On March 3, a committee of the Delaware State Bar Association (DSBA) announced revisions to Senate Bill 21 (SB 21) aimed at paring back some of the proposed protections seen as too controller-friendly.
SB 21 was introduced in the Delaware General Assembly on February 17, 2025, proposing significant changes to the Delaware General Corporation Law (DGCL), including a safe harbor from liability for transactions in which directors, officers and controlling stockholders have a financial interest, and limits on corporate books and records a minority stockholder may inspect. [See our prior overview here.]
Original SB 21
Original SB 21 has proved to be polarizing due to the nature of changes proposed and because of its purported connection to Elon Musk and Tesla. Musk has publicly criticized the Delaware Court of Chancery for its order in the January 2024 case Tornetta v. Musk [1] rescinding Musk’s approximately $56 billion pay package (now worth about $100 billion based on Tesla’s current stock price), and its rejection in December 2024 [2] of Tesla’s attempt to obtain retroactive stockholder approval of the pay package.
The case has been appealed to the Delaware Supreme Court and, in parallel, Tesla has pursued reincorporation in Texas, fueling concerns that a growing number of corporations have left Delaware for states perceived as more friendly toward corporations and their directors, officers and controlling stockholders. It was in this environment, and with drafting help from Delaware law firms representing Musk and Tesla, that original SB 21 was introduced.
Original SB 21 has also been controversial because it did not go through the traditional vetting process before its introduction. Historically, amendments to the DGCL have been developed by the Corporation Law Council (the Council), a committee of the Corporation Law Section of the Delaware State Bar Association. Following their development, amendments are voted on by the Section and finally approved by the Executive Committee of the DSBA before they are recommended to the Delaware General Assembly.
Revised SB 21
Following the original introduction of SB 21 and its widespread criticism, the Council proposed revisions to the bill, and on March 3 recommended the approval and adoption of SB 21 in a revised form.
Below is a detailed summary of the proposed amendments, with the Council’s revisions in boldface.
Proposed Amendments to Section 144 (as revised by the Council on March 3, 2025)
The first section of SB 21 proposes a number of safe harbors for liability arising from acts or transactions involving directors, officers and controlling stockholders.
The proposed amendments to Section 144(a) provide a safe harbor for liability arising from any act or transaction involving or between a corporation and a director or officer of the corporation, or any organization in which a director or officer of the corporation has a financial interest, if the act or transaction is:
- authorized in good faith and without gross negligence by a fully informed majority of the disinterested directors or the members of a special committee of the board of directors, assuming (1) all members of the board of directors or committee are informed as to the material facts of the transaction, and (2) if a majority of the directors are not disinterested, the cleansing approval must be a committee of the board of directors consisting of at least two disinterested directors; or
- approved or ratified by a fully informed, uncoerced, affirmative vote of a majority of disinterested stockholders; or
- fair as to the corporation and its stockholders.
The proposed amendments to Section 144(b) provide a safe harbor for liability arising from any controlling stockholder transaction (other than a going private transaction), if the transaction is:
- approved (or recommended to be approved) in good faith and without gross negligence by a fully informed majority of the members of a special committee of the board of directors, assuming (1) all members of the special committee are informed as to the material facts of the transaction, (2) the special committee is comprised of two or more directors, each of which is disinterested, and (3)the special committee is expressly delegated the authority to negotiate, or oversee the negotiation of, and to reject the transaction; or
- approved or ratified by a fully informed, uncoerced vote of a majority of disinterested stockholders, and the transaction is conditioned upon such vote at the time it is submitted to stockholders for their approval or ratification; or
- fair as to the corporation and its stockholders.
New proposed Section 144(c) provides a safe harbor for liability arising from any controlling stockholder transaction constituting a going private transaction, if the transaction is:
- approved by both a special committee and a stockholder vote, as described in Section 144(b)(1) and (2); or
- fair as to the corporation and its stockholders.
New proposed Section 144(d) provides several parameters to the safe harbors, including:
- a rebuttable presumption as to what constitutes director independence for directors of publicly listed corporations, and a presumption that a director not a party to the act or transaction in question is disinterested, notwithstanding that the director was nominated or elected by a person with a material interest in the act or transaction;
- a statutory test for what constitutes a “controlling stockholder” and a “control group”; and
- a provision that a controlling stockholder or member of a control group will not be liable to the corporation or its stockholders for monetary damages for breaches of the duty of care.
New proposed Section 144(e) defines several key terms used in the safe harbors.
Proposed Amendments to Section 220 (as revised by the Council on March 3, 2025)
The second section of SB 21 proposes several changes to inspection of books and records of a Delaware corporation.
The proposed amendments to Section 220(a) define “books and records” (previously undefined), which a stockholder may inspect in accordance with that Section, to include:
- the certificate of incorporation and the bylaws, including a copy of any agreement or other instrument incorporated by reference in the certificate of incorporation or the bylaws;
- for the three-year period preceding a stockholder’s demand for inspection: stockholder meeting minutes and written consents, all written or electronic communications to stockholders, and annual financial statements for the corporation;
- board and board committee meeting minutes and records of actions taken, and materials provided to the board or board committee in connection therewith;
- any agreement entered into under DGCL Section 122(18) (including, notably, stockholder agreements); and
- director and officer independence questionnaires.
The proposed amendments to Section 220 additionally limit a stockholder’s right to inspect and copy the corporation’s books and records to situations where only all three of the following are true:
- the demand is made in good faith and for a proper purpose,
- the demand describes with reasonable particularity the stockholder’s purpose and the books and records it seeks to inspect, and
- the books and records sought are reasonably related to the stockholder’s purpose.
In any stockholder proceeding to compel inspection of books and records, the Court of Chancery may order the corporation to produce records of the corporation in addition to those defined as “books and records” if the demanding stockholder has met the threshold requirements for production of books and records and the stockholder has shown a compelling need for inspection of such records to further the stockholder’s proper purpose and the stockholder has demonstrated by clear and convincing evidence that such records are necessary and essential to further its purpose.
Further, under the proposed amendments to Section 220, the corporation may impose reasonable restrictions on the confidentiality, use, or distribution of books and records and it may redact portions of the books and records not specifically related to the stockholder’s purpose. The corporation may also condition production of books and records on the demanding stockholder’s agreement that any information in the corporation’s books and records be deemed incorporated by reference in any complaint filed in relation to the subject matter referenced in the demand for inspection.
Retroactivity
The revisions to SB 21 state that the amendments would be retroactive except with respect to pending actions and proceedings. However, the revisions also state that the lack of retroactivity to pending actions and proceedings shall not in any way affect the ability of a court, by reference to existing case law, to reach an outcome consistent with the one that would be dictated by the proposed amendments. According to some commentators, the final sentence is an indication to the Delaware Supreme Court regarding how it should rule on the Tornetta v. Musk appeal.
What This May Mean for You
The revisions to SB 21 illustrate the evolving nature of the proposed amendments to the DGCL and highlight the need to consult with legal counsel to obtain the benefit of proposed safe harbors for liability with respect to initiating, negotiating or approving a transaction in which a director, officer or controlling stockholder has a financial interest.
Given the larger discourse surrounding SB 21 regarding the power of controlling stockholders versus protection of minority stockholders, judicial discretion versus legislative prerogative, and the future of Delaware as the preferred jurisdiction for incorporation, expect more to come on this topic.
[1] 310 A.3d 430 (Del. Ch. Jan. 30, 2024).
[2] 326 A.3d 1203 (Del. Ch. Dec. 2, 2024).