On February 17, 2025, Delaware policymakers, including the governor and a group of bipartisan legislative leaders, took noteworthy steps to enhance transactional certainty and deal protection devices and decrease director, officer, and controlling stockholder liability and related litigation expenses and fees. First, in Senate Bill 21, the legislature has proposed amendments to the Delaware General Corporation Law (DGCL) that would increase protections for directors, officers, and controlling stockholders from fiduciary duty claims and liability when using certain cleansing procedures and decrease stockholders’ access to corporate books and records (Proposed Amendments). Second, in Senate Concurrent Resolution 17, the legislature has requested that the Council of the Corporation Law Section of the Delaware State Bar Association (Council) prepare a report with recommendations for legislative action regarding incentives and caps related to fees granted by the Delaware courts to attorneys representing plaintiff-stockholders (Requested Report). Although the Proposed Amendments remain subject to approval by the Delaware legislature and governor, they are immediately relevant to all companies and investors, and particularly those considering whether to incorporate or remain in Delaware.
Overview of the Proposed Amendments
The Proposed Amendments would significantly modify Sections 144 and 220 of the DGCL. These changes are intended to counteract case law developments in the Delaware litigation and transactional landscape over the past decade and provide all stakeholders with greater clarity and transactional certainty going forward. Specifically, amended Section 144 would codify variations on the deal protection devices used for cleansing breach of fiduciary duty claims by approval of disinterested stockholders (under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), in the absence of a conflicted controlling stockholder transaction) and by approval of both an independent director committee and unaffiliated stockholders (under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (2014), as a conflicted controlling stockholder transaction). Amended Section 220 would largely restrict the inspection of records other than specified formal corporate records. Each of these topics has figured prominently in the recent discourse regarding Delaware’s prominence as a corporate home and source of corporate law and the possibility of a shift toward other jurisdictions. Delaware now appears poised to quickly respond to that discourse by adopting the state-of-the-art Proposed Amendments which will offer corporate constituents unparalleled clarity and transactional certainty moving forward.
Proposed Amendments to Section 144
Section 144 currently provides a limited safe harbor from voidness of interested transactions. The Proposed Amendments to Section 144 would prevent equitable relief, damages, or other sanctions against directors, officers, and controlling stockholders in conflicted transactions under certain circumstances. Amended Section 144 offers cleansing of fiduciary duty claims and liability in three different scenarios: (1) conflicted transactions without a conflicted controlling stockholder (Non-Controller Transactions); (2) conflicted controlling stockholder transactions other than a going-private transaction (Controller Transaction); and (3) conflicted controlling stockholder going-private transaction (Going Private Transaction).
Similar to Corwin and MFW, amended Section 144 would permit fiduciary duty claims related to Non-Controller Transactions to be cleansed by disinterested stockholder approval, while fiduciary duty claims related to Going Private Transactions would require approval by both an independent director committee and disinterested stockholders. In a noteworthy shift, under amended Section 144, claims and liability related to Controller Transactions could be cleansed by disinterested director or independent committee approval instead of both. However, in another notable shift, the requirements for utilizing these deal protection devices under amended Section 144 would be less stringent than under existing law in a few important ways, including that under amended Section 144, (i) a cleansing procedure need not be in place from the outset, (ii) disinterested stockholder approval is determined on a votes cast basis, (iii) an independent committee must only be majority composed by independent directors, (iv) the independence of public company directors is presumably satisfied by applicable stock exchange standards, and (v) Controller Transactions may be cleansed by only one of disinterested stockholder or independent committee approval. Amended Section 144 would also address the critical threshold matter of how a controlling stockholder is defined, by prescribing a standard that is higher and narrower than at Delaware common law, requiring either majority voting power, or one-third voting power in director elections and power to exercise managerial authority over the corporation.
Proposed Amendments to Section 220
Section 220 currently provides stockholders with rights to demand inspection of corporate books and records related to a proper purpose as a stockholder and the right to petition the Delaware Court of Chancery to compel such an inspection based on a credible basis for the inspection. As amended, Section 220 would retain that general framework but would generally limit inspections to specified formal books and records and restrict the stockholder’s ability to obtain redress from the court. Amended Section 220 would also prevent the court from ordering inspection of other corporate records such as informal records and director texts and emails, unless the corporation failed to maintain stockholder meeting minutes and consents for the past three years, board meeting minutes and actions, and financial statements for the past three years (and, if the corporation has publicly listed stock, director and officer independence questionnaires). Amended Section 220 would also increase the standards applicable to an inspection petition, by requiring (i) the books and records to be specifically related to the purpose and (ii) the stockholder to describe its purpose and the demanded books and records with reasonable particularity. By limiting the scope of books and records available for inspection under Section 220, the Proposed Amendments would also clarify and generally limit the books and records available pursuant to a director’s inspection demand.
Requested Report regarding Litigation Fees
In the Requested Report, the legislature has asked the Council to report on potentially appropriate legislative action regarding attorneys’ fees in litigation, expressly including incentives and caps on those fees. The legislature’s request acknowledges the difficulty and importance of striking the right balance in this sensitive area, while suggesting that the legislature may be inclined to impose limits on corporate litigation fees. This is a topic that has also factored into the discourse over whether companies intend to remain incorporated in Delaware. Although the Proposed Amendments were not subjected to the Council’s drafting and review process which has applied as a matter of course to DGCL amendments for more than 50 years, the Requested Report may indicate the legislature’s desire for this matter to run the Council’s typical gamut involving law firms spanning the spectrum of clients and interests. If the Requested Report does lead to legislative caps on attorneys’ fees in corporate litigation, then that would add to the insulating effect of the Proposed Amendments and further reduce companies’ exposure to litigation expenses.
Outlook
Delaware has responded to critics aggressively in a way that may have lasting effects on the corporate, M&A, and litigation landscape. We view these legislative actions as important developments for any board, management team, or investor and in any conversation regarding whether to incorporate, remain, or invest in Delaware or another jurisdiction. At a minimum, the Proposed Amendments would clarify a path forward for recordkeeping and conflict transaction authorization, while emphasizing the benefits of good corporate hygiene, the inclusion of independent directors, and the presence of empowered board committees. From the perspective of the corporate franchise, this demonstrates Delaware’s commitment to flexibility, an enabling corporate statute, responsiveness to corporate constituents, and legal certainty, and these are all factors that have been identified as key elements in the conversation over Delaware’s continued global leadership in corporate law. However, the Proposed Amendments and the Requested Report are not yet law; we anticipate that the precise implications will continue to play out over the coming months and years and will be monitoring for further developments.