is ratified by a majority of votes cast by disinterested stockholders; or (iii) the transaction is “fair to the corporation.”  See Proposed § 144(a).  As defined in the Bill, an action is “fair to the corporation” if the consideration paid or received is comparable to what might have been obtained in an arm’s-length transaction.  See Proposed § 144 (e)(6). 

Transactions Involving Controlling Stockholders

The Bill also pares back the judicial scrutiny surrounding controlling stockholder transactions.  Under current law, any transaction between a Delaware corporation and its controlling stockholder is automatically subject to “entire fairness” review unless it meets the so-called MFW factors, meaning that it is conditioned from the outset on approval of both: (i) an independent and fully empowered special committee and (ii) a fully informed, non-coerced vote of disinterested stockholders.

The Bill rewrites that rule, restricting the requirements of a modified MFW framework to “going private transactions” involving a controlling stockholder.  If the Bill is enacted in its current form, numerous other transactions historically subject to entire fairness review will not be subject to equitable challenge: (i) if approved in good faith by a fully informed and empowered committee of disinterested directors; or (ii) if approved by a fully informed and uncoerced majority of votes cast by disinterested stockholders; or (iii) if the transaction is fair to the corporation.  See Proposed § 144(b). 

With respect to “going private transactions” involving controlling stockholders, the Bill establishes a safe harbor from equitable challenge if the deal: (i) is approved in good faith by a fully informed and empowered committee of disinterested directors and a fully informed and uncoerced majority of votes cast by disinterested stockholders; or (ii) is fair to the corporation.  In a notable departure from MFW and its progeny, the Bill states that the controller need only commit to the unaffiliated stockholder vote “at or prior to the time it is submitted to stockholders,” rather than, as historically required, at the outset of the contemplated transaction.  See Proposed § 144(c).  

The Bill also modifies three key components of the MFW framework.  First, the Bill does not require that all members of a special committee be independent.  Instead, the special committee—which cannot include the controller—need only contain a majority of disinterested and independent members.  Second, in its current form, the Bill does not appear to require that the special committee retain independent legal and financial advisors. Third, in a notable departure from current law, which cleanses a transaction approved by a majority of outstanding disinterested shares, the Bill only requires ratification by a majority of the votes cast by disinterested stockholders.  This, as a practical matter, means that non-voting shares will not count as votes against the transaction. 

DGCL Section 220 Amendments 

In addition to the foregoing changes, the Bill provides welcome clarity regarding books and records demands, an area that has experienced an onslaught of litigation in recent years.  Section 220 of the DGCL provides stockholders with a qualified right to inspect corporate books and records.  Historically, the contours of what constitutes “books and records” have been vague, leading to disputes about whether emails, text messages, and other forms of electronic communication comprise the formal board record. 

The proposed amendments to Section 220 aim to reduce this litigation by statutorily defining the scope of “books and records” available for inspection.  Specifically, new Section 220(a)(1) would define “books and records” to include the following:

1. The corporation’s certificate of incorporation and bylaws;
2. The minutes of all meetings of stockholders, and any actions taken by consent by stockholders without a meeting, within the three years preceding the demand;
3. All communications by the corporation in writing or by electronic transmission to stockholders  within the three years preceding the demand;
4. The minutes of any meeting of the board of directors or any committee thereof and any actions taken by consent;
5. The annual financial statements of the corporation for the three years preceding the demand;
6. Any agreement under Section 122(18) of the DGCL; and
7. Director and officer independence questionnaires.

The Bill does, however, leave a safety valve, enabling courts to order production of the “functional equivalent” of the foregoing books and records—presumably, electronic information—if formal board materials are unavailable. 

New Section 220(b)(2) also enshrines procedural requirements relating to a stockholder’s demand to inspect books and records, requiring that the stockholder’s demand: (i) be made in “good faith and for a proper purpose"; (ii) describe with “reasonable particularity the stockholder’s purpose and the books and records the stockholder” aims to inspect; and (iii) seek books and records “specifically related” to the stockholder’s stated purpose.

Finally, the Bill provides that corporations may require, as a precondition to production, that books and records be deemed incorporated by reference into stockholder complaints related to the subject matter of the demand, such that they can be considered on motions to dismiss.

The Bill’s Implications.

Although the Bill remains subject to approval, if enacted in its current form, it could have far-reaching consequences for Delaware corporations and prospective litigants.  Reactions from the legal community have been varied. Some see the initiative as a restoration of predictability.  Others view the Bill as a recalibration in favor of corporations and controlling stockholders. Regardless of how the proposed reforms are classified, one thing is clear—they are a rebuke of the Delaware judiciary, aimed at removing some of the judicial discretion that has long defined one of Delaware’s most striking assets: the case-by-case refinement of fiduciary law through sophisticated litigation.

Motivations aside, even if adopted, the Bill’s ramifications will take time to crystalize as practitioners test and interpret new definitions of “disinterestedness” and the courts work to reconcile established fiduciary doctrines with the new statutory mandates. The question that remains, though, is also the perennial one:  that is, whether the legislative revisions will solve the issues they purport to remedy or merely reconfigure them?