DELAWARE AMENDS CORPORATE LAWS, RESHAPES STOCKHOLDER RIGHTS

DELAWARE AMENDS CORPORATE LAWS, RESHAPES STOCKHOLDER RIGHTS

On March 26, 2025, the Governor of Delaware signed Senate Bill 21 (SB 21) into law, amending the state’s corporate laws to provide additional protections for certain directors, officers, and stakeholders involved in potential conflict of interest acts or transactions. Consistently regarded as the most business-friendly jurisdiction, Delaware introduced SB 21 in late February when it appeared that Delaware-incorporated companies’ were threatening departure, or actually departing to, states perceived to be more business friendly.

Although several judicial decisions seemingly provoked these corporate actions, they gained momentum following a December 2024 Delaware judgment invalidating, for the second time, Elon Musk’s multi-billion dollar payment package due to a potential lack of board independence and conflicts of interest in negotiation. Notably, the original judgment was reaffirmed although Tesla’s stockholders overwhelmingly voted to reinstate Musk’s pay package after it was originally voided in January of 2024. The outcome of this litigation appears to have been a contributing factor in Tesla’s exit from Delaware in favor of re-incorporating in Texas.

Despite the minor exodus of companies from the state, Delaware’s efforts to save its business-friendly legacy were rewarded with both support and opposition due to the general substance and accelerated  timeline of the bill.  Ultimately, however, SB 21 is in effect and has the potential to change the legal landscape of interested party transactions going forward.

In its final form, SB 21 expands laws regulating the voidability of director and officer conflict of interest transactions, regulating hurdles to controlling stockholder contracts and transactions, and seeks to apply such rules to breach of fiduciary duty challenges. In doing so, it protects a director, officer, or controlling stockholder from liability, equitable relief, damages, and other sanctions when he or she is involved in a conflict of interest transaction with the corporation. Significantly, the bill stipulates that, under certain conditions, controlling stockholders, when acting in their official capacities, cannot be held liable for monetary damages or breach of fiduciary duty. The conditions for these protections include disclosure of the interest to all board members and voting stockholders; approval of the act or transaction in good faith by either a special committee or a majority of voting stockholders; and assurance that the act or transaction is fair to the corporation.

As noted above, SB 21 does not remove the requirement that conflict of interest transactions be disclosed to and approved by disinterested directors and/or stockholders. However, SB 21 removes heightened barriers to this approval. One example is that prior to SB 21 the special committee approving a transaction was to be made up completely of disinterested directors, but with the bill’s passing, the special committee may now consist of only a majority of disinterested directors.

Ultimately, these modifications may not only impact corporate operations and procedures, but may also impact controller party liability and resulting litigation or challenges to conflict of interest transactions. Specifically, the standards of review by which courts examine corporate decisions could be directly altered by this legislation.  Because the revisions to SB 21 lower the bar for transaction approval, the bill may result in a shift of courts’ standard of review for such  transactions to the less strict standard of review courts use when the statutory conflict of interest transaction approval process has been met.

In addition, SB 21 protects controlling parties from litigation or challenges by limiting a stockholder’s right to review corporate records. SB 21 restricts the records a stockholder may demand to inspect and imposes strict conditions as to the intent of the stockholder upon request for records. Stockholders will not have a right to review certain emails, text messages and board minutes, which previously served as evidence or spurred litigation for conflict of interest and breach of fiduciary duty claims.

Lastly, SB 21 provides a bright line test defining a controlling stockholder as either a person who owns a majority of a corporation’s outstanding voting stock, or a person who owns at least 33.33% of a corporation’s outstanding voting stock in addition to having actual authority over the business affairs of the corporation. Notably, were this law in effect prior to 2024, Elon Musk, who owns 21% of Tesla, would not have been considered a controlling shareholder and may have avoided the above noted litigation.

Overall, SB 21 is designed to preserve Delaware’s competitive edge as the primary business-friendly jurisdiction by clarifying shareholder, director and officer rights and responsibilities. As a direct consequence of this legislation, the volume of claims brought against interested directors, officers, and stakeholders is expected to decline.

The attorneys at Dvorak Law Group are closely tracking these developments and are ready to guide you on how it could affect your company or investment.

The final form of Senate Bill 21 can be found here: Delaware General Assembly