Delaware Enacts Sweeping Changes to the Delaware General Corporation Law
The Delaware Legislature passed, and Delaware Gov. Matt Meyer signed on March 25, 2025, the landmark Senate Bill 21. Senate Bill 21 amends the Delaware General Corporation Law (the "DGCL") in significant ways, with broad ramifications for controller transactions and related litigation.
In short, Senate Bill 21 provides a clear definition for controlling stockholders and a clear roadmap to cleanse conflicts of interest in controller transactions. It does so through codifying a greatly expanded version of the doctrinal cleansing mechanisms set forth in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) ("MFW"), and making those mechanisms available to virtually all controller transactions.
The MFW Case
In MFW, the Delaware Supreme Court affirmed the Court of Chancery's dismissal of a squeeze-out merger on summary judgment under the lenient "business judgment" standard—rather than the onerous "entire fairness" standard. The Court held that a conflicted squeeze-out merger can be "cleansed" where the transaction is conditioned upon a recommendation from a committee of fully informed independent directors and an affirmative stockholder vote of the majority of the minority stockholders, even though the controlling stockholder received a non-ratable benefit.
Since MFW was decided in 2014, companies have patterned other controller transactions on this cleansing mechanism, and MFW has crept to cases concerning other types of controlling stockholder transactions. In 2024, the Delaware Supreme Court expressly approved of "MFW creep," holding that the doctrine applied to all controlling stockholder transactions where the controller obtains a non-ratable benefit. See In re Match Group, Inc. Derivative Litig., 315 A.3d 446 (Del. 2024).
What Senate Bill 21 Does
Senate Bill 21 took MFW several steps beyond that, essentially providing that corporate defendants may cleanse conflicted transactions and avail themselves of the business judgment rule by meeting only one of the MFW requirements. Further, Senate Bill 21 lowers the requirement for a director to be deemed "independent," and lowers the standard for what it means to be "fully informed." These changes provide needed clarity to recent Delaware precedent interpreting the concepts of "independence" and "fully informed."
Senate Bill 21 also revised DGCL Section 220, which provides stockholders the right to seek corporate books and records to investigate wrongdoing. The revised Section 220 raises the threshold legal standard for stockholders to seek books and records and limits the scope and nature of the records that may be obtained.
Takeaways
The new law brings long-awaited clarity and predictability to recent uncertainties around controller transactions under Delaware law, but it is controversial. Critics note perceived undue influence from controlling stockholders leading a "DExit" movement for companies to incorporate in other jurisdictions, following recent high-profile judicial decisions adverse to controllers. Other commentators have called this bill a "nuclear winter" for stockholder litigation, noting that not only will transactions be exceedingly difficult to challenge given the lower standards for controlling shareholders to obtain the less onerous business judgment review, but the heightened standard for prevailing on a books and records request and the limited scope of information obtained will make it harder for a challenger to gather evidence to build a case in the first instance.
However, supporters of the law counter that it brings needed stability, balance, and predictability for transaction planners by merely codifying a doctrine the Delaware Supreme Court intended to enact back in 2014, and clarified in 2024, and that aggrieved stockholders will still have appraisal rights under DGCL Section 262 if concerns about transaction process persist following conflicted transactions.