DealLawyers.com Blog

Yesterday, Senate Bill 21 was introduced in the Delaware Senate Judiciary Committee. Boies Schiller partner Renee Zaytsev describes the bill’s new protections for boards and controlling shareholders on LinkedIn as follows:

1.    For corporate transactions with controllers, other than going private transactions, providing a safe harbor if the transaction is 𝘦𝘪𝘵𝘩𝘦𝘳 (a) approved or recommended by a committee consisting of a majority of disinterested directors 𝘰𝘳 (b) approved or ratified by a majority of disinterested stockholders. (Current case law—embodied in 𝘔𝘍𝘞 and 𝘔𝘢𝘵𝘤𝘩—requires approval of 𝘣𝘰𝘵𝘩 an independent committee 𝘢𝘯𝘥 the majority of minority stockholders, plus some twists, for the safe harbor to apply).

2.    For going private transactions with controllers, specifying that the safe harbor applies if only a majority of the committee is disinterested. (Current case law, as set forth in 𝘔𝘢𝘵𝘤𝘩, requires the entire committee to be disinterested).

3.    Re-defining “controlling stockholder” such that minority stockholders must have “the power functionally equivalent to that of a” majority stockholder “by virtue of ownership or control of at least one-third in voting power . . . and power to exercise managerial authority over the business and affairs of the corporation.” (Current case law has a flexible test that looks at actual control, whether generally or specific to a particular transaction, without setting any formal shareholding threshold).

There’s a lot more! Check out the list in Tulane Law Prof Ann Lipton’s latest blog. Notably, it also redefines “independence/disinterest to incorporate federal stock exchange standards” with the board determination presumptively controlling unless a plaintiff shareholder pleads “substantial and particularized facts” showing the director’s material interest in the transaction or material relationship with a person with a material interest.

The bill seems clearly designed to address recent criticisms of how the Delaware Courts approach controlling stockholder transactions. (UCLA Law Prof Stephen Bainbridge noted that SB 21 is largely consistent with proposals in his recent article and points to other papers that seem to have influenced the proposed bill.) But, through some proposed changes to Section 220 on books and records demands and a Senate Resolution requesting that the Council of the Corporation Law Section recommend legislative action on attorney’s fee awards, it seems the General Assembly also seeks to reduce the number of shareholder suits filed — or even investigated — in Delaware through other means as well.

The bill is notable in both substance and process, and there’s speculation out there that the proposed changes might be approved as soon as this spring — not in the usual August timeframe.

Memos already started rolling in today, and we’re posting them in our “State Law” Practice Area. Check that out for more info!

– Meredith Ervine