What Newly Amended DGCL §144 Says (and Does Not Say) about Controlling Stockholder Transactions

After a pitched battle, Delaware’s SB21 amended DGCL § 144 and became effective on March 25, 2025.  As the rhetoric recedes, we should leave the battle over its enactment behind us and look to the future: What does amended DGCL § 144 now say about controlling stockholder transactions? And to what extent does it change prior law?  The actual language of the new section, which we will call the Safe Harbor Provision, does not reflect either its proponents’ dreams nor its opponents’ nightmares.  It instead draws a distinction between statutory controllers and common law controllers and leaves Delaware’s law on the latter untouched .

The legislative synopsis for SB21 makes clear that the goal was to create “safe harbors” for interested director and controlling shareholder transactions: “Section 1 of this Act amends § 144 of Title 8 to provide safe harbor procedures for acts or transactions in which one or more directors or officers as well as controlling stockholders and members of control groups have interests or relationships that might render them interested or not independent with respect to the act or transaction.”  Law firm memos by, among others, Morris Nichols and Richard Layton and Finger, sound the same theme.  Governor Matt Meyer, in his request to intervene in the Dropbox litigation in the event that the Delaware Supreme Court accepts the certified question on the constitutionality of SB21, focuses on the same language in the original synopsis: “[A]mended Section 144 ‘provides safe harbor procedures’ for certain acts or transactions under specified circumstances.”

A “safe harbor” provides legal certainty when its conditions are met—but nothing more.  For example, to provide greater certainty to transactional planners, the SEC promulgated Rule 144 to create a safe harbor from the ambiguity in the statutory definition of “underwriter.” Satisfying that safe harbor then feeds into Section 4(1)’s exemption from liability under Section 5 of the Securities Act of 1933 for offering or selling securities not registered with the SEC:

A person satisfying the applicable conditions of the Rule 144 safe harbor is deemed not to be engaged in a distribution of the securities and therefore not an underwriter of the securities for purposes of Section 2(a)(11). Therefore, such a person is deemed not to be an underwriter when determining whether a sale is eligible for the Section 4(1) exemption for “transactions by any person other than an issuer, underwriter, or dealer.”

As every securities lawyer knows, conduct that falls outside of Rule 144 simply is not entitled to the protections of the Rule 144 safe harbor.  It may still fall under one of the statutory exemptions, or it may not.

With that understanding of safe harbors as background, what does the Safe Harbor Provision contemplate for controlling shareholder transactions?  The operative sections are DGCL § 144(b) and § 144(c) with § 144(e) providing the applicable definitions.  We will focus on § 144(c)’s treatment of “going private transactions” but our analysis applies equally to § 144(b)’s treatment of controller acts and transactions that are not “going private transactions.”

Section 144(c) provides that:

(c) A controlling stockholder transaction constituting a going private transaction may not be the subject of equitable relief, or give rise to an award of damages, against a director or officer of the corporation or any controlling stockholder or member of a control group by reason of a claim based on breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group, if:

(1) Such controlling stockholder transaction is approved (or recommended for approval) in accordance with paragraph (b)(1) of this section and approved in accordance with paragraph (b)(2) of this section; or

(2) Such controlling stockholder transaction is fair as to the corporation and the corporation’s stockholders.

Who enjoys the Safe Harbor Provision’s protection from equitable relief and monetary damages?  Section 144(e)(2) tells us clearly:  “for the purposes of this section . . .  ‘Controlling Stockholder’ means any person that . . . :

a. Owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors or in the election of directors who have a majority in voting power of the votes of all directors on the board of directors;

b. Has the right, by contract or otherwise, to cause the election of nominees who are selected at the discretion of such person and who constitute either a majority of the members of the board of directors or directors entitled to cast a majority in voting power of the votes of all directors on the board of directors; or

c. Has the power functionally equivalent to that of a stockholder that owns or controls a majority in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors by virtue of ownership or control of at least 1/3 in voting power of the outstanding stock of the corporation entitled to vote generally in the election of directors or in the election of directors who have a majority in voting power of the votes of all directors on the board of directors and power to exercise managerial authority over the business and affairs of the corporation.

This statutory definition of “controlling stockholder” is then incorporated into the definition of “controlling stockholder transaction” in § 144(e)(3).

Thus, the protections afforded by § 144(c) and § 144(b) only apply to persons who meet the § 144(e)(2) definition of “Controlling Stockholder.”  Section 144(e)(2)’s use of a “limited purpose” definition of controlling stockholder (“for purposes of this section”) recalls DGCL § 203(c)’s similarly limited definition of “control” and “controlling” as presumptively applying when a person owns 20% or more of the outstanding voting stock (“As used in this section only, the term . . .”). The limitation on protection from liability to defined “controlling stockholders” is further confirmed by § 144(d)(4): “No person shall be deemed a controlling stockholder unless such person satisfies the criteria in paragraph (e)(2) of this section.”  Even though § 144(d)(4) is phrased in general terms, it uses the defined term “controlling shareholder,” which is defined only “for purposes of this section.” As a result, § 144(d)(4) specifies that the safe harbor protections are limited to those who meet the statutory definition.

Consider, now, a situation in which a founder (“Founder”) of a publicly held company (who is no longer an officer or director) currently owns 28% of the shares.  By virtue of his history with the company and relationships with the directors and management team, Founder exercises effective control over the company.  Suppose that Founder decides to take the company private in a freezeout.  What is the law governing that transaction now that § 144 has been amended?

First, the text of the Safe Harbor Provision makes crystal clear that Founder’s going private transaction does not enjoy the protections of the § 144(c) safe harbor because, under the § 144(e)(2) definition of “Controlling Stockholder,” Founder is not considered a “Controlling Stockholder” because he does not hold at least 1/3 of the stock.  The “specified circumstances” of §144(c) have not been met.

Second, there is nothing in the Safe Harbor Provision that says that a controlling shareholder conflict transaction that does not fall within § 144(b) or § 144(c) is, or is not, valid or exempt from “equitable relief” or “an award of damages . . . by reason of a claim based on breach of fiduciary duty by a director, officer, controlling stockholder.”

Accordingly, this hypothetical freezeout would be analyzed under Delaware’s common law of fiduciary duty.  If Founder is determined to be a controller by virtue of his effective control—a “common law controller”—then the transaction will be subject to entire fairness unless the MFW conditions, as interpreted in cases like Match Group, are satisfied.

Had the legislature sought to displace the existing fiduciary duty law, rather than to craft a “safe harbor” that insulates defined transactions from “equitable relief or . . .  an award of damages,” it would have had to enact a very different statute.  One option would be to follow the approach of Section 5.02 of Restatement of the Law of Corporate Governance which provides that an interested director or officer “fulfills the duty of loyalty to the corporation and its shareholders with respect to the [interested] transaction if” the appropriate approvals are received or the transactions is entirely fair.

An alternative approach would be to declare that the immunity from equitable remedies and monetary damages is complete.  The Model Business Corporation Act provides an example of this approach.  MBCA 8.61(b) provides a safe harbor for directors (but not officers or controllers) that is very similar in structure to DGCL § 144(b) and DGCL § 144(c):

(b)  A director’s conflicting interest transaction may not be the subject of equitable relief, or give rise to an award of damages or other sanctions against a director of the corporation, in a proceeding by a shareholder or by or in the right of the corporation, on the ground that the director has an interest respecting the transaction, if:

(1) directors’ action respecting the transaction was taken in compliance with section 8.62 at any time; or

(2) shareholders’ action respecting the transaction was taken in compliance with section 8.63 at any time; or

(3) the transaction, judged according to the circumstances at the relevant time, is established to have been fair to the corporation.

“Director’s conflicting interest transaction” is defined in § 8.60.  Then, critically, MBCA § 8.61(a) makes MBCA § 8.61(b) the exclusive and comprehensive regulation of interested director transactions:

(a)    A transaction effected or proposed to be effected by the corporation (or by an entity controlled by the corporation) may not be the subject of equitable relief, or give rise to an award of damages or other sanctions against a director of the corporation, in a proceeding by a shareholder or by or in the right of the corporation, on the ground that the director has an interest respecting the transaction, if it is not a director’s conflicting interest transaction.

While the Safe Harbor Provision includes a version of MBCA § 8.61(b), right down to the “may not be the subject of equitable relief, or give rise to an award of damages” language, it does not contain any parallel to MBCA § 8.61(a).

The effect of this is that DGCL §§ 144(b) and (c) protect persons who fall within the statutory definition of “Controlling Stockholder” but do not address what happens in interested transactions involving controllers who fall outside the statutory definition, who are not “statutory controllers.”  The law governing the fiduciary duties of “common law” controllers who are not also “statutory controllers” is unaffected by the amendments to § 144.

This statutory structure makes a great deal of sense from a policy perspective.  As Lucian Bebchuk and Kobi Kastiel explained in detail in “The Perils of Small Minority Controllers,” the threat posed to minority shareholders from “small minority controllers” (those who, typically because of dual class capital structures, control the company with far less than 50% of the equity) is substantially greater than the threat posed by traditional “majority” controllers with a majority equity stake.  A traditional controller who owns 50% or more of the shares will, through its equity stake, have interests substantially (although not perfectly) aligned with the non-controlling shareholders.  This is because the controller will enjoy 50% or more of the benefit of increased firm value and bear 50% or more of the costs of any decline in firm value.  In such a situation, the incentives to take non-ratable benefits that injure the company are reduced.  It is not surprising that Bill Gates, who owned around 45% of Microsoft’s shares, took only $623k in salary and bonus during his final year as CEO.

By contrast, “small minority” controllers have very different financial incentives because they will enjoy 100% of whatever non-ratable benefits they extract while only bearing a much smaller percentage of the costs imposed on the company and the non-controlling shareholders.  It is thus unsurprising that so many small-minority controllers have outsized pay packages.

Our interpretation of the Safe Harbor Provision differs from how some other academics have analyzed it.  For example, we disagree with the characterization offered by our friends Jill Fisch and Steven Davidoff Solomon in their critique of amended § 144:  “And perhaps most importantly, the statute provides a statutory definition of controlling shareholder as a substitute for the traditional case-by-case analysis.”  Rather, under the clear language of amended § 144, the most troubling examples discussed by Fisch and Solomon—controllers with less than 1/3 of the voting power who control through a Stockholder Governance Agreement—would be analyzed under existing Delaware fiduciary duty law because they would fall outside the limited scope of 144’s “exculpation.”  Similarly, while our friend Steve Bainbridge’s proposal in his “A Course Correction for Controlling Shareholder Transactions” was a broader proposal than the “safe harbor” actually adopted, and would have had more far-reaching effects, he, like Fisch and Solomon, seems to think that the Safe Harbor Provision accomplished more than its plain language indicates.

Whatever the intent of various participants in the messy process that led to the Safe Harbor Provision, the text itself is not ambiguous.  For controlling stockholder transactions, it does no more, and no less, than create a limited safe harbor.