Key Takeaways:
- The amendments to Section 144 of the Delaware General Corporation law create a safe harbor for controller transactions approved by a special committee or a majority of disinterested stockholders.
- The amendments to Section 144 also provide definitions for controlling stockholder and disinterested director.
- Amendments to Section 220 now strictly define what corporate books and records a stockholder can inspect (in addition to a stock ledger and list of stockholders).
Last week, the Delaware Governor signed a bill amending Section 144 of Delaware General Corporation Law (“DGCL”) to create a safe harbor from litigation for transactions between corporations and their controlling stockholders. The law also amends certain sections of Section 220 of the DGCL, which allows stockholders to obtain access to certain books and records of the corporation.
Under prior precedent, transactions between corporations and their controlling stockholders were subject to Entire Fairness Review (Delaware’s most stringent standard of review requiring a fair price and fair process) unless those transactions were approved by both a special committee of disinterested directors and a majority of disinterested stockholders. A board of directors needed to implement these protections from the start of negotiations and the special committee needed to be fully independent of the controller. As for the stockholder vote, controller transactions needed to be approved by a majority of outstanding shares held by disinterested stockholders who were fully informed and uncoerced.
Under the new law, approval of both a special committee of disinterested directors and a majority of disinterested stockholders is no longer required. The new law only requires approval from either of these options. Moreover, for the safe harbor to apply, only a majority of the special committee needs to be independent.
The new Section 144 also lowers the threshold for approval of a controlling stockholder transaction by disinterested stockholders, from a majority of outstanding shares held by disinterested stockholders to a majority of votes cast by disinterested stockholders. And this condition no longer needs to be in place at the start of the transaction. For stockholder approval to be effective, the transaction needs to be conditioned upon the disinterested stockholder vote at the time it is submitted to stockholders.
The amendments to Section 144 also codify “controlling” stockholder and “disinterested” director, terms that were previously subject to judicial interpretation based on the unique facts of each case. A controlling stockholder is now defined as (1) a stockholder with majority voting power, (2) a stockholder with the contractual power to cause the election of a majority of board of directors, or (3) a stockholder with the equivalent of majority voting power by “virtue of ownership or control of at least one-third in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors or in the election of directors who have a majority in voting power of the votes of all directors on the board of directors and power to exercise managerial authority over the business and affairs of the corporation.” A disinterested director is defined as a director “who is not a party to the [relevant act or transaction] and does not have a material interest in the [relevant act or transaction] or a material relationship with a person that has a material interest in the [relevant act or transaction].”
Finally, the new law amends Section 220 of the DGCL to clarify the scope of the company’s books and records that a stockholder is entitled to inspect. Section 220 now defines books and records as (1) certificates of incorporation, (2) bylaws, (3) minutes of stockholder meetings and consent of action taken by stockholders without a meeting, (4) all communications to stockholders, (5) minutes of any meeting of the board of directors or any committee of the board, (6) materials provided to the board of directors in connection with actions taken by the board,(7) annual financial statements of the corporation, (8) stockholder agreements under DGCL Section 122, and (9) director and office questionnaires. A court is allowed to order the production of documents outside of this definition, but only in very limited circumstances.
The amendments to Section 220 limit the period from which stockholders can obtain minutes and signed consents from stockholder meetings, communications to stockholders, and annual financial statements to three years preceding the demand. The law also requires stockholders to allege their purpose for seeking books and records with “reasonable particularity.”
The Delaware Governor said the new law will ensure “clarity and predictability, balancing the interests of stockholders and corporate boards.” While there has been much debate in Delaware about whether the new law evenly balances the interest of stockholders and corporate boards, the new law is clearly designed to provide more clarity and predictability for Delaware corporations by limiting court scrutiny of potentially conflicted controlling stockholder transactions and stockholder demands for company records.
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