Posted by Eric S. Klinger-Wilensky, William M. Lafferty, and John P. DiTomo, Morris, Nichols, Arsht & Tunnell LLP, on
Thursday, February 20, 2025
Thirty years ago, our now-retired partner Lew Black released his widely read article, “Why Corporations Choose Delaware.” Describing the legislature’s role in the Delaware corporate franchise, Lew wrote, “[a]s a result of its long experience with corporation law matters, and the importance of those matters to Delaware, the legislature has developed a philosophy which emphasize[s] the stability of Delaware corporate law.” Lew also observed that “[t]he guiding principle that underlies legislation affecting corporations in Delaware is to achieve a balanced law.”
Consistent with that philosophy and guiding principle, on Monday, February 17, 2025, the General Assembly publicly released proposed amendments to the Delaware General Corporation Law (“DGCL”). The amendments, which we refer to in this memorandum as the “Balancing Amendments,” are intended to rebalance certain aspects of Delaware law relating to conflict transactions, controlling stockholder liability, and books and records demands. They do so by: (i) clarifying the means by which disinterested directors or disinterested stockholders may approve conflict transactions; (ii) limiting the liability of controlling stockholders to breaches of the duty of loyalty and actions taken in bad faith or involving improper self-interested actions; and (iii) setting forth certain conditions that a stockholder must satisfy in order to demand inspection of a corporation’s books and records, and describing the materials that a stockholder may obtain in such an inspection. The Balancing Amendments, if adopted, would offer a practical path for corporations to approach conflict transactions while still preserving accountability of corporate decisionmakers to stockholders. At the same time as the Balancing Amendments were released, the General Assembly released a proposed concurrent resolution (“Concurrent Resolution”) that would direct the Council (“Council”) of the Corporation Law Section of the Delaware State Bar Association (“DSBA”) to present a report to the Governor and the General Assembly on or before March 31, 2025, with recommendations for legislative action that might help the judiciary ensure that awards of attorney’s fees provide incentives for litigation appropriately protective of stockholders but not so excessive as to act as a counterproductive toll on Delaware companies and their stockholders. The Concurrent Resolution would direct the Council, in considering any such recommendation, to examine the utility of a cap on such awards based on a multiple of lodestar amounts (i.e., amounts determined by multiplying the time devoted by plaintiffs’ counsel to the matter by their ordinary hourly billing rates).
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This note is the first in a series intended to bust several burgeoning myths about the history and trajectory of Delaware common law governing controlling stockholders. These myths are being framed as new and dangerous problems that must be solved if Delaware is to remain the preferred domicile in the United States for corporations, and especially for controlled corporations. In the words of one commentator, “Delaware courts need a course correction” because “[t]hey have pushed the law governing controlling shareholders far beyond legitimate policing into unnecessary and unwise overregulation.”