In late March 2025, the Delaware General Assembly enacted, and Governor Matt Meyer signed, bipartisan legislation making significant amendments to the Delaware General Corporation Law (DGCL). These amendments effect several important changes for Delaware corporations, including:
- The establishment of clear procedures for obtaining "safe harbor" protection for an act or transaction in which a director, officer, or controlling stockholder has a conflict of interest;
- Guidance on what constitutes a disinterested director and controlling stockholder for purposes of a conflicted transaction; and
- Greater clarity about the scope of corporate books and records subject to stockholder inspection rights.
Upon signing the legislation, Governor Meyer stated that it "clarifies key governance structures to reinforce Delaware's reputation for equitable, predictable, and efficient corporate oversight."
Safe Harbor Protections for Transactions Involving Interested Directors, Officers, or Controlling Stockholders
The legislation amends Section 144 of the DGCL to provide safe harbor protection for acts or transactions in which officers or directors of a corporation, or controlling stockholders or members of a control group of the corporation, have interests or relationships that may impact their independence with respect to the act or transaction. The amendments provide corporations with more clarity to structure such acts or transactions in a manner that will not trigger the entire fairness standard of judicial review and provide a safe harbor that protects individuals or entities from liability if they act in good faith and comply with the statute's requirements.
Act or Transaction with an Interested Director or Officer
An act or transaction involving or between a corporation or one or more of the corporation's subsidiaries, on the one hand, and one or more of the corporation's directors or officers, or any entity or organization in which one or more of the corporation's directors or officers has an interest, on the other hand, may not be the subject of equitable relief, or give rise to an award of damages, against a director or officer of the corporation because of the foregoing circumstances or the receipt of any benefit by any such director, officer, entity or organization if any of the following conditions are satisfied:
- The material facts as to the director's or officer's relationship or interest and as to the act or transaction, including any involvement in the initiation, negotiation, or approval of the act or transaction, are disclosed or are known to all members of the board of directors or a committee of the board of directors, and the board or committee in good faith and without gross negligence authorizes the act or transaction by the affirmative vote of a majority of the disinterested directors then serving on the board or such committee, as applicable (even if the disinterested directors are less than a quorum). If a majority of the directors are not disinterested directors with respect to the act or transaction, such act or transaction shall be approved (or recommended for approval) by a committee of the board that consists of two or more directors, each of whom the board has determined to be a disinterested director with respect to the act or transaction; or
- The act or transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or
- The act or transaction is fair as to the corporation and the corporation's stockholders.
Controlling Stockholder Transaction
The amendments also provide protection from liability with respect to fiduciary duties that may be owed to the corporation by controlling stockholders. A controlling stockholder transaction, other than a going private transaction, may not be the subject of equitable relief, or give rise to an award of damages, against a director or officer of the corporation or any controlling stockholder or member of a control group, by reason of a claim based on a breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group, if any of the following conditions is satisfied:
- The material facts as to such controlling stockholder transaction (including the controlling stockholder's or control group's interest therein) are disclosed or are known to all members of a committee of the board of directors to which the board of directors has expressly delegated the authority to negotiate or oversee the negotiation of and to reject such controlling stockholder transaction, and such controlling stockholder transaction is approved (or recommended for approval) in good faith and without gross negligence by a majority of the disinterested directors then serving on the committee, provided that the committee consists of two or more directors, each of whom the board has determined to be a disinterested director with respect to the controlling stockholder transaction; or
- Such controlling stockholder transaction is conditioned, by its terms as in effect at the time it is submitted to stockholders for their approval or ratification, on the approval or ratification by disinterested stockholders, and such controlling stockholder transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or
- Such controlling stockholder transaction is fair as to the corporation and the corporation's stockholders.
The safe harbor protection will be available for a controlling stockholder transaction that constitutes a going private transaction if (1) the transaction is approved (or recommended for approval) by a majority of the disinterested directors on the committee of the board of directors and is approved or ratified by a majority of the disinterested stockholders, in each case as described above for other types of controlling stockholder transactions; or (2) such transaction is fair as to the corporation and the corporation's stockholders.
The amendments further provide that controlling stockholders and members of a control group will not be liable in such capacities to the corporation or its stockholders for monetary damages for breach of fiduciary duty other than for a breach of the duty of loyalty or acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law.
"Controlling stockholder" means any person who, together with such person's affiliates and associates:
- Owns or controls a majority 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 on the board;
- Has the right by contract or otherwise to cause the election of nominees who are selected at the discretion of such person and who constitute either a majority of the members of the board of directors or have a majority in voting power on the board; or
- Owns or controls 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 on the board and has power to exercise managerial authority over the business and affairs of the corporation.
A "control group" means two or more persons who are not controlling stockholders who, by virtue of an agreement, arrangement, or understanding, constitute a controlling stockholder.
General Considerations
In addition to defining a controlling stockholder and a control group, the amendments provide corporations and transaction planners with guidance for complying with the safe harbor procedures by defining the terms "disinterested director," "disinterested stockholder," "going private transaction," "material interest," and "material relationship."
The amendments also provide a heightened presumption that public company directors who are deemed independent under the applicable stock exchange rules are disinterested directors under Delaware law with respect to an act or transaction to which such directors are not a party, which presumption may be rebutted only by substantial and particularized facts that a director has a material interest in the act or transaction or a material relationship with a person who has a material interest in the transaction.
The amendments do not limit the right of any person to seek equitable relief for an unauthorized or unapproved act, or limit judicial review for measures intended to deter, delay, or prevent a change of control, a board reconstitution, or other corporate transaction. Furthermore, the amendments do not limit the rights of any person to seek relief on the grounds that a stockholder or other person knowingly aided and abetted a breach of fiduciary duty by one or more of the directors of the corporation.
Amendments Clarifying Stockholder Inspection Rights
The legislation also amends Section 220 of the DGCL to clarify the scope of a stockholder's right to inspect a corporation's books and records. Prior to these amendments, the DGCL did not define "books and records," and stockholder requests under Section 220 often have included a broad range of informal documents and materials, such as emails and text messages, that can be costly and burdensome for corporations to produce. The amendment seeks to provide greater clarity and limit some of these costs and burdens by specifically identifying the books and records that are subject to a stockholder request for inspection.
Section 220(a)(1) of the DGCL now defines "books and records" of a corporation to mean all of the following:
- The certificate of incorporation (including a copy of any agreement or other instrument incorporated by reference in the certificate);
- The bylaws then in effect (including a copy of any agreement or other instrument incorporated by reference in the bylaws);
- Minutes of all meetings of stockholders and the signed consents evidencing all actions taken by stockholders without a meeting for the preceding three years;
- All communications in writing or by electronic transmission to stockholders generally for the preceding three years;
- Minutes of any meeting of the board of directors or any committee of the board and records of any action of the board or any such committee;
- Materials provided to the board of directors or any committee in connection with actions taken by the board or any such committee;
- Annual financial statements of the corporation for the preceding three years;
- Any stockholder agreement entered into under Section 122(18) of the DGCL; and
- Director and officer independence questionnaires.
The amendment also outlines specific requirements a stockholder must meet to inspect the corporation's books and records. Section 220(b)(2) provides that a stockholder may inspect the corporation's books and records if (i) the stockholder's demand is made in good faith and for a proper purpose, (ii) the stockholder's demand 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. A proper purpose means a purpose reasonably related to a stockholder's interest as a stockholder.
New Section 220(b)(3) allows a corporation to protect certain interests if compelled to produce books and records, including the ability to impose reasonable restrictions on the confidentiality, use, or distribution of the books and records, and to redact unrelated portions of the books and records.
In any proceeding brought by a stockholder under Section 220 to compel the inspection of books and records, the Court of Chancery may only compel a corporation to produce the books and records specified in Section 220(a)(1), subject to two exceptions. First, if a corporation does not have any of the books and records specified in Section 220(a)(1), then the Court of Chancery may order the corporation to produce additional records of the corporation constituting the functional equivalent of any such books and records. The second exception is that the Court of Chancery may order the corporation to produce other specific records requested by the stockholder, such as emails and text messages, if, in addition to the other requirements of Section 220, the stockholder has made a showing of a compelling need for an inspection of such records to further the stockholder's proper purpose, and has demonstrated by clear and convincing evidence that such specific records are necessary and essential to further such purpose.
Effectiveness and Application of Amendments
The amendments to Sections 144 and 220 of the DGCL are effective immediately and apply to all acts and transactions occurring before, on, or after the enactment of the legislation, except that they do not apply to any judicial action or proceeding that is completed or pending, or to any demand to inspect books or records that was made on or before February 17, 2025.
For more information on these amendments or any related matters, please contact any member of Venable's Corporate Group.