Delaware Amendments Provide Clarity on Conflicted Transactions and Books and Records Requests

DGCL Section 144

The amendments to DGCL Section 144 establish three safe harbors for conflicted transactions that, if met, insulate a director or officer from equitable relief and awards of damages for claims based on alleged breaches of fiduciary duties. Absent these safe harbors, the conflicted transactions might otherwise be subject to judicial review under the entire fairness standard, which is considered Delaware’s most demanding standard of review.

Notably, the amendments create a presumption that a director is “disinterested” if the board of directors determines that the director is independent or if the director satisfies the independence standards of the NYSE or Nasdaq, as applicable to the corporation. A stockholder seeking to rebut that presumption must show substantial and particularized facts that the director has a material interest in the transaction, either directly or through a material relationship with another individual. Likewise, a stockholder-nominated director is not, without more, “interested” with respect to a company’s transactions with the nominating stockholder.

DGCL 144(a) provides a safe harbor for acts or transactions with an interested director or officer, even when the director or officer is present at, or participates in, the meeting of the board or committee that authorizes the transaction or was involved in the initiation, negotiation or approval of the transaction, if:

1. a majority of the disinterested directors on the board of directors or a committee of at least two disinterested directors approves the act or transaction and all material facts are known or disclosed to the board of directors or the committee; or
2. a majority of disinterested stockholders approves or ratifies the act or transaction by an informed, uncoerced vote of the majority of votes cast; or
3. the act or transaction is fair as to the corporation and its stockholders (i.e., entire fairness).

DGCL 144(b) provides a safe harbor for acts or transactions involving a controlling stockholder (other than going private transactions) in which:

1. a committee of at least two disinterested directors has the expressly delegated authority to negotiate and to reject the transaction, with all material facts known or disclosed to the committee, and the transaction is recommended or approved in good faith and without gross negligence by a majority of the disinterested directors then serving on the committee; or
2. the transaction is conditioned, at the time it is submitted to stockholders for their approval or ratification,¹ on the approval of, or ratification by, disinterested stockholders, and is approved or ratified by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or
3. the transaction is fair as to the corporation and its stockholders.

DGCL Section 144(c) provides a safe harbor for going private transactions involving a controlling stockholder in which:

1. there is both approval by a committee of at least two disinterested directors as described in DGCL 144(b)(1) AND approval or ratification by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders as described in DGCL 144(b)(2); or
2. the transaction is fair as to the corporation and its stockholders.

The safe harbors require that any approval or recommendation, as applicable, of disinterested directors or a disinterested director committee must be made in good faith and without gross negligence, underscoring that any decisions by the disinterested directors remain subject to the duty of care.

The amendments further define a “controlling stockholder” as a person who, together with that person’s affiliates, owns or controls a majority in voting power of the corporation’s outstanding stock, or the right to cause the election of directors with a majority of voting power on the board, or has functionally equivalent powers by owning or controlling a minimum of one-third of the corporation’s outstanding stock.

DGCL Section 220

The amendments to DGCL 220 seek to enhance clarity around books and records requests by placing guardrails around the scope and structure of such requests. For instance, the amendments limit the scope of books and records to include a corporation’s charters, bylaws, stockholder meeting minutes, written and electronic communications to stockholders, board of directors and committee meeting minutes, materials provided to the board of directors or its committees related to actions taken, annual financial statements, certain agreements, and director and officer independence questionnaires.

Furthermore, the amendments provide that a stockholder may inspect the corporation’s books and records only for demands made in good faith and for a proper purposes. Any such demand must describe with reasonable particularity the stockholder’s purposes and the books and records the stockholder seeks to inspect, and they must be specifically related to the stockholder’s purpose.

In responding to books and records requests under the amendments, corporations may impose reasonable restrictions on the confidentiality, use or distributions of books and records, including through redaction or by conditioning the sharing of information on an agreement by the stockholder that such information will be incorporated by reference to any complaint filed by or on behalf of the stockholder in connection with the demand.

These changes significantly reduce the kinds of books and records that a stockholder may demand in a manner consistent with the Model Business Corporation Act and increase the burden of establishing validity of a request on the stockholder making the demand.

Please reach out to your Vinson & Elkins team to discuss the potential effects of these developments on your company.

¹ The safe harbor in DGCL 144(b)(2) rejects Delaware case law that required a disinterested committee to be formed, or delegated the authority to negotiate and reject, any controlling stockholder transaction before the commencement of substantive economic negotiations.