by Morgan A. Davis, Susan Reagan Gittes, Gordon Moodie, Maeve O’Connor, Zachary H. Saltzman, Shannon Rose Selden, Erik J. Andrén, and David J. Hotelling
From left to proper: Morgan A. Davis, Susan Reagan Gittes, Gordon Moodie, Maeve O’Connor, Zachary H. Saltzman, Shannon Rose Selden, Erik J. Andrén, David J. Hotelling (pictures courtesy of Debevoise & Plimpton)
In opposition to the backdrop of a number of high-profile company departures from Delaware and chatter about doable future departures, on March 25, 2025, Delaware Governor Matt Meyer signed into regulation S.B. 21, which amends the Delaware Basic Company Regulation to supply better readability as to the therapy of transactions involving conflicted administrators or controlling stockholders and to constrain the scope of supplies obtainable pursuant to stockholder books-and-records calls for. The Workplace of the Governor touted the invoice as “aimed toward guaranteeing the state stays the premier house for U.S. and international companies.”
Under we clarify how the regulation: (i) revises and makes extra available secure harbors for conflicted transactions, together with controller transactions; (ii) will increase certainty as to when a stockholder will probably be handled as a controller; and (iii) pulls again a number of the current case regulation expansions with respect to books-and-records entry. These new guidelines will apply in circumstances filed after February 17, 2025.
S.B. 21 incorporates necessary modifications to the secure harbors obtainable for transactions involving conflicted administrators or controlling stockholders and applies to each private and non-private firms. Though previous to S.B. 21, a transaction might be made topic to the enterprise judgment rule (permitting for a excessive chance of pre-discovery dismissal) if sure judge-established procedural protections have been carried out, it was not all the time clear whether or not a courtroom would discover that the necessities for these procedures have been met. In consequence, many transactions meant to obtain enterprise judgment evaluate have been nonetheless examined beneath the “whole equity” normal of evaluate—that means that they have been topic to shut judicial scrutiny that usually precluded pre-discovery dismissal. Therefore, the pre-S.B. 21 state of affairs was one marked by vital uncertainty as as to if a secure harbor would in the end apply.
S.B. 21 codifies and modifies the present secure harbors in ways in which make them much less burdensome and reduces the chance that they are going to be efficiently challenged:
Conflicted Director Transactions
S.B. 21 supplies that the place a number of administrators are conflicted, the transaction won’t be topic to equitable aid or an award of damages if both: (i) the transaction is permitted by a majority of the votes forged by totally knowledgeable disinterested stockholders (pre-S.B. 21, approval by a majority of the votes of all excellent shares held by disinterested stockholders was required), or (ii) the deal is permitted by a majority vote of disinterested administrators, whether or not all the board or a committee thereof, supplied that when greater than half of the administrators are conflicted, the transaction should be permitted by a totally disinterested particular committee of at the very least two administrators.
Controller Transactions (Aside from Take-Personal Offers)
Previous to S.B. 21, offers involving a conflicted controlling stockholder might be protected by the enterprise judgment rule if “MFW”[1] procedural protections have been put in place. MFW required each a totally unbiased particular committee and the favorable vote of a majority of the votes of all excellent shares held by disinterested stockholders. As well as, the deal needed to be conditioned on each MFW necessities earlier than graduation of substantive negotiations (the “ab initio” requirement). The presence of even one conflicted particular committee director was deadly. Plaintiffs thus had a number of routes to plausibly allege {that a} defendant had not complied with MFW, that means all the equity normal of evaluate would apply, making pre-discovery dismissal unlikely.
The trail to dismissal post-S.B. 21 is easier. Now, in non-take-private transactions, a transaction will probably be supplied secure harbor if there’s both a disinterested particular committee or a totally knowledgeable vote of a majority of the votes forged by disinterested stockholders. Moreover, the ab initio requirement was eliminated, with the one remaining timing requirement being that the transaction is made topic to the disinterested stockholder vote on the time of submission for approval to stockholders.
Furthermore, when figuring out whether or not the particular committee consists of disinterested administrators, S.B. 21 requires solely that the board decide in good religion that the members of the particular committee are disinterested such that the protections of the particular committee secure harbor wouldn’t be misplaced merely as a result of it later seems that a number of of the committee members are, the truth is, , so long as a majority of the disinterested administrators approve the transaction. And, until there are “substantial and particularized info” on the contrary, a director assembly inventory trade requirements for independence will probably be presumed to be disinterested as long as the director shouldn’t be a celebration to the transaction in query.
Controller Take-Personal Transactions
For controller take-private transactions, S.B. 21 retains the twin MFW necessities (i.e., each a disinterested particular committee and a majority-of-the-minority stockholder vote), nevertheless it makes acquiring early dismissal simpler and extra predictable by eradicating the ab initio requirement, decreasing the disinterested stockholder voting threshold, and specializing in the board’s dedication that each one members of the particular committee are disinterested (along with the presumption of disinterestedness for administrators assembly nationwide securities trade independence necessities).
Existence of a Controller
Previous to S.B. 21, there was no bright-line minimal shareholding requirement earlier than a minority stockholder might be handled as a controller, and the relevant take a look at was multi-factored and versatile. In consequence, it might be tough to foretell when a stockholder holding lower than 50% of an organization’s voting shares could be handled as a controller.
Now, a stockholder holding lower than one-third of the voting inventory can’t be a controlling stockholder (until that stockholder has a proper to trigger the election of administrators having a majority of the voting energy on the board). As well as, to be thought of a controlling stockholder, a minority stockholder will need to have the “energy functionally equal” to that of a majority stockholder and will need to have the “energy to train managerial authority over the enterprise” of the corporate. S.B. 21 additionally eliminates the idea of “transactional management”—i.e., the idea {that a} stockholder not in any other case a controller may nonetheless be deemed a controller attributable to having vital affect with respect to the precise transaction being challenged.
Disinterested Administrators
Earlier than S.B. 21, some current Delaware judicial opinions had taken a broad view of the circumstances that might give a director a disabling battle. S.B. 21 supplies outlined phrases and presumptions that govern whether or not a director is taken into account , together with: (i) outlined phrases setting out what pursuits and relationships are thought of “materials” and (ii) as famous above, making a presumption of disinterestedness (with respect to acts or transactions to which the director shouldn’t be a celebration) based mostly on a dedication of director independence for nationwide securities trade functions.
Pre-S.B. 21, some Delaware courts had ordered firms to supply administrators’ emails and textual content messages in response to stockholder books-and-records calls for pursuant to Part 220. These choices considerably elevated the fabric obtainable to plaintiffs, resulting in expansive pre-suit discovery. The obtained info was then usually utilized in an effort to assist allegations that the events didn’t adjust to the necessities for procedural protections that may end in enterprise judgment evaluate or a shift to plaintiffs of the burden of proof.
Publish-S.B. 21, the supplies obtainable pursuant to books-and-records calls for are extra narrowly circumscribed exterior of sure particular exceptions. Though plaintiffs nonetheless have the fitting to entry a reasonably complete checklist of supplies, that checklist doesn’t embrace digital communications (apart from a narrowly outlined set of such communications to stockholders).
S.B. 21 ought to make dealmaking extra environment friendly by offering a extra predictable path to avoiding protracted deal litigation. However this regulation certainly not spells the top of stockholder litigation over conflicted and controller transactions.
First, the entire procedural protections in S.B. 21 require that disinterested administrators and stockholders (as relevant) be totally knowledgeable. Traditionally, Delaware courts have scrutinized whether or not proxy statements or different disclosures the truth is resulted in a totally knowledgeable vote. We anticipate that Delaware plaintiffs will proceed to depend on that physique of case regulation to argue that the procedural protections have been ineffective as a result of stockholders weren’t totally knowledgeable or the board was not totally knowledgeable when it was figuring out that the members of the particular committee have been disinterested.
Second, S.B. 21 continues to deal with as a controller transaction any deal through which a controller “receives a monetary or different profit not shared with the company’s stockholders.” The time period “different profit” shouldn’t be outlined, and we anticipate plaintiffs to argue that the time period encompasses all method of non-financial advantages. Thus, whereas the universe of controllers could have shrunk, the variety of transactions involving a controller which might be challenged could develop.
Third, S.B. 21 leaves in place the idea of a “management group” and does little to slender that time period. We are able to anticipate plaintiffs to give attention to transactions involving two or extra non-controlling stockholders that collectively have over one-third of voting shares.
[1] Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).
Morgan A. Davis, Susan Reagan Gittes, Gordon Moodie, Maeve O’Connor, Zachary H. Saltzman, Shannon Rose Selden are Companions and Erik J. Andrén and David J. Hotelling are Associates at Debevoise & Plimpton LLP. This submit first appeared on the agency’s weblog. This publication is for basic info functions solely. It isn’t meant to supply, neither is it for use as, an alternative to authorized recommendation. In some jurisdictions it could be thought of legal professional promoting.
The views, opinions and positions expressed inside all posts are these of the creator(s) alone and don’t signify these of the Program on Company Compliance and Enforcement (PCCE) or of the New York College Faculty of Regulation. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this website and won’t be liable any errors, omissions or representations. The copyright of this content material belongs to the creator(s) and any legal responsibility close to infringement of mental property rights stays with the creator(s).
by Morgan A. Davis, Susan Reagan Gittes, Gordon Moodie, Maeve O’Connor, Zachary H. Saltzman, Shannon Rose Selden, Erik J. Andrén, and David J. Hotelling
From left to proper: Morgan A. Davis, Susan Reagan Gittes, Gordon Moodie, Maeve O’Connor, Zachary H. Saltzman, Shannon Rose Selden, Erik J. Andrén, David J. Hotelling (pictures courtesy of Debevoise & Plimpton)
In opposition to the backdrop of a number of high-profile company departures from Delaware and chatter about doable future departures, on March 25, 2025, Delaware Governor Matt Meyer signed into regulation S.B. 21, which amends the Delaware Basic Company Regulation to supply better readability as to the therapy of transactions involving conflicted administrators or controlling stockholders and to constrain the scope of supplies obtainable pursuant to stockholder books-and-records calls for. The Workplace of the Governor touted the invoice as “aimed toward guaranteeing the state stays the premier house for U.S. and international companies.”
Under we clarify how the regulation: (i) revises and makes extra available secure harbors for conflicted transactions, together with controller transactions; (ii) will increase certainty as to when a stockholder will probably be handled as a controller; and (iii) pulls again a number of the current case regulation expansions with respect to books-and-records entry. These new guidelines will apply in circumstances filed after February 17, 2025.
S.B. 21 incorporates necessary modifications to the secure harbors obtainable for transactions involving conflicted administrators or controlling stockholders and applies to each private and non-private firms. Though previous to S.B. 21, a transaction might be made topic to the enterprise judgment rule (permitting for a excessive chance of pre-discovery dismissal) if sure judge-established procedural protections have been carried out, it was not all the time clear whether or not a courtroom would discover that the necessities for these procedures have been met. In consequence, many transactions meant to obtain enterprise judgment evaluate have been nonetheless examined beneath the “whole equity” normal of evaluate—that means that they have been topic to shut judicial scrutiny that usually precluded pre-discovery dismissal. Therefore, the pre-S.B. 21 state of affairs was one marked by vital uncertainty as as to if a secure harbor would in the end apply.
S.B. 21 codifies and modifies the present secure harbors in ways in which make them much less burdensome and reduces the chance that they are going to be efficiently challenged:
Conflicted Director Transactions
S.B. 21 supplies that the place a number of administrators are conflicted, the transaction won’t be topic to equitable aid or an award of damages if both: (i) the transaction is permitted by a majority of the votes forged by totally knowledgeable disinterested stockholders (pre-S.B. 21, approval by a majority of the votes of all excellent shares held by disinterested stockholders was required), or (ii) the deal is permitted by a majority vote of disinterested administrators, whether or not all the board or a committee thereof, supplied that when greater than half of the administrators are conflicted, the transaction should be permitted by a totally disinterested particular committee of at the very least two administrators.
Controller Transactions (Aside from Take-Personal Offers)
Previous to S.B. 21, offers involving a conflicted controlling stockholder might be protected by the enterprise judgment rule if “MFW”[1] procedural protections have been put in place. MFW required each a totally unbiased particular committee and the favorable vote of a majority of the votes of all excellent shares held by disinterested stockholders. As well as, the deal needed to be conditioned on each MFW necessities earlier than graduation of substantive negotiations (the “ab initio” requirement). The presence of even one conflicted particular committee director was deadly. Plaintiffs thus had a number of routes to plausibly allege {that a} defendant had not complied with MFW, that means all the equity normal of evaluate would apply, making pre-discovery dismissal unlikely.
The trail to dismissal post-S.B. 21 is easier. Now, in non-take-private transactions, a transaction will probably be supplied secure harbor if there’s both a disinterested particular committee or a totally knowledgeable vote of a majority of the votes forged by disinterested stockholders. Moreover, the ab initio requirement was eliminated, with the one remaining timing requirement being that the transaction is made topic to the disinterested stockholder vote on the time of submission for approval to stockholders.
Furthermore, when figuring out whether or not the particular committee consists of disinterested administrators, S.B. 21 requires solely that the board decide in good religion that the members of the particular committee are disinterested such that the protections of the particular committee secure harbor wouldn’t be misplaced merely as a result of it later seems that a number of of the committee members are, the truth is, , so long as a majority of the disinterested administrators approve the transaction. And, until there are “substantial and particularized info” on the contrary, a director assembly inventory trade requirements for independence will probably be presumed to be disinterested as long as the director shouldn’t be a celebration to the transaction in query.
Controller Take-Personal Transactions
For controller take-private transactions, S.B. 21 retains the twin MFW necessities (i.e., each a disinterested particular committee and a majority-of-the-minority stockholder vote), nevertheless it makes acquiring early dismissal simpler and extra predictable by eradicating the ab initio requirement, decreasing the disinterested stockholder voting threshold, and specializing in the board’s dedication that each one members of the particular committee are disinterested (along with the presumption of disinterestedness for administrators assembly nationwide securities trade independence necessities).
Existence of a Controller
Previous to S.B. 21, there was no bright-line minimal shareholding requirement earlier than a minority stockholder might be handled as a controller, and the relevant take a look at was multi-factored and versatile. In consequence, it might be tough to foretell when a stockholder holding lower than 50% of an organization’s voting shares could be handled as a controller.
Now, a stockholder holding lower than one-third of the voting inventory can’t be a controlling stockholder (until that stockholder has a proper to trigger the election of administrators having a majority of the voting energy on the board). As well as, to be thought of a controlling stockholder, a minority stockholder will need to have the “energy functionally equal” to that of a majority stockholder and will need to have the “energy to train managerial authority over the enterprise” of the corporate. S.B. 21 additionally eliminates the idea of “transactional management”—i.e., the idea {that a} stockholder not in any other case a controller may nonetheless be deemed a controller attributable to having vital affect with respect to the precise transaction being challenged.
Disinterested Administrators
Earlier than S.B. 21, some current Delaware judicial opinions had taken a broad view of the circumstances that might give a director a disabling battle. S.B. 21 supplies outlined phrases and presumptions that govern whether or not a director is taken into account , together with: (i) outlined phrases setting out what pursuits and relationships are thought of “materials” and (ii) as famous above, making a presumption of disinterestedness (with respect to acts or transactions to which the director shouldn’t be a celebration) based mostly on a dedication of director independence for nationwide securities trade functions.
Pre-S.B. 21, some Delaware courts had ordered firms to supply administrators’ emails and textual content messages in response to stockholder books-and-records calls for pursuant to Part 220. These choices considerably elevated the fabric obtainable to plaintiffs, resulting in expansive pre-suit discovery. The obtained info was then usually utilized in an effort to assist allegations that the events didn’t adjust to the necessities for procedural protections that may end in enterprise judgment evaluate or a shift to plaintiffs of the burden of proof.
Publish-S.B. 21, the supplies obtainable pursuant to books-and-records calls for are extra narrowly circumscribed exterior of sure particular exceptions. Though plaintiffs nonetheless have the fitting to entry a reasonably complete checklist of supplies, that checklist doesn’t embrace digital communications (apart from a narrowly outlined set of such communications to stockholders).
S.B. 21 ought to make dealmaking extra environment friendly by offering a extra predictable path to avoiding protracted deal litigation. However this regulation certainly not spells the top of stockholder litigation over conflicted and controller transactions.
First, the entire procedural protections in S.B. 21 require that disinterested administrators and stockholders (as relevant) be totally knowledgeable. Traditionally, Delaware courts have scrutinized whether or not proxy statements or different disclosures the truth is resulted in a totally knowledgeable vote. We anticipate that Delaware plaintiffs will proceed to depend on that physique of case regulation to argue that the procedural protections have been ineffective as a result of stockholders weren’t totally knowledgeable or the board was not totally knowledgeable when it was figuring out that the members of the particular committee have been disinterested.
Second, S.B. 21 continues to deal with as a controller transaction any deal through which a controller “receives a monetary or different profit not shared with the company’s stockholders.” The time period “different profit” shouldn’t be outlined, and we anticipate plaintiffs to argue that the time period encompasses all method of non-financial advantages. Thus, whereas the universe of controllers could have shrunk, the variety of transactions involving a controller which might be challenged could develop.
Third, S.B. 21 leaves in place the idea of a “management group” and does little to slender that time period. We are able to anticipate plaintiffs to give attention to transactions involving two or extra non-controlling stockholders that collectively have over one-third of voting shares.
[1] Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).
Morgan A. Davis, Susan Reagan Gittes, Gordon Moodie, Maeve O’Connor, Zachary H. Saltzman, Shannon Rose Selden are Companions and Erik J. Andrén and David J. Hotelling are Associates at Debevoise & Plimpton LLP. This submit first appeared on the agency’s weblog. This publication is for basic info functions solely. It isn’t meant to supply, neither is it for use as, an alternative to authorized recommendation. In some jurisdictions it could be thought of legal professional promoting.
The views, opinions and positions expressed inside all posts are these of the creator(s) alone and don’t signify these of the Program on Company Compliance and Enforcement (PCCE) or of the New York College Faculty of Regulation. PCCE makes no representations as to the accuracy, completeness and validity or any statements made on this website and won’t be liable any errors, omissions or representations. The copyright of this content material belongs to the creator(s) and any legal responsibility close to infringement of mental property rights stays with the creator(s).
