Key Takeaways
The Amendments expand safe harbor protection to controlling stockholders, directors and officers against claims challenging transactions involving a conflict of interest. They also narrow the test for being a controlling stockholder, an important test that can dictate the result of a lawsuit. Further, the Amendments make it easier to ratify initially flawed transactions and adopt a heightened presumption that Directors who meet exchange listing standards are disinterested. Next, the Amendments narrow the scope of a stockholder’s right to inspect books and records by limiting access to internal emails and other informal documents to compelling cases. The Amendments are a win for businesses, but still leave many opportunities to challenge conflicted transactions in Court. First, the Amendments significantly expand the Delaware General Corporation Law (“DGCL”) § 144 safe harbors for controlling stockholder transactions (“Controller Transactions”). Controller Transactions (except for a Going Private Transaction like a cash-out merger) are valid so long as (1) the transaction’s material facts are disclosed or known by a board of directors committee with express authority to negotiate and reject the transaction, which approves it in good faith and without gross negligence; or (2) the transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of votes by disinterested stockholders, as a condition at the time of voting to the transaction having effect. 8 Del. C. § 144(c). A Controller Transaction is also valid if it is entirely fair to minority stockholders. Id. This is the most significant and controversial part of the Amendments, because it overturns Delaware cases holding that a Controller Transaction cannot be cleansed by a vote to ratify the transaction after-the-fact by a majority of disinterested stockholders. See Our Alert re Tornetta v. Musk, 326 A.3d 12-3 (Del. Ch. 2024).[1] In Tornetta v. Musk, the Court applied this now-overturned case law to invalidate Elon Musk’s $55 billion pay package, even after minority stockholders ratified it, which caused businesses like Mark Zuckerberg’s Meta to seek to change the law through legislation. Before the Amendments, ratification of a Controller Going Private Transaction had merely shifted the burden of proving the transaction’s entire fairness, Delaware corporate law’s most difficult standard. Because the heightened legal standard applied, stockholder ratification had very little effect on whether such a transaction would be upheld. But under the Amendments, such ratification makes a Controller Transaction (except a Going Private Transaction) presumptively valid. Second, similarly, the Amendments provide that Controller Going Private Transactions (like cash-out mergers) are valid if both conditions for other Controller Transactions are met: (1) the transaction’s material facts are disclosed or known by a board of directors committee with express authority to negotiate and reject the transaction, which approves in good faith and without gross negligence; and (2) the transaction is approved or ratified by an informed, uncoerced, affirmative vote of a majority of votes by disinterested stockholders, as a condition at the time of voting. 8 Del. C. § 144(b). A Controller Going Private Transaction is also independently valid if it is entirely fair to minority stockholders. Third, the Amendments narrow the test for being a Controlling Stockholder. 8 Del. C. §144(e)(2). A Controlling Stockholder is now a person that either (i) controls a majority of voting power entitled to vote for directors, (ii) controls the election of directors holding a majority of board voting power, or (iii) controls at least one-third of voting power and the power to exercise managerial authority. This is a major change from prior Delaware case law, which held that a person can be a controlling stockholder based on “transaction-specific” control from as low as “less than 15%” of stock ownership, coupled with management of day-to-day operations. Tornetta v. Musk, 310 A.3d 430, 499-500 & n. 558 (Del. Ch. 2024). Indeed, Musk held that Elon Musk’s “21.9%” stake in Tesla made him a controlling stockholder. This will no longer be the case. Fourth, the Amendments establish a heightened presumption of independence for directors whom a board of directors determines is independent under the rules of a national stock exchange. 8 Del. C. § 144(d)(2).This presumption can only be rebutted by “substantial and particularized facts that such director has a material interest in” a transaction or has “a material relationship” with a person having a material interest in a transaction. This increases the Delaware law impact of qualifying as independent under stock exchange rules and makes it harder to plead that a Director has a material conflict of interest. Finally, the Amendments narrow stockholder’s books and records right to inspect a Corporation’s books and records under DGCL § 220 by limiting access to internal emails and similar informal corporate documents. Standard books and records for inspection are defined as:
To get more documents, a stockholder must show a compelling need for them, and prove by clear and convincing evidence that such documents are necessary and essential. This is a high bar. In sum, the Amendments provide several material changes to Delaware law that will benefit major stockholders, directors and officers in corporate governance disputes. On the other hand, the Amendments still leave many important opportunities for minority stockholders and plaintiffs to attack transactions involving conflicts of interest. The Board of Directors may not have received full disclosure of material facts; or may have approved a transaction in bad faith, with gross negligence, or with improper involvement of a conflicted fiduciary. A stockholders’ vote to approve or ratify a transaction may not have been fully informed or uncoerced (as in Tornetta v. Musk), particularly in omitting or misstating the transaction details. Whether you are a minority or major stockholder, director or officer, now is the time to contact us to discuss how these major Delaware Amendments may impact any case or transaction. Sadis & Goldberg’s litigators have deep experience representing stockholders and companies in corporate disputes. If you have any questions about this article or any other shareholder rights issue, please contact Co-Heads of Litigation Douglas Hirsch (dhirsch@sadis.com) and Sam Lieberman (slieberman@sadis.com), or Frank Restagno (frestagno@sadis.com), James Ancone (jancone@sadis.com), or Scott Ferrier (sferrier@sadis.com). [1] https://www.sadis.com/insights/no-backsies-tornetta-v-musk-holds-that-fiduciary-duty-breaches-in-a-conflicted-controlling-stockholder-transaction-are-not-fixed-by-a-shareholder-vote. See also In re Match Grp., Inc. Derivative Litig., 315 A.3d 446 (Del. 2024) (“Match”); Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”). |