The Delaware Empire Strikes Back to Protect its Turf!
By Amit Singh
In March 2025, a sweeping reform of the Delaware General Corporation Law (DGCL) took effect. SB 21 codifies safe harbors for conflicted transactions, clarifies director independence standards, and significantly tightens shareholder inspection rights. The new law reflects Delaware’s strategy to maintain its position as the corporate domicile of choice amid growing competition from states like Texas and Nevada.
Section 1: Amendments to § 144 – Conflict of Interest Transactions
The law codifies and expands protections for directors, officers, and controlling stockholders in transactions that could otherwise be challenged as breaches of fiduciary duty.
New Safe Harbors for Directors and Officers:
A transaction involving a director or officer is not subject to damages or equitable relief if any of the 3 following conditions is met:
Board or Committee Approval:
Material facts are disclosed to a majority of disinterested directors or a committee of at least two disinterested directors.
The approval is made in good faith and without gross negligence.
2. Stockholder Approval:
The transaction is approved or ratified by an informed, uncoerced majority of disinterested stockholders.
3. Entire Fairness:
The transaction is fair to the corporation and its stockholders in terms of both process and price.
Safe Harbors for Controlling Stockholder Transactions:
Similar protections apply to transactions involving controlling stockholders or control groups, but with some added conditions:
Non–Going Private Transactions (§ 144(b)):
May qualify for safe harbor via:
Disinterested committee approval,
Disinterested stockholder approval, or
Proof of entire fairness.
Going Private Transactions (§ 144(c)):
Must have
both:
Disinterested committee approval, and
Disinterested stockholder approval; or
Proof of entire fairness.
Director Independence Presumption (§ 144(d)):
Public company directors are presumed disinterested if they meet NYSE/Nasdaq independence criteria and are not parties to the transaction.
The presumption can only be rebutted with particularized evidence of a material interest or relationship.
Key Definitions from SB 21 (codified in § 144(e)). The new law includes some key definitions:
Controlling Stockholder
A controlling stockholder is a person (or entity) who, either alone or with affiliates/associates:
Owns or controls a majority of the voting power, or
Has the contractual or practical power to cause the election of a board majority, or
Exercises power functionally equivalent to majority control—such as holding at least one-third of the voting power and having managerial authority over the corporation.
This includes both traditional majority holders and those with defacto control.
Disinterested Director
A disinterested director is one who:
Is not a party to the transaction,
Does not have a material interest in the transaction, and
Does not have a material relationship with anyone who has a material interest in the transaction.
This ensures that only truly impartial directors can provide effective safe harbor approvals.
Disinterested Stockholder
A disinterested stockholder is a stockholder who:
Does not have a material interest in the transaction,
Does not have a material relationship with a controlling stockholder, control group, or any other materially interested party.
This definition is key for determining valid majority-of-the-minority approvals.
Material Interest
An actual or potential benefit (or avoided detriment) that:
Would impair a director’s objectivity, or
Is significant to a stockholder or other person, and not shared generally with other stockholders.
It’s not material just because it’s financial - it must be meaningful enough to impact decision-making.
Material Relationship
A relationship—familial, financial, professional, employment, or otherwise—that:
Reasonably impairs a director’s objectivity, or
Is material to a stockholder, such that it may compromise impartiality.
Think of it as any tie that could undermine independence in the eyes of the court.
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Other Provisions in § 144:
Clarifies that approval must be made without gross negligence, reinforcing fiduciary responsibility.
Controlling stockholders are insulated from from monetary damages unless there is:
A breach of loyalty,
Bad faith or knowing legal violations,
Improper personal benefit.
Preserves common-law rights and federal claims (e.g., aiding and abetting liability, equitable challenges to anti-takeover measures).
Section 2: Amendments to § 220 – Stockholder Inspection Rights
This section narrows the circumstances under which stockholders can inspect books and records, particularly after safe-harbored transactions. This will likely significantly speed up stockholder inspection right litigation.
New Definitions of “Books and Records”:
Stockholders can request access to:
Charter and bylaws,
Board and stockholder meeting minutes,
Communications to stockholders,
Financial statements (last 3 years),
Board materials and independence questionnaires,
Certain contracts under § 122(18). Section 122(18) was added to the DGCL in 2022. It allows a Delaware corporation to include in its certificate of incorporation (or approve via board resolution) a “management contract” that delegates control or management of the corporation’s business and affairs to another person or entity—such as a founder, investor, or external advisor.
Tightened Inspection Requirements:
To inspect books and records, a stockholder must:
Act in good faith and with a proper purpose,
Describe with particularity the purpose and specific records sought,
Show the records are necessary and essential to that purpose.
Additional Restrictions:
Corporations can impose confidentiality agreements and redact non-relevant material.
Information obtained via inspection is deemed incorporated by reference into any related complaint.
Courts may deny inspection if the company followed a § 144 safe harbor unless the stockholder pleads with specificity that the safe harbor was not met.
Court’s Limited Power:
Courts can only compel production of documents listed in § 220(a)(1), unless:
The stockholder proves compelling need under § 220(f) or § 220(g) (under § 220(f) and § 220(g), a court may compel the production of additional or more sensitive documents — but only if the stockholder clears a much higher bar),
Demonstrates, by clear and convincing evidence, that other records are necessary and essential.
Section 3: Effective Date & Retroactivity
The new law:
is effective immediately upon enactment (March 25, 2025).
applies to all acts and transactions, whether before or after enactment.
excludes:
Legal proceedings or books-and-records demands pending or completed on or before February 17, 2025.
Bottom Line
Senate Bill 21 significantly strengthens Delaware’s protections for boards, officers, and controlling stockholders by:
Codifying robust safe harbors,
Raising the bar for shareholder challenges,
Limiting access to internal corporate documents,
And providing statutory clarity around fiduciary standards and independence.
It reflects Delaware’s intent to remain the premier jurisdiction for incorporation—especially as states like Texas and Nevada challenge its dominance.
The original article can be found here. To learn more about startup-related legal information, visit Amit’s blog.