DealLawyers.com Blog

Last week, the Delaware Bar’s Corporation Law Council offered some proposed revisions to SB 21, the controversial proposed amendments to the DGCL that would, among other things, provide a safe harbor for certain transactions involving a corporation and its controlling stockholder.  This excerpt from Ann Lipton’s recent post on The Business Law Prof Blog summarizes the CLC’s proposed changes:

Under the original version of the law, if the transaction did not involve a controlling shareholder, board level cleansing was achievable even if the board was majority-conflicted. As long as the disinterested directors voted in favor of the deal, it was cleansed – meaning, a board 4-1 conflicted could still cleanse the deal, so long as that single director voted in favor. If the transaction did involve a controlling shareholder, board-level cleansing required the creation of a majority-independent committee, but there was no specification as to how many committee members were necessary – one, in other words, would do.

The new statute says that board level cleansing, either for controller transactions or simply transactions where the board is majority-conflicted, requires the creation of a committee. The committee must have at least two people. All committee members must be disinterested.

Ann says that this is an improvement over the original bill but argues that problems remain.  In particular, she contends that the statute would permit a conflicted board to decide which directors are disinterested and put them on the committee charged with passing on the transaction.  In addition, she contends that in the event of a challenge to director independence, the statute doesn’t appear to permit a court to revisit whether the committee was in fact completely disinterested, but only to determine whether a majority of the actually disinterested members voted in favor of the transaction.

In other SB 21 developments:

– Harvard’s Lucian Bebchuk argues that SB 21 throws the Delaware courts under a bus by communicating the legislature’s judgment that “(a) the Delaware courts have gotten their work wrong and developed inferior doctrines with respect to important subjects, and (b) the courts nonetheless applied these doctrines for a substantial period of time.”

– UCLA’s Stephen Bainbridge responds by saying that the Delaware courts have it coming to them, because they’ve gotten the law of conflicted controller transactions “egregiously” wrong.

– Boston College’s Brian Quinn highlights the proposed legislation’s retroactivity language and says that it’s a not-so-subtle hint to the Delaware Supreme Court about how it should decide the Tornetta appeal.

– Columbia’s Eric Talley suggests an “opt in” alternative to the mandatory safe harbor contemplated by SB 21.

– Former Chancellor William Chandler & Widener Law Professor Emeritus Lawrence Hamermesh penned an editorial supporting SB 21 as an effort “to reestablish long-accepted rules once familiar to the Delaware courts and are nothing less than a sincere effort by public officials to protect the interests of their constituents.”

– Evan Epstein provides a terrific compendium of commentary on SB 21 in his recent newsletter – and the Chancery Daily’s Lauren Pringle has pulled together one on an even grander scale.

– And in the “Who asked you anyway?” category, Texas Gov. Greg Abbott provided a reminder of why Delaware is hustling to enact these proposed changes by inviting businesses to head to The Lone Star State in a WSJ opinion piece called “Forget Delaware – Y’all Street is Open for Business.”

Speaking of hustling, Lauren Pringle has a LinkedIn post in which she suggests that this legislation isn’t just on a fast track, but on a rocket sled – and that it could be voted upon as soon as March 20th.

– John Jenkins