Delaware enacts significant amendments to its corporation law

Key points:

• Sec. 144 of the Delaware corporation law is amended to provide safe harbors for transactions involving interested directors and officers and controlling stockholders.
• Sec. 220 of the Delaware corporation law is amended to list the books and records subject to a stockholder inspection and to require that the inspection demand be made in good faith and for a proper purpose.

On March 25, 2025, Delaware’s governor Meyer signed Senate Bill 21, a bill enacting amendments to Secs. 144 and 220 of Delaware’s General Corporation Law. This article describes some of the key changes made by S.B. 21, particularly regarding the “safe harbors” of Sec. 144 and the books and records stockholders can inspect and the conditions they must meet to inspect those books and records, as provided in amended Sec. 220. However, the amendments contain many details not summarized here. For full details please refer to the full text of Senate Bill 21.

What is Sec. 144 of the GCL?

Section 144 provides “safe harbor” procedures for acts or transactions involving interested directors and officers in which one or more directors or officers have interests or relationships that might render them interested or not independent with respect to the act or transaction. It also provides a safe harbor procedure arising from transactions involving controlling stockholders. The safe harbor for controlling stockholders is new. If the procedures are followed, the act or transaction cannot be the subject of equitable relief or give rise to a damage award against the director, officer, or controlling stockholder.

Sec. 144, as amended, has three separate safe harbor provisions. Sec. 144(a) deals with interested directors and officers. Sec. 144(b) with controlling stockholders in transactions other than going private transactions, and Sec. 144(c) with controlling stockholders in going private transactions.

Sec. 144 (a) - Acts or transactions involving interested directors or officers

Sec. 144(a) is amended to provide that an act or transaction involving the corporation and one or more of its directors or officers or an organization in which the director or officer has a financial interest may not be the subject of equitable relief or give rise to a damage award against a director or officer if:

1. The material facts as to the director’s or officer’s relationship or interest are disclosed or known to all members of the board of directors or a committee of the board, and the board or committee in good faith and without gross negligence authorizes the act or transaction. If a majority of the directors are not disinterested, the act or transaction must be approved (or recommended for approval) by a board committee consisting of at least two directors, each of whom the board determined were disinterested; or
2. The act or transaction was approved or ratified by an informed, uncoerced, affirmative vote of a majority of the disinterested stockholders; or
3. The act or transaction is fair to the corporation and its stockholders.

Sec. 144 (b) - Transactions involving controlling stockholders (other than a going private transaction)

A new Sec. 144(b) is added to provide that a controlling stockholder transaction (other than any going private transaction), may not be the subject of equitable relief or give rise to a damage award against a director, officer, or controlling stockholder or member of a control group by reason of a claim based on a breach of fiduciary duty if:

1. The material facts of the transaction are disclosed or known to all members of a committee of the board that the board has expressly delegated the authority to negotiate, oversee the negotiations of, or reject the transaction, and the transaction is approved or recommended for approval in good faith and without gross negligence by a majority of the disinterested directors on the committee; provided the committee consists of at least two directors the board has determined to be disinterested; or
2. The transaction is conditioned, at the time it is submitted to the stockholders, on the approval or ratification by disinterested stockholders, and the transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the disinterested stockholders; or
3. The transaction is fair to the corporation and its stockholders.

Sec. 144 (c) - Transactions involving controlling stockholders (constituting a going private transaction)

A new Sec. 144(c) is added to provide that a controlling stockholder transaction constituting a going private transaction may not be the subject of equitable relief or give rise to a damage award against a director, officer, or controlling stockholder or member of a control group by reason of a claim based on a breach of fiduciary duty if:

1. The transaction is approved or recommended for approval in the manner described above in both Sec. 144(b)(1) and (2); or
2. The transaction is fair to the corporation and its stockholders.

Other amendments to Sec. 144

S.B. 21 amends Sec. 144 in a number of ways beyond the safe harbors of subsections (a), (b) and (c), including the following:

• Providing that a controlling stockholder or member of a control group cannot be held liable to the corporation or its stockholders for monetary damages for a breach of the duty of care.
• Defining a disinterested director as a director who is not a party to the act or transaction, who does not have a material interest in the act or transaction, and who does not have a material relationship with a person who has a material interest in the act or transaction.
• Creating a presumption (which can only be overcome with a heightened pleading standard) that a director is independent if it has been determined that the director is independent under the rules of the national securities exchange where the corporation’s shares are traded.
• Defining a controlling stockholder as a person who either owns or controls a majority of the voting power of outstanding stock, has a right to cause the election of a majority of the board, or has the power functionally equivalent to a majority stockholder and holds at least one-third of the voting power of outstanding stock.

What is Sec. 220 of the GCL?

Sec. 220 deals with the inspection of books and records. S.B. 21 defines the materials that a stockholder may demand to inspect pursuant to a request for books and records under Sec. 220. It also sets forth certain conditions that a stockholder must satisfy in order to make an inspection of books and records. Both the defining of materials and the conditions for inspection are new.

What books and records are subject to inspection?

Sec. 220(a) is amended to define “books and records” as the following:

1. The certificate of incorporation
2. The bylaws
3. Minutes of all meetings of stockholders and the signed consents evidencing all action taken without a meeting, for the 3 years preceding the inspection demand
4. All written or electronic communications to stockholders generally within the past 3 years preceding the demand
5. Minutes of any meeting of the board of directors or board committee and records of any action of the board of directors or committee
6. Materials provided to the board of directors or any board committee in connection with actions taken by the board of directors or committee
7. Annual financial statements of the corporation for the 3 years preceding the date of the demand
8. Any agreement entered into under Sec. 122(18) of the GCL. (Agreements giving stockholders governance rights normally reserved for the directors without the delegation of rights being set forth in the certificate of incorporation).
9. Director and officer independence questionnaires

What conditions have to be met for a stockholder to inspect books and records?

Sec. 220(b) is amended to provide that a stockholder may inspect and copy the corporation’s books and records only if all of the following apply:

1. The stockholder’s demand is made in good faith and for a proper purpose,
2. The stockholder’s demand describes with reasonable particularity the stockholder’s purpose and the books and records the stockholder seeks to inspect, and
3. The books and records sought are specifically related to the stockholder’s purpose

Proper purpose is defined as a purpose reasonably related to a stockholder’s interest as a stockholder.

Other amendments to Sec. 220

S.B. 21 amends Sec. 220 in a number of other ways including the following:

• Providing that the corporation may impose reasonable restrictions on the confidentiality, use, or distribution of the books and records, demand that the stockholder agree that the books and records be deemed incorporated by reference in any complaint filed, and redact certain information not relevant to the purpose of the inspection.
• The Court of Chancery, in an action brought by a stockholder to inspect books and records, cannot order an inspection of any books and records other than those listed in Sec. 220(a). (Subject to certain limited exceptions such as if the corporation does not have minutes or financial statements)

Effective date and applicability of the amendments

The amendments to Secs. 144 and 220 take effect on the enactment of S.B. 21 (March 25, 2025) and apply to all acts and transactions, whether occurring before, on, or after enactment, except they do not apply to or affect any action or proceeding commenced in a court of competent jurisdiction that is completed or pending, or any demand to inspect books and records made, on or before February 17, 2025.

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