Delaware Ignores Tradition and Misses Big With Opt-In Snub

Delaware has made a bold shift to its corporate legal framework that will likely affect the future of corporate governance across the US. By amending Sections 144 and 220 of the state’s corporate statue through Senate Bill 21, Delaware is heralding a new chapter in corporate law.

Traditionally, the Delaware State Bar Association’s Corporation Law Council has spearheaded efforts to amend corporate laws by drafting proposals and submitting them to the general assembly for consideration. SB 21 took a different path, bypassing the DSBA’s usual drafting and voting process.

Sponsors introduced the bill directly to the Delaware General Assembly, where it quickly passed through both chambers and was signed by the governor on March 25. The Corporation Law Council eventually voted to recommend the bill, while the executive committee of the DSBA chose not to take a position.

While the expedited process was efficient, it raises questions about the future of Delaware corporate law reform.

A critical suggestion from law professors—an opt-in provision—was left out of the final version. This proposal, which would have allowed shareholders to opt in to certain provisions of the statute, would have offered greater flexibility and shareholder protection.

The opt-in provision allows for shareholders to make the decision whether to adopt the amendments or contract around them, a typical feature of Delaware law. The law professors, supporting the provision, argue the opt-in would have preserved the flexibility of Delaware’s corporate law and reduced the risk of reincorporation by allowing corporations to customize their governance structures in a manner that suits them. Further, law professors argue an opt-in provision allows for empirical testing of the amendments’ market impact.

The failure to adopt this suggestion is a missed opportunity to enhance the balance of power between corporate managers and shareholders.

Significant Changes

The legislation overhauled Section 144 of Delaware’s corporate statute, which governs interested director transactions, to broaden its scope and strengthen protections.

Previously, a transaction in which a director had a vested interest could proceed only if the board or shareholders were informed and the deal was fair to the company. Now, only a majority of shareholders must approve the transaction, provided their vote is informed and voluntary. They no longer need to be notified of the material facts about the director’s interest in the transaction.

Section 144’s safe harbor rules were extended to cover transactions involving controlling shareholders. The statute now applies similar standards to these transactions, except for “going-private” deals, which now require both shareholder and director approval.

The law introduces a presumption that directors are disinterested in safe harbor transactions—a presumption that can be overturned only if substantial evidence proves a conflict of interest. There also is now a lower standard for being classified as an “independent” director to the equivalent level under federal securities laws.

Another change is the introduction of a duty-of-care exculpation for controlling shareholders. Modeled after rules for directors, this provision limits liability for controlling shareholders, protecting them from lawsuits unless they violate their duty of loyalty, engage in bad faith actions, or benefit personally from the transaction.

The new law offers a more stringent definition of “controlling shareholder,” setting the bar at a one-third ownership stake, coupled with managerial control, rather than the traditional majority threshold.

SB 21 also overhauled Section 220, which governs shareholder access to a corporation’s books and records. Previously, shareholders needed only to have a proper purpose and present a “credible basis to suspect wrongdoing” to request documents. This made it relatively easy to gain access to informal materials, including emails and other communications between corporate directors.

The amendments now explicitly define what constitutes “books and records,” excluding informal documents from the statutory definition. Shareholders may only request such materials if they demonstrate a “compelling need” for the information, backed by “clear and convincing” evidence that the records in question will contain the sought-after information.

This change effectively raises the bar for stockholders hoping to access informal materials, potentially reducing the frequency and scope of book and records requests.

The Road Ahead

The changes to Section 144 are likely to shift the balance between directors, controlling shareholders, and other stakeholders in a way that may lead to significant changes in corporate governance practices across the nation.

Had the opt-in provision been included, the bill may have avoided an expected constitutional challenge that may be on the horizon. The amendments impose a broad, mandatory restriction on the Chancery Court’s equitable power, potentially violating state constitutional guarantees. An opt-in approach would let corporations explore different governance structures, avoiding the complex issues related to the separation of powers and legal validity that arise with sudden statutory changes such as SB 21.

The opt-in proposal—designed to offer shareholders more control over how certain provisions apply to their corporations—feels like a lost opportunity to strike a better balance in Delaware’s corporate law. It could have provided clearer pathways for shareholder protection.

It’s a reminder that even in a state known for its forward-thinking corporate laws, there’s still room for more innovation and flexibility when structuring corporate governance.

These amendments will influence corporate governance far beyond Delaware’s borders. But with certain suggestions left on the table and unanswered questions about the future of corporate law reform, one can’t help but wonder what could have been achieved with a more inclusive approach.

We will see whether Delaware will continue its tradition of adapting and evolving its corporate laws to meet the needs of modern business, or whether we’ve witnessed a rare misstep in what is otherwise a dynamic legal landscape.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anat Alon-Beck is associate professor at Case Western Reserve University Law School.

Atticus Williams is a second-year law student at Case Western Reserve University Law School.

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