On March 25, Delaware Senate Bill 21 (“S.B. 21”) was signed into law by Governor Matt Meyer. The bill amends Delaware General Corporation Law (“DGCL”) §§ 144 and 220, establishing safe harbor provisions for transactions involving directors, officers, and controlling shareholders with potential conflicts of interest. By clarifying approval and ratification procedures, the bill aims to provide greater predictability and protection for corporate decision-makers. Additionally, it refines the scope of shareholder rights to inspect corporate books and records, specifying the materials accessible and the conditions under which inspections may occur.

These changes are designed to reinforce the state’s status as a premier domicile for businesses by addressing concerns about its business climate, particularly those regarding increased judicial oversight of corporate transactions.

What Has Changed?

• New Safe Harbors

  • The amendments establish statutory safe harbors for transactions involving conflicts of interest, including conflicts associated with directors, officers, controlling stockholders and control groups. The amendments strengthen the presumption that corporate boards act independently from management and controlling shareholders, making it more challenging for minority shareholders to contest mergers, acquisitions and compensation packages based on conflicts of interest.
  • Equitable relief and damages are now unavailable with respect to conflicted transactions, so long as either of the following occurs: (i) the transaction is approved (in good faith and without gross negligence) by an informed, disinterested vote of the board or a committee of the board, or (ii) the transaction is approved or ratified by the informed and uncoerced vote of a majority of the disinterested stockholders entitled to vote.^[1]
  • If these cleansing mechanisms are not utilized, fiduciaries must instead demonstrate that the transaction meets the traditional “entire fairness” standard.

• Revised Definition of Controlling Stockholders

  • One of the most significant provisions of S.B. 21 is the narrowing of the definition of a "controlling stockholder." By providing a clearer description of who qualifies as a controlling stockholder or part of a control group, S.B. 21 aims to reduce the number of transactions that might trigger judicial review.
  • Specifically, “controlling stockholder” is defined to mean any person who, together with its affiliates and associates, (i) owns or controls a majority of the corporation’s voting power, (ii) controls the election of a majority of the corporation’s board, or (iii) enjoys the functional equivalent of majority control, due to ownership or control of at least one-third of the voting power in addition to management rights. “Control group” means two or more persons that are not controlling stockholders individually but constitute a controlling shareholder by virtue of an agreement between them.^[2]

• Controller Exculpation

  • Formerly, only directors and officers could be exculpated for monetary damages in relation to claims for breach of the fiduciary duty of care, and this was only possible through an amendment to a corporation’s charter.
  • S.B. 21 automatically extends exculpation to controlling stockholders, with no further action required on the part of corporations.^[3]

• Limitations on Stockholder Access

  • Stockholder access to corporate books and records had traditionally been defined by case law.

  • S.B. 21 clarifies stockholder access rights by restricting the scope of records that can be requested. Requests are now primarily limited to board-level materials such as governing documents, minutes from board meetings, board presentations, and financial statements, among other fundamental corporate records. 

  • However, the Court of Chancery may permit access beyond this scope if the stockholder: (i) made a demand in good faith and for a proper purpose, (ii) describes with reasonable particularity the stockholder’s purpose and the books and records the stockholder seeks to inspect and (iii) the books and records sought are specifically related to the stockholder’s purpose.^[4]

What Motivated These Changes?

Delaware has long been the dominant state of incorporation for businesses, with over 60% of Fortune 500 companies and the majority of publicly traded companies choosing it as their legal home. Its dominance stems from its well-developed body of corporate law, a specialized and efficient Court of Chancery, and a business-friendly regulatory framework.

The "DExit" trend represents a growing shift away from Delaware, as some companies opt to incorporate in other states, often on the idea that Court of Chancery decisions have gone too far in expanding fiduciary liability and increasing litigation risk for Delaware corporations. High-profile cases, including judicial reversals of large executive compensation packages, have caused corporations to reconsider their domicile, with several companies already moving their incorporations to states like Nevada and Texas.

These reforms were enacted to fortify the state’s appeal by reducing judicial interference in corporate governance and mitigating concerns over litigation risks for businesses and controlling stockholders.

The law received strong bipartisan backing, including support from a coalition of corporate attorneys and influential private equity groups. In particular, private equity firms lobbied in favor of the bill to maintain Delaware’s appeal as a jurisdiction that balances shareholder rights with management flexibility. In light of recent court decisions expanding officer liability, investors sought legislative reforms to ensure predictable governance standards, reduce the risk of costly fiduciary duty claims, and prevent unnecessary shareholder intrusion into business operations.

Conclusion

Delaware SB 21 represents a significant attempt to provide greater predictability and reduce litigation exposure for officers and directors navigating complex corporate transactions. Overall however, it is unclear whether these amendments will meaningfully reinforce Delaware’s status as the leading jurisdiction of incorporation for American companies. 

We will continue to monitor how Delaware law evolves in these areas. For additional guidance on corporate governance, mergers and acquisitions and other corporate law issues, please reach out to Koley Jessen’s Mergers and Acquisitions practice group.

^{* Special thanks to summer associate Ellie Johnson for her contributions to this article.}

^{[1] DGCL §144(a-c). If the disinterested directors be less than a quorum, the transaction can be approved (or recommended for approval) by a committee of the board of directors that consists of 2 or more directors, determined by the board of directors to be a disinterested director with respect to the act or transaction.}

^{[2] DGCL §144(e)(1)-(2).}

^{[3] DGCL §144(d)(5).}

^{[4] DGCL §220.}

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