DealLawyers.com Blog

On Tuesday, Delaware Gov. Matt Meyer signed SB 21 into law. The legislation amends Section 144 of the DGCL to, among other things, establish broad safe harbors for transactions with controlling stockholders and other insiders. It also significantly narrows the information available pursuant to a books & records demand under Section 220 of the DGCL.  While the amendments are now law, it’s unlikely that the fight over them is going to end anytime soon.

In that regard, at least one commenter has noted that there may be questions about the constitutionality of some of the provisions of SB 21.  The concern is the language in Section 144 that prohibits equitable relief in the case of transactions approved in compliance with the safe harbors. Prof. Eric Talley has pointed out that if this language is read as limiting the equitable powers of the Chancery Court as set forth in the Delaware Constitution, it may not fly.  He cites these excerpts from the Delaware Supreme Court’s 1951 decision in DuPont v. DuPont in support of that proposition:

“Briefly stated, the question posed is this: Is the grant to the Court of Chancery by Section 10 of Article IV of the Constitution of 1897 of “all the jurisdiction and powers vested by the laws of this state in the Court of Chancery” subject to unrestricted legislative curtailment [by the General Assembly under Section 17 of Article IV]?”

[The Answer: No]

“Section 10 of Article IV is a guarantee to the people of the State that equitable remedies will at all times be available for their protection. This guarantee the Legislature may not ignore….Section 17 does not authorize the Legislature to alter, amend or repeal any part of the jurisdiction of the Court of Chancery conferred upon it by Section 10 of Article IV of the Constitution.”

“Section 17 is not an authorization to the Legislature to restrict Chancery jurisdiction to less than it was in 1792. We think the Constitutions of 1792, 1831 and 1897 intended to establish for the benefit of the people of the state a tribunal to administer the remedies and principles of equity. They secured them for the relief of the people. This conclusion is in complete harmony with the underlying theory of written constitutions. Its result is to establish by the Judiciary Article of the Constitution the irreducible minimum of the judiciary. It secures for the protection of the people an adequate judicial system and removes it from the vagaries of legislative whim.”

In addition to the potential constitutional issues with the statute, Prof. Stephen Bainbridge raises the possibility of the Chancery Court engaging in an end run around the limitations of the statute in reliance on Schnell v. Chris-Craft’s proposition that “inequitable action does not become permissible simply because it is legally possible.” Of course, he also recognizes that the language in the statute itself may make turn this end run into a dead end:

Note that SB 21 says that acts by directors, officers, and controlling shareholders may not, inter alia, “be the subject of equitable relief” if appropriate cleansing actions are taken. Does that foreclose the Schnell end-run? It depends on what you think “equitable relief” means. If you think it means that any relief granted pursuant to the court’s exercise of its inherent equitable powers under Schnell is “equitable relief,” then the end run likely won’t work. But is there another reading?

Of course, there’s always another reading – and I’ll be surprised if we don’t hear some arguments about alternative readings in the very near future.  We’re posting memos on the 2025 DGCL amendments in our “State Laws” Practice Area.

– John Jenkins