DealLawyers.com Blog

Enactment of the SB 21 safe harbor for transactions with a controlling stockholder was accompanied by much wailing and gnashing of teeth from plaintiffs’ lawyers. However, a recent lawsuit challenging Skechers’ 2025 controller-backed LBO suggests that anyone who bought into arguments that SB 21 slammed the door on litigation challenging controller transactions may have seriously underestimated the resourcefulness of the plaintiffs’ bar.

This excerpt from a recent “D&O Diary” blog by Sarah Abrams discusses how the plaintiffs in that case have attempted to plead around the SB 21 safe harbor:

The recent Delaware Supreme Court decisions upholding SB 21 and in Moelis could reshape the legal framework applicable to disputes involving controller-led transactions, like the deal outlined in the Skechers Complaint. Transactions involving controlling stockholders that satisfy specified procedural protections, such as approval by a fully empowered and independent special committee and a majority-of-the-minority vote, may now qualify for business judgment review rather than the more exacting entire fairness standard.

Against that backdrop, the allegations in the Skechers Complaint, if substantiated, appear aimed at placing the transaction outside of this emerging safe harbor framework. The plaintiff alleges that the process was dominated by the company’s controlling stockholders, that the special committee was either ineffective or insufficiently independent, and that the transaction lacked meaningful procedural safeguards. If proven, these allegations could preclude application of the more deferential standard of review and instead subject the transaction to traditional entire fairness scrutiny, under which defendants would bear the burden of demonstrating both fair dealing and fair price.

The Skechers Complaint further alleges that the controlling stockholders structured the transaction to provide themselves with differential consideration and ongoing governance rights, including through rollover equity and post-closing influence. The plaintiff appears to advance these allegations in an effort to align the claims with the types of controller conduct that Delaware courts have historically scrutinized under the entire fairness framework. If substantiated, such allegations could reinforce arguments that the transaction was not conditioned on protections sufficient to replicate an arm’s-length process.

The blog goes on to make the point that while the Delaware legislature and its courts have tried to map a clear pathway for controller transactions to receive the protections of the business judgment rule, the ability to achieve that result remains highly dependent on the integrity of the transaction process. In other words, in order to reach the safe harbor, fiduciaries may still need to navigate a fairly narrow channel.

– John Jenkins