Delaware has long been the state of choice for companies seeking to attract investment because of its savvy judiciary and its stable, predictable, and fair corporate law. As a result of this status, more than 20% of the state’s tax revenue comes from corporate franchise fees. But if companies start to prefer incorporation in states like Nevada and Texas, then Delaware would face a substantial budget shortfall.

This concern reared its head especially after high-profile, investor-friendly decisions from the judiciary, even though the substantive law had not actually changed. After the Court of Chancery for the State of Delaware rescinded Elon Musk’s $56 billion pay package from Tesla, he reincorporated Tesla in Nevada. Musk also took advantage of his “X” platform to denigrate Chancellor Kathaleen McCormick and encourage other Delaware corporations with controlling stockholders to reincorporate elsewhere. Following the lead of other states, Texas formed a Business Court in order to provide specialized judges and courts for business disputes and attract corporations.[1] Shortly after the new year, rumors circulated that Meta and Walmart were also considering more controller-friendly pastures.

These stirrings echoed those of ten years before, when another billionaire controlling stockholder threatened to leave Delaware amidst lawsuits accusing him of unfairly buying out minority stockholders.[2] Ultimately, Delaware ignored those threats against its franchise to no harm.

But this time, the threats and fear were transformative. Newly elected Governor Matt Meyer “convened an online meeting with attorneys from law firms that have represented Meta, Musk, Tesla and others in shareholder disputes in the state.”[3] The next day, Meyer held a second meeting, this time with the corporate secretary of Meta, and an attorney that has represented Meta in Delaware. Less than two months later, Senate Bill 21 (“SB 21”) Delaware’s legislative response to these rumors, easily passed through both houses of the Delaware legislature and received Governor Matt Meyer’s signature despite vociferous opposition from institutional stockholders and the plaintiffs’ bar.

The resulting bill, SB 21, amends two sections of the Delaware General Corporation Law: Section 144, and Section 220, in order to provide a statutory safe harbor for transactions between companies and their controlling stockholders, and to limit the rights of stockholders to the books and records of the corporation. This short article will address the changes to controller transactions, while a future article will describe the new requirements and limitations for books and records investigations.

Previous Delaware Law

Under pre-SB 21 Delaware law, transactions between a company and its controlling stockholders challenged in court would be subject to “entire fairness” review unless the negotiation of the transaction satisfied six procedural protections provided under Kahn v. M&F Worldwide (“MFW”):

1. The controller conditioned the transaction on the approval of both a special committee of the company’s board of directors and a majority of the minority stockholders from the beginning of economic negotiations;
2. The entire special committee was disinterested and independent;
3. The special committee was empowered to freely select its own advisers and to say no definitively to the proposed transaction;
4. The special committee met its duty of care in negotiating a fair price;
5. The vote of the minority was informed; and
6. There was no coercion of the minority.

After the Delaware Supreme Court’s 2024 decision in In re Match Group Derivative Litigation, these requirements applied to all controlling stockholder transactions where the controlling stockholder received a unique benefit.

The New Procedural Safeguard Requirements

Supporters of SB 21 delivered demonstrably false testimony to the Delaware Senate that SB 21 overturns Delaware Supreme Court precedent in only “one, maybe one and a half, significant ways.”[4] In fact, SB 21 overturns both In re Match Group and at least four of the six requirements for avoiding entire fairness review set out in MFW.

For so-called “going private” transactions where a controlling stockholder buys the shares of company stock that it does not already own, approval of both a special committee and the minority stockholders will still be required to avoid entire fairness. For all other transactions, however, where a controlling stockholder extracts a unique benefit from the Company, such controlling stockholder needs only to obtain either the approval of a special committee or the approval of the minority stockholders to bring the transaction under the lenient “business judgment” standard. If only a special committee approves the transaction, then only the special committee needs to be informed about the transaction. Minority stockholders will receive little notice of the transaction.

SB 21 also further guts existing caselaw that was favorable to minority stockholders.

• A special committee approving a transaction no longer needs to be entirely independent from the controlling stockholder, as only a majority of the committee need be independent. Thus, a controlling stockholder could place their spouse on the special committee alongside two members of its country club, and the approval of the committee would cleanse the transaction entirely.
• Approval of a transaction by minority stockholders will no longer require the affirmative vote of a majority of all outstanding minority shares. Instead, the plain text of SB 21 requires only the “affirmative vote of a majority of the votes cast by the disinterested stockholders.” This change is significant because for most stockholder votes, dissenting stockholders simply do not vote because a so-called “broker non-vote” is counted as a vote against the measure. Now, controlling stockholders can take full advantage of stockholder ignorance or apathy to push through unpopular go-private transactions. It is worth noting that this change alone overturns over forty years of Delaware precedent regarding majority of the minority provisions.[5]
• SB 21 eliminates MFW’s requirement that the procedural protections be in place ab initio, which required that the special committee and majority of the minority provisions be in place from the outset of economic negotiations. Now, a controlling stockholder can use these provisions as a bargaining chip later in the process when it does not want to improve its economic offer.
• A stockholder must control at least one-third of the voting power of the company to be found to be a controlling stockholder. This goes against common sense findings in previous cases, like Musk’s pay package case, that have determined a stockholder controlled the company with less than 30% voting power because of their importance to the company, their day-to-day control over the company, and domination of the board of directors.
• The stockholder must now have general control over the company rather than just control over the particular transaction being challenged.
• Delaware now looks to stock exchange requirements for director independence to award a strong presumption of independence. Such requirements are weak and frequently ineffective. For example, companies have successfully received blessings of independence from their stock exchange where a director was the life-long friend and college roommate of an 85-year old controlling stockholder (in other words, the two had been close friends for over 60 years). This presumption will make challenging director independence much more difficult than it had been previously, where such a determination was a fact-intensive one for the court to decide.
• Controlling stockholders may now use coercion to achieve approval by the special committee. The Court of Chancery previously ruled that a controlling stockholder coerced the approval of a special committee by threatening to engage in a different transaction without approval of the committee that would have caused substantial economic damages to the unaffiliated stockholders.[6] Now, such behavior is purportedly fine so long as the special committee was informed and had a majority of “disinterested” directors.

Takeaways for Concerned Stockholders

Investors should keep this new controller-friendly regime in mind when investing in controlled public companies incorporated in Delaware. SEC filings regarding related party transactions and the independence of directors should be given additional skepticism. Investors can no longer trust that the purportedly independent members of a board will protect them from a controlling stockholder, or ensure their fair compensation in a going private transaction. And it is more important than ever that minority stockholders actually vote when given the chance, as withholding a vote is no longer an effective dissent in controller-driven transactions. As always, if investors have concerns about a specific company or transaction, they are invited to contact Levi & Korsinsky, LLP to learn more about their rights and options.

[1] This was hardly a novel threat. As noted by White & Case LLP, nearly half of all states have created a specialized court for business and commercial disputes. Andrew Zeve & Stephen Shuchart, Texas Business Courts: What You Need to Know, White & Case LLP Alert (Sep. 9, 2024) available at https://www.whitecase.com/insight-alert/texas-business-courts-what-you-need-know.

[2] See Joel Friedlander, Are Hamermesh, Chandler and Strine Making Delaware Corporate Law Great Again?, Delaware Online (Mar. 17, 2025) available at https://www.delawareonline.com/story/opinion/2025/03/17/are-hamermesh-chandler-and-strine-making-delaware-corporate-law-great-again-opinion/82490918007/.

[3] Lora Kolodny, Meta’s Potential Exit from Delaware Had Governor Worried Enough to Call Special Weekend Meetings, CNBC.com (Mar. 19, 2025) available at https://www.cnbc.com/2025/03/19/meta-billions-of-dollars-at-stake-in-overhaul-delaware-corporate-law.html.

[4] Lauren Pringle, Transcript – SS 1 to SB 21 Delaware Senate Floor Vote, Mar. 13, 2025, available at https://www.linkedin.com/pulse/transcript-ss-1-sb-21-delaware-senate-floor-vote-lauren-pringle-dj45c/?trackingId=3BfJlsgHREWuyoMI0qRTDA%3D%3D.

[5] See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701, 703 (Del. 1983).  

[6] See In re Dell Tech., Inc. Class V Stockholders Litig., 2020 WL 3096748, at *33 (Del. Ch. June 11, 2020).