On March 25, 2025, Delaware enacted sweeping changes to the Delaware General Corporation Law (“DGCL”) to provide certainty to key areas of Delaware corporate law. The changes are expected to reduce the tide of redomestications to other states and reduce litigation risks for corporations and their boards of directors. The key changes include new safe harbor protections for one or more directors, officers, or controlling shareholders/groups, from liability where they may not be independent in a transaction and changes to stockholders’ rights to inspect books and records.
Related Party Liability Protections
Section 144 of the DGCL relates to interested directors, officers and controlling stockholder transactions. In essence, Section 144 provides a safe harbor against liability claims for transactions between a corporation and its officers, directors, or controlling stockholders where conflicts, such as a financial interest, exist. Section 144 prevents a transaction from being declared void or voidable solely due to the conflict of interest, as long as certain conditions are met. In general, where a conflict exists, a transaction must be either approved by an independent board committee comprised of two or more directors, by a majority if independent stockholders, or both, depending on the particular transactions involved.
In addition, under Section 144, where a transaction does not obtain the necessary independent stockholder approvals, it may still stand if the transaction passes the entire fairness test. That is if the transaction is entirely fair to the corporation. In determining whether a transaction is fair, courts consider both the process (i.e., fair dealing) and the price of the transaction. Courts look at all aspects of the transaction and the transaction as a whole in determining fairness, not just the portion or portions of the transaction involving a conflict with the executive. The entire fairness standard can be a difficult hurdle and is often used by minority shareholders to challenge a transaction where there is a potential breach of loyalty and where such minority shareholders do not think the transaction is fair to them or where controlling shareholders have received a premium. For more information on director duties and the entire fairness standard see HERE.
Over recent years, there have been an increased number of lawsuits against officers/directors or controlling stockholders under Section 144, including a slew of SPAC/de-SPAC related cases. In response to growing concerns over liability and uncertainty as to the best methods of corporate protection, Delaware has enacted, what some view as, landmark changes to reduce stockholder litigation and strengthen the longstanding Delaware public policy of providing deference to the decisions of independent directors and disinterested stockholders.
Section 144 has been amended such that transactions (other than going private transactions) involving a controlling stockholder now receive safe harbor treatment from equitable relief and damages liability if they are either: (i) approved by an independent board committee consisting of at least two directors; or (ii) approved or ratified by a majority of the votes cast by the corporation’s disinterested stockholders. For going private transactions involving controlling stockholders, both approval by an independent board committee comprised of at least two directors, and a majority of disinterested stockholders are required for safe harbor protection.
Section 144 has also been amended to limit liability to claims for breaches of loyalty or improper benefits, shielding controlling stockholders from damages for breaches of the duty of care in their capacity as controllers. As a reminder, the duty of care requires the director/officer to perform their duty with the same care a reasonable person would use, to further the best interest of the corporation and to exercise good faith, under the facts and circumstances. The duty of loyalty requires that there be no conflict between duty and self-interest.
Further, Section 144 has added a definition of “controlling stockholders” narrowing the previous view and has added a presumption of independence for directors whom a board determines to be independent under the rules of a national stock exchange. Under the amended Rule, a “controlling stockholder” means any person that, together with such person’s affiliates and associates:
- Owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors or in the election of directors who have a majority in voting power of the votes of all directors on the board of directors;
- Has the right, by contract or otherwise, to cause the election of nominees who are selected at the discretion of such person and who constitute either a majority of the members of the board of directors or directors entitled to cast a majority in voting power of the votes of all directors on the board of directors; or
- Has the power functionally equivalent to that of a stockholder that owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors by virtue of ownership or control of at least 1/3in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors or in the election of directors who have a majority in voting power of the votes of all directors on the board of directors and power to exercise managerial authority over the business and affairs of the corporation.
A “control group” means two or more people that are not otherwise controlling stockholders but that by virtue of an agreement, arrangement, or understanding between or among such persons, constitute a controlling stockholder.
Summary of Section 144, as Amended
- Except for a controlling stockholder transaction under (b) or (c) described below, an act or transaction involving or between a corporation (or any of its subsidiaries) on the one hand and any entity in which one or more of its directors, officers or controlling stockholders has a financial interest, on the other hand, may not be the subject of equitable relief or a damage award as a result of: (i) the conflict; (ii) the receipt of a benefit by the officer, director or controlling stockholder; (iii) the presence or participation by the officer, director or controlling stockholder at board or committee meetings authorizing the transaction; or (iv) the initiation, negotiation, or approval of the transaction by the officer, director or controlling stockholder, if:
(x) The material facts as to the director’s or officer’s relationship or interest and as to the act or transaction, including any involvement in the initiation, negotiation, or approval of the act or transaction, are disclosed or are known to all members of the board of directors or a committee of the board of directors, and the board or committee in good faith and without gross negligence authorizes the act or transaction by the affirmative votes of a majority of the disinterested directors then serving on the board of directors or such committee (as applicable), even though the disinterested directors be less than a quorum; provided that if a majority of the directors are not disinterested directors with respect to the act or transaction, such act or transaction shall be approved (or recommended for approval) by a committee of the board of directors that consists of 2 or more directors, each of whom the board of directors has determined to be a disinterested director with respect to the act or transaction; or
(y) The act or transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or
(z) The act or transaction is fair as to the corporation and the corporation’s stockholders.
(b) A controlling stockholder transaction (other than any going private transaction) may not be the subject of equitable relief, or give rise to an award of damages, against a director or officer of the corporation or any controlling stockholder or member of a control group, by reason of a claim based on a breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group, if: (i) the material facts as to such controlling stockholder transaction (including the controlling stockholder’s or control group’s interest therein) are disclosed or are known to all members of a committee of the board of directors to which the board of directors has expressly delegated the authority to negotiate (or oversee the negotiation of) and to reject such controlling stockholder transaction, and such controlling stockholder transaction is approved (or recommended for approval) in good faith and without gross negligence by a majority of the disinterested directors then serving on the committee; provided that the committee consists of 2 or more directors, each of whom the board of directors has determined to be a disinterested director with respect to the controlling stockholder transaction; or (ii) such controlling stockholder transaction is conditioned, by its terms, as in effect at the time it is submitted to stockholders for their approval or ratification, on the approval of or ratification by disinterested stockholders, and such controlling stockholder transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or (iii) Such controlling stockholder transaction is fair as to the corporation and the corporation’s stockholders.
(c) A controlling stockholder transaction constituting a going private transaction may not be the subject of equitable relief, or give rise to an award of damages, against a director or officer of the corporation or any controlling stockholder or member of a control group by reason of a claim based on breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group, if: (i) Such controlling stockholder transaction is approved (or recommended for approval) in accordance with paragraph (b)(i) of this section and approved in accordance with paragraph (b)(ii) of this section; or (ii) Such controlling stockholder transaction is fair as to the corporation and the corporation’s stockholders.
(d)(i) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the act or transaction.
(ii) Any director of a corporation that has a class of stock listed on a national securities exchange shall be presumed to be a disinterested director with respect to an act or transaction to which such director is not a party if the board of directors shall have determined that such director satisfies the applicable criteria for determining director independence from the corporation and, if applicable with respect to the act or transaction, the controlling stockholder or control group, under the rules (and interpretations thereof) promulgated by such exchange (treating the applicable controlling stockholder and control group as if the controlling stockholder and control group were the corporation for purposes of applying such criteria to determine independence from a controlling stockholder or control group), which presumption shall be heightened and may only be rebutted by substantial and particularized facts that such director has a material interest in such act or transaction or has a material relationship with a person with a material interest in such act or transaction.
(iii) The designation, nomination, or vote in the election of the director to the board of directors by any person that has a material interest in an act or transaction shall not, of itself, be evidence that a director is not a disinterested director with respect to an act or transaction to which such director is not a part.
(iv) No person shall be deemed a controlling shareholder unless they specifically satisfy the criteria in the definition of the rule (described above).
(v) No person who is a controlling stockholder or member of a control group shall be liable in such capacity to the corporation or its stockholders for monetary damages for breach of fiduciary duty other than for: (a) a breach of the duty of loyalty to the corporation or other stockholders; (b) acts or missions not in good faith or which involve intentional misconduct or a knowing violation of the law; or (c) any transaction from which the person derived an improper personal benefit.
Stockholder Rights to Inspect Books and Records
Section 220 of the DGCL sets forth the process and procedures for shareholder inspections of the books and records of the company. Section 220 has been amended to require that books and records inspections be conducted in good faith, following demands describing the statutorily approved proper purpose with reasonable particularity, and that the requested records be specifically related to the stockholder’s stated proper purpose.
Section 220 has also been amended to specify the “books and records” that a stockholder can request to inspect including: (i) the certificate of incorporation and any document incorporated by reference therein; (ii) the bylaws then in effect; (iii) minutes of all meetings of stockholders and signed consents evidencing all action taken without a meeting for a period of 3 years preceding the inspection demand; (iv) all communications in writing or electronically to stockholders within the last 3 years; (v) minutes of any meeting of the board of directors or any committee and records of any actions taken by the board or committees; (vi) materials provided to the board or any committee in connections with actions taken; (vii) annual financial statements for the past 3 years; (viii) agreements between the company and one or more current or prospective stockholder; and (ix) director and officer independence questionnaires.
In addition, under the same circumstances, a stockholder may examine a corporation’s stock ledger and a list of stockholders.
The corporation may impose reasonable restrictions on the confidentiality, use, or distribution of books and records and may require, as a condition to producing books and records to a stockholder, that the stockholder agree that any information included in the corporation’s books and records is deemed incorporated by reference in any complaint filed by or at the direction of the stockholder in relation to the subject matter referenced in the demand. The corporation may redact portions of any books and records produced to such stockholder to the extent the portions so redacted are not specifically related to the stockholder’s purpose.
Finally, where a stockholder brings an action to compel the inspection of books and records, the Court of Chancery may order the corporation to produce additional records, beyond those specified in the statute, if and to the extent: (i) such stockholder has met the demand requirements of the statute; (ii) such stockholder has made a showing of a compelling need for an inspection to further the stockholder’s stated purpose; and (iii) such stockholder has demonstrated by clear and convincing evidence that such specific records are necessary and essential to further such purpose.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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