April 01, 2025
On March 25, 2025, the Delaware General Assembly enacted amendments to the Delaware General Corporation Law (the DGCL and such amendments, the DGCL Amendments), which were subsequently signed into law by the governor of Delaware. The DGCL Amendments have significant implications for corporations and their stockholders, most specifically with respect to controlling stockholder and interested party transactions under Section 144 of the DGCL and stockholder rights under Section 220 of the DGCL, which governs the inspection of corporate books and records.
The following summarizes the specific changes under Sections 144 and 220 of the DGCL.
Section 144 sets forth the procedures for the approval of transactions involving a corporation on one hand and an officer, director or controlling stockholder of the corporation or their respective affiliates on the other hand. Prior to the passage of the DGCL Amendments, Section 144 did not provide a specific framework for the approval of interested party transactions involving a controlling stockholder or their respective affiliates, resulting in recent Court of Chancery decisions in which the entire fairness standard, a heightened level of scrutiny by the court, was unexpectedly applied to transactions involving controlling stockholders. The DGCL Amendments address this issue by creating explicit safe harbors for interested party transactions, including transactions involving a corporation and its controlling stockholder. The DGCL Amendments also eliminate monetary damages against controlling stockholders for duty of care violations.
Under the DGCL Amendments, a controller is now defined as a stockholder holding either (i) at least 33⅓ percent of the voting power of the corporation’s issued and outstanding shares plus managerial authority equivalent to a majority owner or (ii) ownership or control over the election or nomination of a majority of the directors or voting power on the board of directors. In addition, transactions with controllers that are not squeeze out or going private mergers, and other interested transactions would have to satisfy only one prong of a prescribed framework to receive the more favorable business judgement rule review. The framework is:
Only in controller mergers where minority stockholders are squeezed out (i.e., going private transaction) would both of the conditions described above be required to be met for the safe harbor to be established.
Under the DGCL Amendments, the committee review or majority of the minority vote can be implemented at any time during the deal process, in contrast to prior jurisprudence, which required similar conditions to be implemented ab initio, interpreted as before the start of substantive economic negotiations.
Section 144 provides that as an alternative to complying with one or both of the above safe harbor requirements, safe harbor protection can also be obtained for controller and other interested transactions if such transaction is “fair as to the corporation.” Under this standard, known as the entire fairness standard, the corporation and its board of directors must show that the economic terms of the transaction and process taken to negotiate and approve the transaction were fair to both the corporation and the corporation’s stockholders.
Under the DGCL Amendments, a “safe harbor” is created for transactions in which a corporation’s directors or officers are a party or have a material interest if the requirements for a Disinterested Director Approval Safe Harbor or Disinterested Stockholder Approval Safe Harbor are met, subject to the following differences:
The DGCL Amendments also seek to provide increased predictability with respect to determinations of director disinterestedness. The DGCL Amendments create a presumption that directors of public companies are independent with respect to a transaction if they are not a party to the transaction and the board of directors determines that such director is independent under the criteria set forth by the NYSE or Nasdaq. The independence presumption is rebuttable only if there is substantial and particularized evidence that the director has a material interest in the transaction or material relationship with an interested party.
Under Section 220, a stockholder may demand inspection of a corporation’s books and records if the stockholder can demonstrate a “proper purpose” which Delaware courts have interpreted broadly. Corporations have long complained that this stockholder inspection right was expanding beyond its mandate and causing corporations, officers and directors to expend considerable resources to respond to an ever-increasing volume of demands requiring the production of voluminous records including, in some instances, electronic communications and threatened litigation. The DGCL Amendments aim to provide predictability, lower costs and reduce corporate risk.
Under the DGCL Amendments, a corporation’s “books and records” subject to demand will be specifically defined as the following corporate materials and documents over the prior three years:
Importantly, the DGCL clarifies that a stockholder may inspect the corporation’s books and records only if (i) the demand is made in good faith and for a proper purpose, (ii) the stockholder’s demand describes with particularity the purpose and the books and record sought and (iii) the books and record sought are specifically related to the stockholder’s purpose. This is a heightened standard compared to the standard set forth under Section 220 before the DGCL Amendments, which required demanding stockholders only to show a proper purpose for the demand.
In order for a stockholder to compel a corporation to produce records outside the scope of the definition of “books and records,” under the DGCL Amendments, such stockholder must (i) meet all of the procedural requirements for demands to inspect books and records outlined in the previous paragraph, (ii) show a compelling need for an inspection of such other records and (iii) demonstrate by clear and convincing evidence that such other records are necessary and essential to further the stockholder’s purpose.
Finally, the DGCL Amendments clarify the corporation’s right to confidentiality. Not only may a corporation demand stockholders execute a confidentiality agreement prior to obtaining books and records, but the corporation may redact portions of records not specifically related to the proper purpose of the stockholder’s demand. Additionally, corporations can require that information obtained be deemed incorporated by reference in any related legal action filed by the stockholder.
The impact of the changes regarding stockholder demands under Section 220 should be considerable. By defining the scope of what constitutes books and records, and providing enhanced conditions to demonstrate with particularity the proper purpose, corporations will be better suited to anticipate and manage stockholder demands, reduce legal uncertainties and lower administrative burdens and cost. The changes should further reduce litigation of frivolous or expansive inspection demands that are followed by even more litigation.
Taken together, the DGCL Amendments will likely limit a corporation’s exposure to stockholder demands under Section 220 and lessen the burden of costly litigation that can result from such demands.
With respect to the DGCL Amendments to Section 144, corporations should consider the following:
With respect to the DGCL Amendments to Section 220, corporations should consider the following:
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