Inside Senate Bill 21

Amendments to Sections 144 and 220 of the Delaware General Corporation Law

BY TYLER O’CONNELL

SENATE SUBSTITUTE 1 for Senate Bill 21, which was signed into law by Governor Matt Meyer on March 25, garnered significant attention from both local and national media due to its potential impact on corporate governance and stockholder rights. Within the bill, Delaware amended Sections 144 and 220 of the Delaware General Corporation Law.

The Section 144 amendments provide safe harbor procedures for transactions in which directors, officers, or a controlling stockholder have potential conflicts of interest. In sum, the proposed amendments provide that directors’, officers’, or controlling stockholders’ potential divergent interests in transactions do not give rise to claims for equitable relief or damages, provided that, 1) the material facts as to the person’s interest in and involvement in the transaction, including any such potential conflicts, are disclosed; and 2) the transaction is approved in good faith by an informed majority of the disinterested directors or an informed majority of the disinterested stockholders.

In circumstances where a board does not have a disinterested majority of directors, to obtain protections from disinterested director approval, the act or transaction must be approved or recommended by a committee of at least two directors whom the board has determined are independent. The statute provides that board and committee approvals must be made in good faith and without gross negligence, consistent with fiduciary standards.

For controlling stockholder going-private transactions, both informed disinterested director and disinterested stockholder approval must be obtained. The amendments also recognize that transactions do not result in breaches of fiduciary duties if they are shown to be fair to the corporation and its stockholders, consistent with the “entire fairness” standard.

The amendments also define when a person may be found to be a “controlling stockholder” or a member of a “control group,” primarily by reference to ownership of percentages of the corporation’s voting stock or by the power to appoint a majority of directors.

The amendments to Section 220, which concerns stockholders’ rights to inspect the corporation’s “books and records,” define certain types of documents that are subject to production in response to a stockholder’s books and records demand. The materials identified include, among other things, the certificate of incorporation and bylaws, stockholder agreements binding the corporation, board and committee minutes, materials presented, and annual financial statements.

The amendments provide that, in the absence of those types of documents, the Delaware Court of Chancery may order the corporation to provide other types of “functionally equivalent” documents as may be necessary and essential to satisfy the stockholder’s proper purposes. Similarly, the court has the authority to order the production of other documents based upon a stockholder showing a “compelling need.”

The amendments are intended to apply retroactively, except they do not govern cases that were pending or completed on or before February 17, 2025, which is the date the amendments were first proposed. The amendments similarly do not apply to stockholder books and records demands made on or before that same date.

Tyler O’Connell is a partner at Morris James LLP.