On March 26, 2025, Delaware Governor Matt Meyer signed into law a significant piece of corporate legislation amending the Delaware General Corporation Law (“DGCL”). While subject to significant controversy among various interested parties, the stated goal of the amendments is to maintain Delaware’s preeminence as a home for business entities in the United States, and to provide certainty and deference to the treatment of decisions made by independent directors and disinterested stockholders of Delaware corporations. The amendments also aim to restore the predictability that has long characterized Delaware corporate law, but was in question following certain recent court decisions in the state. Set forth below is a brief summary of the most significant changes that the amendments make to the DGCL.
The amendments are effective immediately and apply to all prior and future acts and transactions, with the exception of any acts or transactions that are subject to pending or completed court proceedings on or before February 17, 2025, or to stockholder demands to inspect books and records of Delaware corporations made on or before February 7, 2025.
What You Need to Know:
Amongst other changes, the amendments to the DGCL that went into effect:
- Provide new safe harbor procedures for Delaware corporations’ boards of directors and stockholders to approve interested transactions;
- Redefine the term “Controlling Stockholder” for purposes of applying such safe harbor; and
- Narrow stockholders’ right to inspect books and records of Delaware corporations.
Section 144 Amendments
Among other changes, Section 144 of the DGCL has been amended to provide safe harbor procedures for acts or transactions approved by Delaware corporations involving directors, officers and/or controlling stockholders that have a financial interest in the transaction.
Under the revised § 144(a), certain acts or transactions involving interested directors or officers will be protected under a statutory safe harbor if approved or recommended (a) by a majority of the corporation’s disinterested directors, or the majority thereof serving on a committee of the board of directors consisting of at least two (2) members which are determined by the board of directors to be disinterested, or (b) approved or ratified by a majority of the votes cast by the disinterested stockholders entitled to vote thereon, in each case upon disclosure of material facts of the interested act or transaction. With respect to the independent director approval option, Delaware law prior to such amendment did not require a minimum two (2)-member committee of disinterested directors, and did not require the board of directors to make an independent determination of independence. With respect to the independent stockholder approval option, Delaware law prior to such amendment did not allow for ratification of an interested transaction after the fact, and required a vote of the majority of disinterested stockholders, rather than a majority of all disinterested stockholder votes cast.
Under the new § 144(b), a conflicted transaction with a controlling stockholder that does not constitute a “going private” transaction may be entitled to statutory safe harbor protection if it is negotiated and approved or recommended, as applicable, by a majority of the corporation’s disinterested directors then serving on a board committee which are determined by the board of directors to be disinterested, or if it is conditioned on approval or ratification by disinterested stockholders and is approved or ratified by a majority of the votes cast by the disinterested stockholders. In addition to same differences related to committee composition and counting of stockholder votes discussed above in the context of § 144(a), prior to the amendments, approval of a transaction now covered by § 144(b) would have been required from both a disinterested committee and disinterested stockholders (rather than only one of the two).
Under new § 144(c), a conflicted transaction with a controlling stockholder that constitutes a “going private” transaction may be entitled to the statutory safe harbor protection if it is negotiated and approved or recommended, as applicable, by a majority of the corporation’s disinterested directors then serving on a board committee which are determined by the board of directors to be disinterested, and is conditioned on the approval of or ratification by disinterested stockholders and is approved or ratified by a majority of the votes cast by the disinterested stockholders. The requirement of both board committee and disinterested stockholder approval is the key difference between approvals under § 144(b) and § 144(c). In addition, similar differences related to committee composition and counting of stockholder votes discussed above in the context of § 144(a) and § 144(b) also apply to actions covered by § 144(c).
In addition, the amendments to § 144 define the parties that constitute a controlling stockholder or control group, and provide safe harbor procedures that can be followed to insulate from challenge specified acts or transactions from which a controlling stockholder or control group receives a unique benefit. A “controlling stockholder” is generally any person that, together with such person’s affiliates and associates:
(a) controls a majority in voting power of the outstanding stock that is entitled to vote in elections of directors;
(b) has the right (by contract or otherwise) to cause the election of directors that will comprise a majority of the members of the board of directors or directors with a majority in voting power of the board of directors; or
(c) has the functional equivalent of majority control by having both control of (i) at least one-third (1/3) in voting power of the outstanding stock entitled to vote generally in the election of directors and (ii) the power to exercise managerial authority over the business and affairs of the corporation.
A “control group” is defined as “2 or more persons that are not controlling stockholders that, by virtue of an agreement, arrangement, or understanding between or among such persons, constitute a controlling stockholder.”
Additionally, the amendments to § 144 establish a heightened presumption of independence for public company directors if they are not party to the relevant transaction, and the board of directors determines such directors satisfy applicable national stock exchange rules for independence. This is a heightened presumption that may only be rebutted by substantial and particularized facts that the director has a material interest in an act or transaction or has a material relationship with a person with a material interest in such act or transaction.
Revised § 144 also provides that any approval or recommendation of disinterested directors or a disinterested director committee must be made in good faith and without gross negligence, and common law requirements regarding core fiduciary conduct are not displaced. The references in § 144 to an act or transaction being “fair as to the corporation and the corporation’s stockholders”, which would apply if the applicable disinterested director and disinterested stockholder safe harbors are not used, is intended to be consistent with the entire fairness doctrine developed in Delaware common law. In addition, if the framework of revised § 144 is not applicable to a particular corporation, the framework set forth in In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. 2013), aff'd sub nom., Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) will still be available as an avenue by which to have transactions protected by an irrebuttable version of the business judgment rule.
Revised § 144 also does not limit the right of any person to seek relief on the grounds that a stockholder or other person aided and abetted a breach of fiduciary duty by one or more directors. Consistent with existing case law, the stockholder or other person must have knowingly participated in a breach of fiduciary duty to establish an aiding and abetting claim. In re Mindbody, Inc., 2024 WL 4926910 (Del. Dec. 2, 2024).
Section 220 Amendments
Section 220 of the DGCL was also amended with respect to books and records demands made upon a Delaware corporation. Among other things, the amendments narrow stockholders’ right to inspect “books and records” of the corporation, including for purposes of investigating claims against corporate actors. Under amended § 220, stockholders are generally only entitled to inspect a discrete set of formal corporate documents, such as board minutes, board books relating to corporate actions, and financial statements. Such demand must (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 seeks to inspect and (iii) seek books and records specifically related to the stockholder’s purpose.
A stockholder may only inspect informal corporate documents, such as internal emails, upon a heightened showing to the Court of Chancery that there is a compelling reason to conduct the inspection. The stockholder must show a compelling need for an inspection of such records to further the stockholder’s proper purpose and demonstrate by clear and convincing evidence that such specific records are necessary and essential to further such purpose. These amendments respond to the growing volume of books-and-records demands and follow-on litigation brought by stockholders in recent years, which have imposed substantial costs on Delaware corporations.
