Delaware General Corporation Law 2025 Amendments: Interested Person/Control Person Transactions and Inspection Rights

 The State of Delaware, home to a majority of the so-called “Fortune 500” corporations, has been the subject of a variety of criticisms relating to corporate governance, director and officer litigation risk, controlling stockholder exposure, franchise taxes, and more. The criticisms, coupled with recent reincorporation migrations away from Delaware by several significant Delaware corporations to jurisdictions deemed to be more hospitable (such as Nevada, Texas, and Maryland) has spawned a “reincorporation from Delaware movement” referred to in the media and press as “DExits”, which has been perceived as a genuine threat to Delaware’s long-standing reign of incorporation dominance. As a result, after an exceedingly short legislative process, on March 25, 2025, Delaware’s newly elected Governor executed into law sweeping changes affecting the authorization and approval of interested person transactions, controlling stockholder transactions, and “going private transactions”. These changes create express statutory safe harbors designed to insulate such transactions from stockholder challenge, and express statutory liability exculpation protections designed to reduce and dissuade interested officer, director and control stockholder litigation, as well as a flurry of other modifications to stockholder statutory inspection rights.  The newly enacted amendments are to Title 8 of the Delaware Code, §144 (“Interested  Directors and Officers; Controlling Stockholder Transactions;  Quorum”) and §220 (“Inspection Corporate Books and Records”). The amendments are, in many respects, a rollback of existing Delaware common law, most notably the well-trodden “MFW” doctrine reflected in In re MFW Shareholders Litigation, Kahn v. M & F Worldwide Corp. (88 A. 3d 635 (Del. 2014)) and its progeny, which set forth the mechanics for approval of controlling stockholder and interested person transactions. The amendments have generally been characterized as an alignment by the Delaware legislature of Delaware’s existing statutory and common law frameworks with the Delaware legislature’s longstanding philosophy as to corporate governance and broad deference in favor of disinterested, independent board judgments. 

§144 Amendments: Interested  Directors and Officers; Controlling Stockholder Transactions; Quorum

The §144 amendments provide for a variety of safe harbors relating to approval and adoption of interested person transactions. The safe harbors and their procedural conditions are segregated based upon the nature of the interested party and, in certain narrow circumstances, the nature of the transaction at issue. Except as set forth in the amended statute, the statutory safe harbors are applicable to all forms of interested person acts and transactions, regardless of nature.

A.    Safe Harbor: Officer or Director Transactions

Under revised §144(a), acts and transactions solely involving corporate directors or officers are eligible for safe harbor protections if, as part of the approval process, full disclosure of all material facts, including those giving rise to the conflict or potential conflict are disclosed to the board or its subcommittee. The transactions must be (x) approved or recommended by (i) a majority of the disinterested directors serving on a board of directors comprised of a majority of disinterested directors, or (ii) a majority of disinterested directors serving on a subcommittee of the board consisting of at least 2 disinterested directors, or (y) approved or ratified in an informed and uncoerced manner by a majority of the votes cast by the disinterested stockholders entitled to vote on such matters. Notably, the subcommittee of the board need not be comprised entirely of disinterested members, a significant rollback of MFW and its progeny, and the approvals are effective regardless of whether the number of disinterested directors constitutes a quorum of the full board.

As to the determination of disinterested and independence status, the amendments provide for a presumption. In the case of a corporation with a class of equity listed on a national securities exchange, the criteria for director independence and disinterestedness defer to the applicable rules of such exchange. Although such determination is deemed a presumption, it is a “heightened” presumption that may only be rebutted by “substantial and particularized facts”, which affords greater transaction certainty to boards and interested parties, reducing the risks of subsequent challenge. In other instances, a disinterested director is defined as a director who is not a party to the transaction at issue and does not have a material interest therein or a material relationship with a person that has a material interest therein. Lastly, and certainly of importance to private equity sponsors and other institutional investors, the amendments clarify that a director who is not a party to the transaction at issue will not be disqualified as a disinterested director merely because the director was nominated and elected by a person that has a material interest in the transaction at issue.

B.    Safe Harbor: Controlling Stockholder / Control Group Transactions

A statutory bright line definition of “controlling stockholder” has been added. It is defined as any person who, together with their affiliates and associates, either: (a) owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote in the election of directors or in the election of directors who have a majority in voting power; (b) has the right, by contract or otherwise, to cause the election of nominees who are selected at their discretion and who constitute either a majority of the members of the board of directors or directors entitled to cast a majority in voting power; or (c) has the power that is “functionally equivalent” to that of a stockholder who owns or controls a majority in voting power entitled to vote in the election of directors by virtue of such stockholder owning or controlling at least one-third in voting power of the outstanding stock of the corporation entitled to vote in the election of directors and has the power to exercise managerial authority over the business and affairs of the corporation. A “control group” has been defined to mean what one would imagine--two or more persons who are not themselves “controlling stockholders” but who, by virtue of an agreement, arrangement, or understanding between or among such persons, collectively constitute a controlling stockholder. 

Notably, absent actual majority ownership and control, the amendment provides for a bright line ownership floor of at least 33 and 1/3 percent of voting power prior to the establishment of control person status. Of pertinence, this threshold is significantly higher than prior judicial determinations under Delaware law, where control person status was found to exist at significantly lower ownership percentages.

The conditional procedures for the availability of a controlling stockholder/control group transaction safe harbor are set forth alternatively, turning on whether or not the controlling stockholder/control group transaction at issue is a “going private transaction”. Determination of whether a controlling stockholder/control group transaction is a “going private transaction” is also set forth in the alternative. For those corporations that have a class of equity securities subject to the requirements of Securities Exchange Act of 1934 §12(g) or §15(d), or have a class of equity securities that is otherwise listed for trading on a national securities exchange, a “going private transaction” is defined as a “Rule 13e-3” transaction as promulgated under the Exchange Act. For any other corporation to which the preceding definition does not apply, a “going private transaction” is defined as any controlling stockholder/control group transaction, including a merger, recapitalization, share purchase, consolidation, amendment to the certificate of incorporation, tender or exchange offer, conversion, transfer, domestication or continuance, whereby all or substantially all of the shares of the corporation’s capital stock held by the disinterested stockholders (excluding those held by the controlling stockholder or control group) are cancelled, converted, purchased, or otherwise acquired or cease to be outstanding.

1. Safe Harbor: Non-Going Private Controlling Stockholder/Control Group Transactions: For those transactions that do not constitute a “going private transaction”, statutory safe harbor protections may apply if the transaction (x) was negotiated and approved or recommended by a majority of the disinterested directors then serving on a board committee delegated with authority to negotiate or oversee the negotiation of, and the power to reject, such transaction, or (y) is conditioned upon the approval or ratification by disinterested stockholders and is approved or ratified in an informed and uncoerced manner by a majority of the votes cast by the disinterested stockholders.
   
   Notably, this amended standard is a significant relaxation of existing law (MFW), which previously required dual procedural protections--both a disinterested board vote and a disinterested stockholder vote--and a softening of the “disinterested stockholder” approval calculation from a true “majority of minority” to an easier-to-attain majority of “votes cast” calculus. Further, the stage at which a deal must be expressly subjected to a stockholder consent condition has been relaxed, no longer requiring the MFW “ab initio” express requirement, whereby a sanitizing stockholder approval condition had to exist at the commencement of the transaction at issue.
2. Safe Harbor: Going Private Controlling Stockholder/Control Group Transactions: For those controlling stockholder transactions that do constitute a “going private transaction”, statutory safe harbor protections may apply if both of the approval conditions applicable to a non-“going private transaction” have been satisfied, namely, (x) the transaction was negotiated and approved or recommended, as applicable, by a majority of the disinterested directors then serving on a board committee and (y) the transaction is conditioned upon the approval or ratification by disinterested stockholders and is approved or ratified in an informed and uncoerced manner by a vote of a majority of the votes cast by the disinterested stockholders.
   
   As noted above, controlling stockholder “going private transactions” are the only controller transactions that retain the original MFW “dual procedural protections” requirement of both a disinterested board and disinterested stockholder vote, as modified in the manner set forth above. 

C.    Interested Person, Control Person, Control Group Liability Exculpation

The §144 amendments make clear that the revised statute is intended to provide for broad exculpation in favor of controllers, officers, and directors, and specifically provides that an interested person or controlling stockholder transaction that falls within the safe harbors set forth above, and is approved in the manner described above, or is otherwise fair to both the corporation and its stockholders, will not be the subject of equitable relief, or give rise to an award of damages, against a director, officer, controlling stockholder, or member of a control group by reason of a claim based on a breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group, if the statutory safe harbors were opted into in accordance with the applicable approval requirements and procedures described above. Such exculpation extends to “duty of care” claims and the statute makes clear that it does not extend to  duty of loyalty claims or acts or omissions entered into without good faith, or for which the person seeking exculpation derived an improper personal benefit.  

D.             Safe Harbor Alternatives

Lastly, the new safe harbors are not exclusive and are not a repudiation of existing Delaware common law. The amended statutes provide that in addition to the safe harbors set forth above, amended §144 preserves existing law, allowing for approval of interested person transactions and controlling stockholder transactions upon a showing that the transaction at issue was otherwise fair to both the corporation and its stockholders. Such determination would no doubt be based upon existing common law such as MFW and its progeny, and other common law (“total fairness”) doctrines. 

§220 Amendments: Inspection of Books and Records

Section 2 of the new law amends §220 of Title 8 to largely create greater clarity as to the scope and nature of stockholder statutory inspection rights. Of pertinence, the amendments define with specificity what materials constitute a corporation’s “books and records” and as such serve as a limitation on what materials a stockholder may demand. In particular, the amendment defines “books and records” generally as the corporation’s certificate of incorporation and certain related documents, the corporation’s bylaws and certain related documents, stockholder meeting minutes and stockholder written consents, in each case for the three years preceding the date of demand, stockholder communications for the three years preceding the date of the demand, board of director and subcommittee minutes, board of director presentation materials provided in connection with actions taken, annual financial statements for the three years preceding the date of demand, certain agreements with stockholders, and director and officer independence questionnaires. Of pertinence, omitted from the definition is board member communications such as notes, emails, and the like.

The amendments further provide that a corporation may impose reasonable restrictions and conditions that a stockholder must satisfy in order to perfect their right to inspect books and records, including restrictions as to confidentiality, use, and distribution of books and records and requiring stockholder agreement that any information included in the corporation’s books and records is deemed incorporated by reference in any complaint filed by or at the direction of the stockholder in relation to the subject matter referenced in the demand.  In addition, corporations are now statutorily permitted to redact portions of books and records to the extent that such portions are not specifically related to the stockholder’s purpose. 

Consistent with existing law, a stockholder demand must be made in good faith and for a proper purpose, must describe with particularity the stockholder’s purpose and the specific books and records sought, and justify how the information so sought relates to the stockholder’s purpose.

E.    Amendment Effective Time

Revised §144 and §220 are effective as of March 25, 2025, and apply retroactively to all acts and transactions, whether occurring before, on, or after March 25, 2025, provided that the amendments will not retroactively apply to or affect any action or proceeding that is completed or pending, nor apply to any demand to inspect books and records made on or before February 17, 2025. 

F.    Final Thoughts

As it relates to crucial interested party transactions that are often the subject of protracted, and at times frivolous, litigation, the revisions are designed to ensure deference to disinterested, independent board decision-making, resulting in greater predictability, deal certainty and judicial economy, while curbing frivolous stockholder litigation and other forms of improper stockholder activism.