For decades, Delaware has been widely regarded as the leading forum for incorporation in the United States. More than half of all publicly traded U.S. companies, including more than two-thirds of the Fortune 500, have made Delaware their corporate home. There are many reasons for this, including Delaware’s deep body of case law that has been developed over decades, a judiciary comprised of appointed, experienced Delaware attorneys, and an annual review of the Delaware General Corporation Law (DGCL) by the Corporation Law Council (a committee of the Delaware State Bar Association comprised of experienced Delaware transactional attorneys and litigators) and the Delaware Legislature to ensure the law stays current and adaptive to new issues and challenges.
In addition, most corporate disputes are heard in the Delaware Court of Chancery, a court of equity, which sits without juries and does not award punitive damages. Appeals from the Court of Chancery go directly to the Delaware Supreme Court, allowing for prompt adjudication, and both the Court of Chancery and the Delaware Supreme Court are well known for moving quickly when expedited proceedings are warranted.
Recently, some vocal critics have questioned whether Delaware should remain the jurisdiction of choice for incorporation. Several prominent companies have redomesticated from Delaware to other jurisdictions, most notably to Nevada and Texas, and it has been reported that other corporations have been considering whether to do so, including based on concerns about Delaware’s judicial scrutiny of controlling stockholder transactions and perceived exposure to significant awards of damages and attorney’s fees.
The discussion around redomestication was highlighted by the recent Delaware Supreme Court decision in TripAdvisor. In that case, the Delaware Supreme Court unanimously reversed the Court of Chancery’s decision to apply entire fairness to a controlled company’s decision move to Nevada. The Supreme Court held that the business judgment rule should apply to a redomestication decision when there are no well-pled allegations of material, non-ratable benefits flowing to the directors or controlling stockholders, and that an alleged reduction in litigation liability exposure in Nevada was not material because it was hypothetical and speculative.
In response to the growing debate, amplified greatly through social media, Delaware’s legislative leaders, working together with Delaware’s new governor, proposed amendments to the DGCL (Proposed DGCL Amendments) designed to address fundamental issues driving the redomestication debate, including director independence standards, controlling stockholder liability, and the scope of corporate books and records that must be made available to stockholders submitting a demand.
Overview of Proposed Section 144 Amendments
The Proposed DGCL Amendments broaden Section 144 of the DGCL by offering “safe harbors” for certain acts or transactions involving directors or officers and for controlling stockholder transactions, and would provide increased clarity and certainty on a number of crucial topics:
Director and Officer Conflicts
Under the Proposed DGCL Amendments, conflicted directors and officers who have an interest in an act or transaction with the corporation, would have no personal liability if:
- after being informed about the material facts giving rise to such conflicts:
- majority of disinterested directors serving on the board or a committee of the board approve the act or transaction, or
- a majority of disinterested stockholders approve the act or transaction, or
- the act or transaction is “fair as to the corporation.”
The Proposed DGCL Amendments also establish a presumption of independence for directors of a publicly traded company whose shares are listed on a national stock exchange, and who are not a party to the act or transaction at issue, if (a) the board determines the directors are independent, or (b) the director satisfies the relevant criteria for determining director independence under the applicable stock exchange rules. This presumption would be “heightened” and could only be rebutted by “substantial and particularized facts” that a director has a material interest in the act or transaction or has a material relationship with a party having a material interest in the act or transaction. Further, the amendment would clarify that the mere fact that a director is designated by a party having a material interest in the act or transaction does not alone negate independence.
Controlling Stockholder Transactions
The Proposed DGCL Amendments also include “safe harbors” for controlling stockholder transactions: one relating to “going private transactions,” and one for other transactions not involving a “going private transaction.” These provisions, if adopted, would be a change of direction from the recent Delaware Supreme Court opinion in Match Group, which held that any controlling stockholder transaction that provided a non-ratable benefit to the controller (including a going private transaction) requires the MFW doctrine to apply in order to achieve business judgment protection.
In connection with a going private transaction, the Proposed DGCL Amendments would insulate directors, officers, controlling stockholders and any members of a control group from liability arising from a breach of fiduciary duty if:
- the transaction is:
- approved or recommended in good faith by an informed committee comprised of a majority of disinterested directors that has bargaining power, and
- approved by an informed and uncoerced majority of disinterested stockholders, or
- the transaction is “fair as to the corporation.”
Notably, there is no “ab initio” requirement as required by MFW; instead, a controller must commit to the stockholder vote “at or prior to the time it is submitted to the stockholders for their approval.”
For all other controlling stockholder transactions, the safe harbor would apply if the transaction is approved by either a majority of disinterested directors serving on a committee or by disinterested stockholders (as described (i)(a) and (i)(b) in the preceding bullets), or the transaction is fair as to the corporation. This appears to change course from the Match Group decision which, under MFW, would have required both the committee and stockholder vote prongs be satisfied for non-going private transactions.
Overview of Proposed Section 220 Amendments
The Proposed DGCL Amendments relating to Section 220 Amendments are equally significant, in that they expressly curtail and specifically define the scope of what company records are available through a books and records demand.
The Proposed DGCL Amendments would limit “books and records” to mean:
- The certificate of incorporation.
- Bylaws.
- Minutes of meetings of stockholders.
- All communications written to stockholders within three years of any demand.
- Minutes of meetings of the board or any board committee (and any materials provided to the board or any board committee in connection with actions taken).
- Annual financial statements.
- Certain corporate contracts with stockholders.
- Director and officer independence questionnaires.
If certain books and records materials are unavailable, the Proposed DGCL Amendments contemplate that the court may order the “functional equivalent” of such documents, “but only to the extent necessary and essential to fulfill the stockholder’s proper purpose.”
The Proposed DGCL Amendments expressly authorize “reasonable restrictions on the confidentiality, use or distribution of books and records,” and may also require that the information in the books and records provided are deemed incorporated by reference into any complaint filed by the demanding stockholder.
In addition, the Proposed DGCL Amendments permit a stockholder to access books and records only if the stockholder’s demand: (i) is made 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) seeks information specifically related to the stockholder’s purpose.
Next Steps
The Delaware Legislature has scheduled a hearing on the Proposed DGCL Amendments on March 12, 2025. The Legislature has also requested that the Corporation Law Council provide comments on the Proposed DGCL Amendments in advance of that hearing. The Legislature also asked the Corporation Law Council to analyze the size and frequency of plaintiffs’ attorneys fees awarded for stockholder litigation and to prepare a report to the governor and Legislature on recommendations for legislative reform, including consideration of a potential cap on fees. The Legislature requested the report on plaintiffs’ attorneys fees by March 31, 2025.
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