Proposed amendments to the Delaware General Corporation Law (DGCL) introduce safe harbors for liability from transactions involving directors, officers and controlling stockholders and define and limit a stockholder’s right to inspect corporate books and records.
Long considered a business-friendly state because of its corporate tax advantages and, more importantly, the Court of Chancery – a unique court of equity composed of sophisticated jurists responsible for case law that has shaped how Delaware corporations operate – Delaware has come under fire in recent years for being “too favorable” to minority stockholders. This has led several corporations with large controlling stockholders, including Tesla, SpaceX and Neuralink (all controlled by Elon Musk), to reincorporate out of Delaware, and several others, including Meta, Dropbox and Pershing Square Capital Management, to announce plans to leave Delaware. The proposed amendments to the DGCL attempt to stem the tide by making it more difficult for minority stockholders to prove that a transaction in which a director, officer or controlling stockholder has a financial interest was not entirely fair to a corporation and by limiting corporate books and records a minority stockholder may inspect.
Background
On February 17, 2025, Senate Bill 21 was introduced in the Delaware General Assembly, proposing significant amendments to Section 144 of the DGCL with respect to interested directors and officers and controlling stockholder transactions, and to Section 220 of the DGCL with respect to inspection of books and records by stockholders.
Senate Bill 21 is unusual because of the ostensible enhanced protection for corporate directors, officers and controlling stockholders the amendments would provide, and because of the manner in which the bill was introduced.
Historically, amendments to the DGCL have been formulated by the Corporation Law Council of the Corporation Law Section of the Delaware State Bar Association and recommended to the Delaware General Assembly after approval by the Delaware State Bar Association. The amendments proposed in Senate Bill 21, in contrast, were introduced by a bipartisan group of lawmakers without following the traditional process and with drafting assistance from the Delaware law firm that represents Tesla and Elon Musk.
Continue reading for a more detailed summary of the proposed amendments.
Proposed Amendments to Section 144
The first section of Senate Bill 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 by a fully informed majority of the disinterested directors; or
- approved or ratified by a fully informed, uncoerced vote of a majority of disinterested stockholders; or
- fair as to the corporation.
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 by a fully informed majority of the members of a special committee of the board of directors, assuming a majority of the special committee is comprised of disinterested directors and 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; or
- fair as to the corporation.
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.
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
The second section of Senate Bill 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.
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.
What This May Mean for You
Directors, officers and controlling stockholders of Delaware corporations should be aware that the proposed amendments, if enacted into law, may change legal practice with respect to initiating, negotiating or approving a transaction in which a director, officer or controlling stockholder has a financial interest. In order to obtain the benefit of the proposed safe harbors from liability, these parties should follow the processes outlined and obtain advice of counsel.
Legal news and commentary on Senate Bill 21 indicate that it is a significant data point in a larger conversation about the balance of power between corporate insiders and minority stockholders and Delaware’s continued primacy as the preferred jurisdiction for incorporation. Expect further news and updates after Senate Bill 21 is first heard at a Senate Judiciary Committee Hearing planned for March 12.