August 21, 2025

Delaware Legislature Rebalances Corporate Law

A recent legislative development, Delaware’s enactment of Senate Bill 21 (SB 21), has the potential to affect the D&O landscape, if it can escape an early attack on its constitutionality.[1] Among other things, SB 21 amends Delaware General Corporation Law (DGCL) §144.[2] The Delaware legislature passed SB 21 to address concerns that other states, such as Nevada and Texas, were becoming more attractive to businesses as states of incorporation. These changes create challenges for stockholders exercising their rights relative to claims involving controlling stockholders, particularly relating to purportedly conflicted transactions. A close examination, however, reveals that even after the bill’s passage, opportunities may still remain for the plaintiff’s bar to mount meaningful challenges. Corporations should be aware of these opportunities and manage their D&O coverage accordingly.

Delaware has been the home to America’s businesses

SB 21 arises from concerns over the recent departures of several high-profile companies, such as Tesla, Dropbox and Trade Desk, from Delaware to Texas and Nevada. Other Delaware-based corporations, such as Meta Platforms and Pershing Square, have also disclosed that they intend to recharter outside Delaware, or are considering it.

Historically, Delaware has long been home to America’s businesses. According to the Delaware Division of Corporations, as of 2023, over two million entities were incorporated in Delaware, and approximately two-thirds of Fortune 500 companies called the state home.[3] In the same year, around 298,000 entities were formed in Delaware, and close to 80% of US initial public offerings were registered to the state.[4] Delaware generated approximately $2 billion in 2023 revenue through corporate taxes and fees, illustrating the financial importance of Delaware-domiciled businesses to the state.[5]

Delaware’s long history as a business-friendly forum helped establish the Delaware Court of Chancery as the preeminent and most influential corporate law court in the country. The Court of Chancery has historically been a stable and predictable forum to resolve business disputes, partly due to its large body of case law.

However, this predictability has been called into question following several rulings that, according to some observers, have shifted the balance of corporate law to favor shareholders and made Nevada and Texas appear more attractive as states of incorporation. The Delaware legislature passed SB 21 to rebalance the scales of Delaware corporate law by providing more predictability to controlling stockholder transactions.

Shareholder-friendly rulings contributed to Delaware’s concerns

The exit of Delaware corporations to Nevada and Texas, at least in part, was a response to a series of shareholder-friendly rulings that began in January 2024 when the Court of Chancery issued its ruling in Tornetta v. Musk.[6] The Court of Chancery found that Elon Musk, despite holding only a 21.9% equity stake and lacking a mathematical voting majority, was a controller at Tesla because he exercised actual control over the approval process of his compensation package.[7] This led to the Court of Chancery applying the plaintiff-friendly “entire fairness” standard of review which, on a high level, shifts the burden of proof to the defendant, requiring them to prove the fairness of the transaction.[8]

Ultimately, this application of the entire fairness standard resulted in the Court of Chancery striking down Musk’s compensation package, valued at up to $55.8 billion. The decision caused Musk to become an outspoken critic of Delaware,[9] and eventually led to the rechartering of both Tesla and SpaceX in Texas.

In February 2024, on the heels of the Musk decision, came the Court of Chancery’s decision in Maffei v. Palkon. The matter involved a review of Tripadvisor’s director-, officer- and shareholder- approved decision to recharter in Nevada.[10] The Court of Chancery found Nevada law provided greater fiduciary protections and thus, that rechartering a Delaware corporation in Nevada may have provided a material non-ratable benefit to the controlling stockholder.[11] Once again, this led the Court of Chancery to apply the entire fairness standard of review to the transaction.

The Delaware Supreme Court eventually overruled the Court of Chancery and held that the more corporate-friendly “business judgment” standard of review should have been applied to the transaction.[12] Yet even though the Court of Chancery was reversed, the effect of its initial ruling caused Delaware corporations to take notice and consider whether Nevada, Texas or elsewhere might provide a warmer business environment.

Finally, in April 2024, the Delaware Supreme Court issued its decision in In Re Match Group, Inc. Derivative Litigation, which reversed a corporate-friendly ruling issued by the Court of Chancery.[13] The matter involved a reverse spinoff of Match Group from its controlling stockholder IAC/InterActiveCorp. The Court of Chancery concluded the spinoff could satisfy the requirements established by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp. (MFW), if among other things a majority of independent directors on the Special Committee approved the transaction.[14] The Delaware Supreme Court disagreed, holding that the Special Committee had to be entirely independent—and the presence of a single conflicted director on the Special Committee meant the MFW requirements could not be met.[15] This resulted in the more exacting entire fairness standard of review being applied to the transaction.

These early 2024 shareholder-friendly rulings caused some to fear that Delaware courts were no longer predictable and balanced. Each of the rulings, at least initially, resulted in the application of the entire fairness standard, which as noted is a rigorous standard for a defendant to meet. It may result in the denial of a motion to dismiss, and can be a fatal blow to the overall defense. By passing SB 21, the Delaware legislature attempted to provide more predictability around when directors, officers and controlling stockholders can apply the business judgment standard to certain transactions.

SB 21 makes corporate-friendly changes to DGCL §144

SB 21 amends DGCL §144 by lowering the criteria necessary to approve a conflicted or controlled transaction by enhancing legal protections for directors, officers and controlling stockholders. It accomplishes this in three ways: (i) introducing safe harbor provisions; (ii) defining what controlling stockholder means; and (iii) setting criteria for director independence.

Safe harbor: The DGCL §144 amendments provide three safe harbor provisions. A common feature of each of these is the requirement that all material facts regarding the transaction, and any interest in the transaction of a director, officer or controlling stockholder, must be fully disclosed or known to those voting to approve the transaction. The type of transaction will dictate the criteria that must be met to invoke the safe harbor protections. A director, officer or controlling stockholder should not be liable for equitable relief or an award of damages under the following:

§144( a ) applies to transactions when the director or officer is a party to the transaction or otherwise has a financial interest. It requires the transaction be approved by a majority of disinterested directors serving on the board or committee, or that the transaction be approved or ratified by a majority of votes cast by disinterested shareholders.

§144( b ) applies to controlling stockholder transactions that do not constitute a “go private” transaction. It requires the transaction to be approved by a majority of disinterested directors serving on a committee that consists of two or more directors who have been determined by the board to be disinterested and has been delegated express authority to negotiate and reject the transaction, or that the transaction is approved or ratified by a majority of votes cast by disinterested shareholders.

§144( c ) applies to controlling stockholder transactions that constitute a “go private” transaction. It requires the transaction to be approved by a majority of disinterested directors serving on a committee that consists of two or more directors who have been determined by the board to be disinterested, and that has been delegated express authority to negotiate and reject the transaction, and that the transaction is approved by a majority of votes cast by disinterested shareholders.

Establishing these necessary safe harbor elements can help protect the transaction from being reviewed under the onerous entire fairness standard of review and instead likely result in the application of the business judgment rule. Directors, officers and controlling stockholders can also seek safe harbor by illustrating how the transaction was fair to the corporation and the corporation’s stockholders. It should be noted, however, that doing so may result in the application of the more exacting entire fairness standard of review, potentially subjecting the transaction to greater judicial scrutiny.

Controlling stockholder: The DGCL §144 amendments define “controlling stockholder” and on the whole raise the bar on who constitutes a controller. The following constitute a controlling stockholder:

§144( e )( 2 )( a ) – a person who owns or controls a mathematical majority of the voting power of outstanding stock of a corporation.

§144( e )( 2 )( b ) – a person who has the right, by contract or otherwise, to cause the election of nominees selected at the discretion of such person, who will either constitute a majority of the board of directors or will be entitled to cast a majority of the votes of all directors.

§144( e )( 2 )( c ) – a person who has power functionally equivalent to a stockholder that owns or controls a majority in voting power, by owning or controlling at least one-third in voting power and having power to exercise managerial authority over the business affairs of the corporation.

Prior to the DGCL §144 amendments, it was difficult to determine when a stockholder with less than a mathematical majority would be considered a corporate controller. The amendments provide more clarity and predictability around who will be considered a controlling stockholder, and in turn, when a transaction will be deemed a controlling stockholder transaction.

Director independence: The DGCL §144 amendments also increase clarity and predictability by defining what constitutes a “disinterested director.” Pursuant to the language in the amendments. director independence is deemed satisfied by establishing that the director was not a party to the transaction, and that the director had neither a material interest in the transaction nor a material relationship with any person that had a material interest in the transaction. The amendments go a step farther and create a presumption of director independence, if the board of directors of a publicly traded corporation determines a director is independent under the rules promulgated by the applicable exchange. This presumption may be rebutted by demonstrating that the director had an interest or relationship that was reasonably expected to impair the director’s objective judgment when participating in the negotiation, authorization or approval of the transaction.

Opportunities remain for the plaintiff’s bar to mount challenges

The DGCL §144 amendments helped restore some balance to Delaware corporate law through enhanced clarity and predictability associated with conflicted and controlling stockholder transactions. The amendments are expected to result in fewer stockholders being classified as controllers and more transactions being evaluated under the corporate-friendly business judgment standard of review. However, litigation involving conflicted and controlling stockholder transactions may not immediately decrease. The amendments still offer an active, assertive plaintiff’s bar significant opportunity to challenge conflicted and controlling stockholder transactions.

For instance, litigation is likely to persist over the materiality of facts, and whether those facts were fully disclosed to the parties approving the deal. Full disclosure of material facts is necessary to invoke any of the safe harbor provisions and, to the extent a shareholder challenging a transaction can demonstrate that material facts were withheld, the result may be the application of the plaintiff-friendly entire fairness standard of review. Controlling stockholder go-private transactions are likely to remain highly litigious, as full disclosure is required to both the board or committee and to the majority of disinterested voting shareholders.

Whether a director is conflicted or interested is also expected to remain a highly litigated issue. A shareholder challenging a transaction may no longer circumvent the application of the business judgment standard by “picking off” a single director. However, the shareholder may still potentially avoid its application by demonstrating that a majority of the voting directors on the board or committee were conflicted or had an interest in the transaction. Proving that most of the voting directors lacked independence is a demanding requirement, but is not insurmountable; it likely becomes easier as the size of the board or committee decreases.

The directors of publicly traded corporations may be presumed independent under certain circumstances. To overcome this presumption, a shareholder challenging the transaction must demonstrate that the director had a material interest in the transaction, or a material relationship to a person with an interest in the transaction. The amendments broadly define an interest or relationship as material if it’s reasonably expected to impair the objectivity of the director’s judgment. This broad definition may likely lead to ongoing litigation over the materiality of a director’s interest or relationship.

Is Senate Bill 21 enough?

Despite the reforms enacted by SB 21, it seems likely that Nevada and Texas will continue to challenge Delaware’s dominance as American corporations’ preferred home, a likelihood that increases should the Delaware Supreme Court find the safe harbor provisions run afoul of the state constitution. Recently, the Nevada legislature proposed the creation of a business court that would have exclusive jurisdiction over disputes involving shareholder rights, mergers and acquisitions, fiduciary duties and other business disputes. Meanwhile, the Texas legislature introduced a bill allowing corporations to adopt a beneficial ownership requirement of up to 3% for shareholders seeking to initiate a derivative lawsuit.

From a business perspective, the key question is whether SB 21’s passage and the corresponding amendments to DGCL §144 will be enough to deter future corporate exits from Delaware to Nevada, Texas and elsewhere. From a D&O insurance perspective, SB 21 is expected to expand the application of the more corporate-friendly business judgment rule to conflicted and controlled transactions, potentially leading to a reduction in related claims over time. However, it should be anticipated that an active and assertive plaintiff’s bar will continue to challenge conflicted and controlled transactions, and may ultimately overcome the perceived corporate benefits of SB 21. For this reason, Delaware corporations should remain focused on carefully evaluating their approval process associated with these types of transactions.

The DGCL §144 amendments rebalance Delaware corporate law, but opportunities remain for the plaintiff’s bar to mount challenges. The outcome of these challenges remains uncertain and will unfold over the coming years.

References
[1]     Rutledge v. Clearway Energy, 2025 WL 1604186 (certifying two questions: (1) does elimination of “equitable relief” or “damages” where safe harbor provisions are satisfied violate the Delaware constitution; and (2) does the retroactive application of the safe harbor provisions to cases that have already “accrued or vested” violate the Delaware constitution.)
[2]    https://legis.delaware.gov/BillDetail/141930
[3]    https://corpfiles.delaware.gov/Annual-Reports/Division-of-Corporations-2023-Annual-Report.pdf
[4]    Id.
[5]    Id.
[6]    Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024).
[7]    Id. at 497-500, 520.
[8]    Id. at 445.
[9]     https://x.com/elonmusk/status/1752455348106166598?lang=en
[10] Maffei v. Palkon, No. 125, 2024, 2025 WL 384054, at *1 (Del. Feb. 4, 2025).
[11] Id. at *1, *9.
[12] Id. at *18, *28.
[13] In Re Match Group, Inc. Derivative Litigation, 315 A.3d 446 (Del. 2024).
[14] Id. at 456; Kahn v. M&F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014) (establishing criteria necessary to apply business judgment standard of review to controlling stockholder transactions).
[15] In Re Match Group, Inc. Derivative Litigation at 473.

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Meet the Author

Alexander Wilder

Director–Executive Liability, Markel

Alexander Wilder is an experienced insurance claims leader with expertise managing high-severity, complex professional liability claims across a broad range of insurance products. He currently oversees a team of senior claims professionals responsible for handling Director & Officers and Financial Institutions claims.