On February 17, 2025, the Delaware General Assembly introduced a bill seeking to amend two sections in the General Corporation Law: Sections 144 and 220 of Title 8. On March 12, 2025, the Senate introduced a substitute for Senate Bill 21 which was adopted in lieu of the original Senate Bill 21. The next day, the Delaware Senate unanimously passed Senate Bill 21 and it is now in the House Judiciary. A Committee Hearing is set to take place within twelve legislative days. An affirmative vote of two-thirds of the members elected to each house of the General Assembly is necessary to amend the general corporation law.
Some believe the introduction of Senate Bill 21 is a consequence of the idea that Delaware’s corporate law has evolved into favoring a company’s shareholders over their board of directors. Delaware’s Governor, Matt Meyer, has referred to Senate Bill 21 as a “course correction” that will bring the Delaware business courts back into alignment with rulings from a decade ago. As Delaware is the home to over 1.3 million legal entities and more than half of the country’s Fortune 500 companies, the State understandably has an interest in revisiting and refining its corporation laws to ensure it maintains its “business-friendly” reputation. Although the Senate Bill 21 was passed unanimously by the Senate, the amendments are controversial among the public. While the amendments provide greater clarity and predictability as to potentially interested individuals and transactions, some see them as having the potential to wipe out “decades” of thoughtful caselaw developed by Delaware courts.
Title 8, Section 144
The primary sponsor of Senate Bill 21, Senator Brian Townsend, stated that the Section 144 amendments are “intended to provide a comprehensive liability exculpation scheme with respect to the fiduciary duties owed by stockholders and with respect to when particular safe harbors” apply. Townsend explained that the amendments would “provide safe harbor procedures for acts or transactions in which one or more directors or officers as well as controlling stockholders and members of control groups have interests or relationships that might render them interested or not independent with respect to the act or transaction.” Senate Bill 21’s amendments include several statutory definitions which will provide greater guidance to better understand the implications of particular affiliations and transactions. In particular, the following terms are defined: “control group”; “controlling stockholder”; “controlling stockholder transaction”; “disinterested director”; “disinterested stockholder”; “going private transaction”; “material interest”; and “material relationship.” With these statutory definitions, there is significantly less potential for ambiguity or “gray areas” regarding these terms.
Notably, the amendments also provide that a person who is a controlling stockholder or member of a control group generally cannot be liable, in that capacity, for monetary damages for a breach of the fiduciary duty. However, there are three exceptions to be aware of, which apply to the following: (1) a breach of the duty of loyalty to the corporation or the other stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; or (3) any transaction from which the person derived an improper personal benefit. Importantly, Senator Townsend has clarified that the amendments “do not displace any safe harbor procedures or other protections available at common law, including processes and procedures that comply with the pre-amendment common law but do not conform to the § 144 safe harbors.”
Title 8, Section 220
Senate Bill 21’s amendments to Section 220 provide guidance on the scope of the materials a stockholder may demand to inspect upon a request for inspection of the corporation’s books and records by providing a list of materials that constitute “books and records.” Notably, there is no “catch-all” item left open to interpretation; the list provides nine discrete and specific items. However, the amendment provides that in any proceeding brought to compel the inspection of books and records, the Court of Chancery may order the corporation to produce additional records if, among other requirements, the stockholder shows a “compelling need” for the records to further a specific purpose and the stockholder demonstrates the records are “necessary and essential” to further such purpose. The amendments also provide express conditions that a stockholder must follow in order to make a demand for books and records.
Key Takeaways
If enacted, the amendments to Section 144 and 220 will take effect immediately and will apply retroactively to all acts and transactions, whether they occurred before or after the enactment. The amendments will not apply, however, to any pending or completed litigation or to any demand for inspection of books and records that was made on or before February 17, 2025. Because of this, companies incorporated in Delaware should watch the progression of Senate Bill 21 in the coming weeks with vigilance and should begin preparing for the possibility of its potential enactment. Because application will be retroactive, companies will not only need to update their compliance mechanisms going forward but will also need to review their past transactions and activities to ensure compliance with the new statute. Upon enactment, companies will need to review and likely amend their articles of incorporation, bylaws, shareholder agreements, and/or other governance documents. Given the large amount of change the amendments will bring to Sections 144 and 220, companies should consider consulting with their legal counsel to ensure the full scope of the amendments are understood and addressed.
