On February 17, 2025, Delaware’s legislative leaders and Governor announced landmark legislation and initiatives that would, if enacted into law, result in welcome and much-needed amendments to Delaware corporate law to address problems of recent vintage. The legislation and initiatives address critical topics, including director independence, controlling stockholders, stockholders’ books and records inspection rights, and plaintiffs’ attorney fee awards. The legislative efforts have been introduced at a time of growing debate over the vitality of Delaware corporate law and in response to case law developments that have frustrated boards of directors, corporate management, and investors. These legislative efforts would, in our view, restore Delaware law to what it was before those recent developments and mark a return to the stability, predictability, and balance that long characterized Delaware law.
Many clients have been discussing with us their concerns about Delaware law. We think that clients evaluating these issues will want to seriously consider the potential benefits of the proposed amendments, combined with the already significant built-in advantages that have long made Delaware the primary state of incorporation, and closely monitor their status.
Background of the Amendments
Before we describe the proposed amendments, it is important to understand the problems that they would correct. Over the last decade, Delaware case law addressing controlling stockholder conflicts has proliferated in response to stockholder litigation and established a number of principles that can be problematic for companies with founders and other significant stockholders:
- Decisions have assigned controlling stockholder status at relatively low levels of stock ownership (including 15-25 percent of voting power) based on a number of factors, such as influence over the company and board, the use of contractual veto rights, and relationships to board members. This trend has led to sometimes inconsistent and varied outcomes, subjecting many companies that are led by founders, visionaries, and large investors to heightened scrutiny and making it more difficult to obtain precise advice in this area.
- When controlling stockholders engage in a transaction with the company, including receiving executive compensation, or obtain a special benefit, such as in corporate restructurings or mergers and acquisitions, the transaction will not by default get business judgment rule protection and, instead, will be closely scrutinized as a potential breach of the fiduciary duty of loyalty by directors, officers, and the controlling stockholder. This is the backdrop against which the Elon Musk compensation case, for example, was decided. An array of transactions can and have become subject to this standard.
- The only way such transactions can be returned to the business judgment rule and “cleansed” is through the use of an onerous and often impracticable framework through which the underlying transaction is conditioned, up front, before negotiations begin, on both (1) approval by a fully independent board committee with the power to say “no” and (2) the affirmative vote of minority stockholders who are fully informed and uncoerced. Obtaining such a minority stockholder vote for a public company, for example, can be exceedingly difficult in various transactions, depending on voter turnout, the effect of proxy advisory firms, and the positions of institutional or other large investors. It is a fundamental tenet of Delaware law that corporations are guided by directors, who do not serve as thermometers for short-term sentiment.
- The case law has also constrained controlling stockholders when exercising voting rights or contractual veto rights. Recent case law imposes a duty of care when controlling stockholders exercise voting rights to change the “status quo,” in which case controlling stockholders must show adequate care and not seek to harm stockholders. Other recent case law has taken into account how large stockholders have exercised contractual veto rights in some circumstances.
Relatedly, the Delaware case law has become increasingly unclear and fact-dependent as to when directors are considered “independent” under Delaware law. The Delaware independence analysis is separate from the stock exchange rules governing independence for public company directors, and that analysis matters in various settings—including assessing when board members themselves have actionable conflicts when making decisions and which board members can serve on a committee to cleanse controlling stockholder conflicts or decide whether to pursue derivative claims belonging to the corporation.
Finally, the stockholder litigation landscape in Delaware has fairly rapidly changed. In recent years, the plaintiffs’ bar has become increasingly active and successful, bringing stockholder litigation on an ongoing basis—ranging from high-profile matters in which large fee amounts are awarded based on claimed corporate benefits to more mundane, day-to-day technical challenges that can nonetheless be difficult for corporations to resolve without significant expense. The plaintiffs’ bar also frequently uses statutory rights allowing stockholders to inspect books and records even before litigation arises to obtain board minutes and records and, where they can, communications such as texts and emails to maximum effect.
Legislative Efforts
There are two components to the legislative efforts that have been introduced. The first component is proposed changes to the Delaware General Corporation Law intended to restore certainty to a number of important issues, including:
- Defining “controlling stockholders” to require that they (1) have majority voting power, or (2) own, either as a single stockholder or through a control group, at least 33 percent of voting power and have control through the power to exercise managerial authority. This aspect of the legislation would provide greater certainty about when controlling stockholders exist and eliminate costly and protracted litigation brought in a variety of fringe circumstances.
- Providing that most controlling stockholder conflicts can be cleansed without the use of both an independent board committee and a minority stockholder vote. Instead, the legislation permits controlling stockholder conflicts to be cleansed through either procedural mechanism—deferring to the decision of either independent directors or disinterested stockholders. The narrow exception would be in the context of a squeeze-out transaction in which the controller acquires the remaining shares, in which case both protections must be used to get business judgment rule protection.
- Providing that an independent board committee need only be majority independent (although cannot include the controlling stockholder) rather than fully independent, as the case law has recently held. This aspect of the legislation would particularly help companies and advisors making judgment calls about one director’s independence—without risking the cleansing effect of the committee as a whole.
- Eliminating the requirement that the use of an independent board committee or minority stockholder vote, to get cleansing effect, would have to be declared as a condition to the transaction “ab initio,” before negotiations over the transaction begin. This condition has proved unworkable or as a potential trap in practice, because the moment when negotiations begin can be difficult to pinpoint (or can occur before advisors are even involved to assist with transaction planning).
- Confirming that controlling stockholders do not owe an obligation to act with adequate care when simply using their voting power to change the status quo.
- Providing that where directors themselves—outside of the controlling stockholder transaction context—have a material financial interest in a transaction, or their affiliates do, such transaction can be cleansed through properly informed approval by disinterested stockholders or disinterested directors, whether at the board or committee level. This is an important aspect of the legislation, because director conflicts themselves can be a hotbed and indeterminate area for litigation.
- Providing more certainty about what it means to be a “disinterested” director. Directors will be considered disinterested when they and their affiliates do not have a material interest in a transaction and where they do not have a material relationship to parties who do. For public companies, the legislation will provide that directors deemed independent under relevant stock exchange rules are presumed to be disinterested in a decision unless rebutted by a high evidentiary threshold.
- Meaningfully narrowing the scope of “books and records” that stockholders can obtain under the Delaware statute to include core materials. These statutory rights allow stockholders, outside of the litigation context, to obtain corporate documents to investigate wrongdoing or for another defined “proper purpose.” The legislation would limit the scope of documents that can be obtained to core books and records—such as governing documents, annual financial statements, and board-level materials—and effectively eliminate rights that had been growing under the case law to obtain emails, texts, and other documents. The proposed amendments would preserve an exception for stockholders to obtain information beyond core records—and to obtain their “functional equivalent”—where a company does not have minutes or other formal board records.
The second component of the legislative effort consists of a directive by the Legislature, supported by the Governor, for the Corporation Law Council of the Delaware State Bar Association—a Delaware body of expert practitioners that develops new legislation—to assist with developing legislative reforms to appropriately address the size and frequency of plaintiffs’ attorney fee awards for stockholder litigation. The increasing reach and success of the plaintiffs’ bar in Delaware has been a relatively recent development and has brought with it a steady flow of “gotcha” litigation that has imposed harmful costs on corporations and investors and resulted in windfalls for plaintiffs’ lawyers. This litigation has clogged the Delaware courts and increased their workload in suboptimal ways. Although Delaware generally recognizes the need for litigation to protect and vindicate stockholder interests where important stockholder interests are implicated, the current environment is in need of correction, as the Legislature’s directive reflects.
Takeaways
In very recent years, frustration with Delaware has grown. In 2024, the Delaware Legislature and Governor rightly adopted statutory amendments to provide greater clarity in the realm of transaction planning and governance structuring in response to some case law that the market found disruptive. The currently proposed legislative efforts are far more expansive and directly address significant remaining issues of controlling stockholder law and conflicts of interest and would reform the litigious environment in Delaware.
The legislation is, in our view, necessary and remarkable: the Legislature and Governor are promising to act decisively to address recent problems in Delaware law—problems that should not be permitted to undo Delaware’s century-long legacy of providing balance, stability, clarity, and predictability in corporate law. The Delaware statute will, for the first time, address issues that have previously been left to the case law, but this development is, in our view, necessary. The legislative efforts, if adopted, can give corporate actors comfort that Delaware law will continue to do what it has always done, responding nimbly in the face of new developments, striking a proper balance among stakeholders, and being guided by strong policy considerations and expertise. If the legislative efforts are adopted, corporations and investors will have the stability they deserve, along with the longstanding benefits that Delaware law has offered: an expert judiciary that can act quickly, a state-of-the-art statute, clear guidance for boards, a Secretary of State’s office that can process corporate and transactional filings faster than anywhere else, and familiarity to corporate actors and transaction planners. We believe that should all be taken seriously in the ongoing conversation.
With respect to timing, the proposed legislation now must be considered by the Legislature as a whole, which we expect to occur relatively soon, and ultimately signed into law by the Governor if passed by the Legislature. As for the Legislature’s direction to the Corporation Law Council to report back to the Legislature on potential legislation to address plaintiffs’ fee awards, the report is due March 31, 2025.
