Delaware Adopts Safe Harbor Protections for Directors and Controlling Stockholders

• Limits on Stockholder Inspection of Corporate Books and Records Also Adopted
• New Rules Apply both Prospectively and Retroactively except to Litigation already Pending on February 17, 2025
• Changes to Plaintiff Fee Award Rules Also Under Consideration

Delaware, the corporate home of a majority of US public companies and venture-backed private companies, has adopted important amendments to the Delaware General Corporation Law (DGCL) to provide additional protection and clarity for boards of directors and controlling stockholders.

The New Safe Harbors

Delaware law has long followed the business judgment rule and its core principle of respecting the decisions of boards of directors.  Delaware courts generally will not consider a challenge to the advisability or fairness of a board decision unless a serious conflict of interest is shown.  Even when there is a conflict of interest, the decision will not be questioned if procedural steps are taken to mitigate the conflict. 

Section 144 of the DGCL has been amended to provide additional clarity concerning the procedural steps that can be used to mitigate conflicts and to modify certain of the key procedural steps originally developed in the Delaware case law to ensure easier compliance.  When the parties comply with such steps, directors and controlling stockholders get the protection of a complete safe harbor from liability.

Safe Harbor Under new Section 144

If half or more of a board has a conflict (i.e., is not “disinterested”), or if there is a conflict transaction with a controlling stockholder, the board and the controlling stockholder are fully protected if the transaction is approved by either (a) a committee of two or more disinterested directors or (b) a stockholder vote of a majority of the votes cast at a meeting by disinterested stockholders.  The only exception is for a going-private transaction with a controlling stockholder, which is fully protected if both such approvals are obtained.

If the committee path is used, the board must determine that all committee members are disinterested.  Even if a court were to disagree with that determination, the committee’s decision would still be respected if approved by majority vote of the directors who the court determined were independent.

Definitions Under new Section 144

The statute defines the key elements of the new safe harbors including:

• Directors are “disinterested” so long as they do not have a material interest (different from stockholders generally) or material relationship (with a conflicted party that itself has a material interest) that would “reasonably be expected to impair the objectivity of the director’s judgment.”
• Directors of public companies are presumed to be disinterested if they are independent under applicable stock exchange rules and the board makes such a determination. This presumption can only be rebutted with substantial facts that a director has a conflict of interest.
• A stockholder is not a “controlling stockholder” unless it is (a) a majority stockholder or (b) owns at least one-third of the voting stock and has “power to exercise managerial authority over the business and affairs of the corporation.”

The new safe harbor rules provide protection for boards and influential stockholders and should reduce non-meritorious stockholder litigation and plaintiff settlement leverage.  The new rules do not displace, and indeed at their core reinforce, Delaware’s longstanding business judgment rule.

Stockholder Inspection Rights

Delaware has also adopted important limits on the right of stockholders to inspect corporate “books and records.”  That right has long existed under Section 220 of the DGCL.  In recent years, however, it was being used more intrusively by stockholders, including in some circumstances to seek director communications such as emails and texts.  Section 220 has been amended to include a strong presumption that stockholders seeking corporate records are only entitled to formal corporate records such as board minutes and stockholder consents.  Even then, the stockholder may only receive records if the stockholder has a “proper purpose” stated with “reasonable particularity,” seeks only records that are “specifically related” to that purpose, and agrees to an NDA if requested by the corporation.  There is an exception to permit inspection of additional documents, but only if a stockholder demonstrates a “compelling need” to do so.  The new provisions should reduce sweeping books and records demands.

Continuity with Established Delaware Law

The amendments make important changes but are consistent with well-established Delaware precedent and principle, most notably the business judgment rule and judicial deference to board decisions.  They are also consistent with Delaware’s ongoing commitment to taking market feedback and adjusting as necessary to optimize the effectiveness of Delaware law, as shown by many prior innovations such as:

• DGCL amendments in 2024 allowing broad private ordering via voluntary contractual limits on board authority with respect to governance, similar to previous amendments permitting advance waiver of corporate opportunities. DGCL §§ 122(18), 122(17). 
• Adopting a duty of care liability shield for directors and, more recently, expanding that protection to officers. DGCL § 102(b)(7).
• Changing the rules on settlement of stockholder suits to discourage “strike suit” litigation attacking M&A deals, which decreased significantly in Delaware following the change in rules. See generally, In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 894 (Del. Ch. 2016).
• Enforcing forum selection clauses to prevent multi-jurisdiction litigation based on fiduciary duty claims. DGCL § 115.
• Using the ripeness doctrine to deter lawyer-driven stockholder challenges to corporate documents in the absence of a clear present controversy among the parties. See generally, Siegel v. Morse, 2025 WL 1101624 (Del. Ch. Apr. 14, 2025) (holding that challenge to advance notice bylaw by stockholder who had no intention to nominate a director was unripe); see also, Maffei v. Palkon, 2025 WL 384054 (Del. Feb. 4, 2025) (emphasizing ripeness doctrine in context of ruling that decision to reincorporate in another jurisdiction was subject to business judgment rule).
• Strongly adhering to principles of freedom of contract, such as in interpreting charters, preferred stock terms and merger agreements. See Desktop Metal, Inc. v. Nano Dimension Ltd., 2025 WL 904521 (Del. Ch. Mar. 24, 2025) (deciding merger dispute, including full trial and written opinion, in 3 months and ordering specific performance of merger); Jacobs v. Akademos, Inc., 326 A.3d 711, 748 (Del. Ch. Oct. 30, 2024), judgment entered, (Del. Ch. Nov. 4, 2024) (discussing literal interpretation of deemed liquidation provision in preferred stock charter); DGCL §261(a) (permitting “lost premium” damages in merger if agreed by parties).

The Delaware legislature has also directed that the council of corporate lawyers which recommends annual updates to the DGCL issue a report on whether there should be any changes to the law governing attorneys’ fees in stockholder litigation.

Effective Date of the Amendments

The amendments to the DGCL summarized above took effect on March 25, 2025.  They apply retroactively to all acts and transactions unless legal proceedings were already commenced, or any demand to inspect books and records was already made, on or before February 17, 2025.

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