On March 25, 2025, Delaware Governor Matt Meyer signed into law legislation creating significant revisions to the Delaware General Corporation Law (DGCL). In a previous post, we discussed how the revisions significantly narrow the scope of an allowable stockholder's demands to inspect Delaware corporations’ books and records. This post discusses certain other revisions, which significantly relax corporate requirements for approving conflicted transactions.
Under prior Delaware law, the Business Judgment Rule—in which a board of directors is presumed to act in good faith, on an informed basis and in the best interests of the company—applied to conflicted transactions involving fiduciaries, including a control group, only if two hurdles were cleared. First, the transaction had to be approved by a Special Committee consisting entirely of members who were independent and disinterested. And then the transaction had to be approved by a majority of uncoerced, fully informed and unaffiliated stockholders. If the transaction did not clear both of these hurdles, it would be evaluated under the much tougher Entire Fairness standard, requiring a showing that the transaction was fair to the company and its stockholders. See In re Match Group, Inc. Deriv. Litig., 315 A. 3d 446 (Del. 2024). This process was often described as the MFW framework, after Kahn v. M&F Worldwide Corp., 88 A. 3d 635 (Del. 2014), in which the Delaware Supreme Court approved this standard of review.
Business leaders and corporate lawyers alike attacked the standard as expensive, complicated, and unpredictable, and several corporations left Delaware to reincorporate in other states.
The Delaware legislature heard these concerns loud and clear. The amended DGCL creates safe harbors under § 144 (a-c) in which conflicted transactions, with one major exception, will not be subject to claims for equitable relief and damages if either 1) the transaction is approved by a majority of disinterested directors, or if a majority of the directors are not disinterested, by a properly formed and functioning special committee consisting of at least two disinterested directors or 2) the transaction is approved by a majority vote of informed, uncoerced, and disinterested stockholders. Critically, the test is now disjunctive: Corporations no longer are required to use both procedures, just one of them. (The company also may still rely on demonstrating that the transaction is fair to the corporation and its stockholders).
The one exception is for a controlling stockholder transaction that constitutes a “going private” transaction, which is defined as either an SEC Rule 13e-3 transaction for a public company, or specified transactions for a private company in which all of the stock held by disinterested stockholders is cancelled, converted, purchased, acquired or is otherwise no longer outstanding. For such a transaction, approval by a disinterested special committee and by a majority of informed, uncoerced and disinterested stockholders is still required to avoid claims for equitable relief and damages.
The amendments also provide important definitional clarifications. A “disinterested director” is now defined as one who is not a party to or has a material interest in the act or transaction at issue and does not have a material relationship with a person who has a material interest in the act or transaction. Further, a director of a public company is presumed to be disinterested if the director satisfies the independence standards for any exchange on which the company is listed. A “material interest” is defined as an actual or potential benefit, including the avoidance of a detriment, other than one which would apply to the corporation or all stockholders generally, that would reasonably be expected to impair the objectivity of the director. A “material relationship” is defined as a familial, financial, professional, employment or other relationship that also would be reasonably expected to impair the director’s object. The mere fact that a director was nominated by a stockholder does not mean that the director is not disinterested with respect to a transaction involving the stockholder. The goal of these definitions is to make clear that a director is not disinterested simply because of a tangential relationship with a stockholder and/or another director.
“Controlling stockholder” got a definition as well: a person who, together with affiliates and associates, owns or controls either a majority of the voting power of a company’s stock; has the contractual right to elect a majority of directors; or owns or controls at least one-third of the voting power of the outstanding stock and has the power to exercise managerial authority over the company’s business. This definition was intended to overturn decisions in which stockholders with only 20% or less of the company’s stock were deemed to be controlling.
Further, the amendments eliminate liability for monetary damages for a controlling stockholder or member of a control group for a breach of fiduciary duty other than for a breach of the duty of loyalty or intentional misconduct. This provision is similar to the ability of corporations to exculpate directors and officers for mere negligent conduct.
On top of the obvious, material changes to various aspects of Delaware corporate law, the recent DGCL amendments highlight Delaware’s clear desire to remain one of, if not the, preeminent jurisdictions for incorporators (and re-incorporators) looking for a well-reasoned and predictable body of statutory and common law to govern their entity.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.
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