By: Connor Charney
Delaware Senate Bill 21 (“the Bill”) amends sections 144 and 220 of the Delaware General Corporation Law (“DGCL”).[1] The Bill responds to the perceived flight of large American corporations after Tesla reincorporated outside of Delaware.[2] Elon Musk’s move to reincorporate follows a decision by the Delaware Chancery Court to reject a compensation plan that would award him an estimated maximum value of $55.8 billion.[3] After a successful vote in the House on March 26, 2025, Governor Matt Meyer officially signed the Bill into law.[4]
Under the previous iteration of section 144, the less differential entire fairness doctrine was applied if the board took steps to confront and mitigate any actual conflicts of interest.[5] A plaintiff must show that the board’s conduct around the transaction breached their fiduciary duty to all shareholders.[6] The Delaware Chancery Court is given wide latitude to evaluate the procedure of approving the transaction, the role of disinterested directors, and the relationships between the disinterested directors and controllers.[7] The original iteration of section 144 balanced shareholder needs with the need for board discretion in business decisions by providing a clear procedure for dealing with interested board directors and allowing the Chancery Court to exercise their business expertise in evaluating a given factual situation.
The Bill facially constricts the discretion of the court and expands the business judgement scrutiny protection to transactions involving majority shareholders; this results in a clear abrogation of fiduciary duty to each shareholder equally. The new language added to section 144(b) specifically expands the business judgment safe harbor to include transactions with controlling shareholders if there is a disclosure of material facts to the board and the transaction is approved by a majority of disinterested directors.[8] Further, it presumes that directors are disinterested if the board’s bylaws are determined to be disinterested, and the categorization of a disinterested director “may only be rebutted by substantial and particularized facts that such director has a material interest in [the transaction] or has a material relationship with a person with a material interest in [the transaction].”[9] The Bill further limits shareholder access to evidence by the shareholder, but that is beyond the scope of this piece.[10]
The true impact of the Bill will remain unclear until dissenting shareholders contest specific transactions, but there is no doubt that the Bill will limit the Chancery Court’s discretion. It is clear the legislature sought to limit the discretion of the Chancery Court in transactions involving controlling shareholders by prescribing a specific test.[11] However, under the new tests, the ruling against Musk in Tornetta may still be valid; the Chancery Court pointed to specific evidence stating “[t]he testimony from key witnesses is perhaps as close to an admission of a controlled mindset [of board members] as a stockholder-plaintiff will ever get.”[12] This evidence would surely satisfy the Bill’s “substantial and particularized” requirement that the board has a “material relationship” with the controlling shareholder.[13] A similar ruling assumes that a stockholder plaintiff would be able to gather said evidence under the new evidence rules promulgated by the Bill to get to a point in the trial where witnesses can be deposed or are compelled to testify.[14]
Some commentators herald the Bill as a reigning in of abused discretion by the Chancery Court by promulgating a specific procedure.[15] These commentators view the clear procedure promulgated by the legislature as a stabilizing measure that limits a board’s exposure to costly litigation.[16] However, Delaware is an attractive location for incorporation because it not only has board-friendly laws but also a court with specialized business knowledge. If the Chancery Court is not able to call on its specialized business knowledge in unique fact patterns, Delaware’s specialization as a location for incorporation is substantially weakened.
[1] S.B. 21, 153rd Gen. Assemb., Reg. Sess. (Del. 2025) (to be codified at Del. Code Ann. tit. 8 §§ 144, 220).
[2] Lora Kolodny, After Elon Musk’s Delaware Exit, State Lawmakers Weigh Bill to Overhaul Corporate Law, CNBC (Mar. 15, 2025, 8:00 AM) https://www.cnbc.com/2025/03/15/after-elon-musk-delaware-exit-state-weighs-overhaul-of-corporate-law.html.
[3] Tornetta v. Musk, 310 A.3d 430 (Del. Ch. 2024).
[4] Press Release, Off. of the Governor, Governor Meyer Signs SB21 Strengthening Delaware Corp. L. (Mar. 26, 2025) https://news.delaware.gov/2025/03/26/governor-meyer-signs-sb21-strengthening-delaware-corporate-law/.
[5] See Del. Code Ann. tit. 8, § 144 (2010); Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014).
[6] See In re Trados Inc. Shareholder Litigation, 73 A.3d. 17, 35 (Del. Ch. 2013).
[7] See Tornetta, 326 A.3d at 510-11; see, e.g., In re Viacom Inc. Shareholder Litigation, No. 2019-09-48, 2020 WL 7711128, at *19 (Del. Ch. Dec. 29, 2020).
[8] S.B. 21, 153rd Gen. Assemb., Reg. Sess. (Del. 2025) (to be codified at Del. Code Ann. tit. 8 §§ 144, 220).
[9] See id § 1(d)(2).
[10] See id. at 6-9; Mike Leonard, Musk-Linked Corporate Law Rewrite Would Stymie Investor Scrutiny, Bloomberg L. (Mar. 10, 2025, 5:00 AM), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/XCDQ1IO4000000?bc.
[11] Compare Del. S.B. 21 at 1-3, with Del. Code Ann. tit. 8, § 144.
[12] See Tornetta, 310 A.3d at 520.
[13] Del. S.B. 21 § 1(d)(2).
[14] Id.
[15] See Seth Oranburg, Delaware’s Corporate Law Reform Would Fortify Stable Governance, Bloomberg L. (Mar. 18, 2025, 4:30 AM), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/XCRPPECS000000?.
[16] Id.
