In our March article ‘O-H!’ ‘I-N-C!’, we explored why several well-known companies, including Tesla and TripAdvisor, are leaving Delaware and why Ohio presents a compelling alternative. Since then, Delaware has responded with Senate Bill 21 (SB 21), a legislative attempt to stem the tide. But is it working?
In response to the major re-incorporations and the threat of other companies, such as Meta, contemplating reincorporation, the Delaware legislature recently signed SB 21 into law. Likely an effort to encourage companies not to reincorporate elsewhere, SB 21 makes key amendments to Delaware General Corporate Law (DGCL) in favor of corporations. SB 21 specifically imposes greater limitations on stockholder inspection rights while also implementing comprehensive safe harbor protections for directors and officers, controlling shareholders, or control groups. Moreover, SB 21 creates additional pathways for application of the corporate-friendly business judgment rule, as opposed to the more stringent entire fairness standard.
Limits on Stockholder Inspection Rights
Prior to the passage of SB 21, shareholders had broad rights to inspect corporate records, a practice which likely contributed to the proliferation of shareholder derivative suits. SB 21 tightens those rules, making it harder for shareholders to demand access to internal documents unless they meet stricter requirements. Pursuant to 8 Del. C. § 220(a)(1), ‘books and records’ constitute board and committee minutes, materials provided to those bodies, financial statements, stockholder communications, agreements under § 122(18), and director/officer independent questionnaires. Additional records are only accessible if the stockholder shows ‘compelling need’ and clear and convincing evidence that the records are ‘necessary and essential’ to their proper purpose, and even then, the court may authorize redactions or impose confidentiality conditions.
This change is intended to cut down on legal fishing expeditions and give companies more breathing room to operate without constant scrutiny.
Safe Harbor Protections for Conflicted Transactions
SB 21 also adds a new safe harbor protection to help companies navigate transactions involving conflicts of interest. If a transaction involves a director, officer, or shareholder with a personal stake, it can be protected from legal challenges if it’s approved by disinterested directors or shareholders. Importantly, Section 144(a)(1) of the DGCL provides in pertinent part that an interested transaction “may not be the subject of equitable relief, or give rise to an award of damages” if the material facts are disclosed and the transaction is approved “in good faith and without gross negligence” by disinterested directors. This limitation of liability is obviously a huge win (or loss depending on who you’re rooting for) and the type of risk shifting provision which could potentially result in impacts far beyond the courtroom.
For controlling stockholders, Section 144(b) now provides a safe harbor if the transaction is approved by either a committee of disinterested directors or a fully informed and uncoerced vote of disinterested stockholders. For going-private transactions, Section 144(c) provides two pathways to safe harbor: either (1) approval by both a committee of disinterested directors and disinterested stockholders, or (2) a showing that the transaction was fair to the corporation and to its stockholders.
The bill also clarifies who counts as “disinterested” or “independent,” making it easier for boards to determine who can vote and harder for shareholders to challenge that status. Under SB 21 a “disinterested director” is defined as one who is not a party to the transaction, lacks a material interest in it, and has no material relationship with anyone who does. A “disinterested stockholder” is a stockholder who has no material interest in the transaction and no material relationship with a controlling stockholder or other interested party.
Access to the Business Judgment Rule through Safe Harbor
Although SB 21 does not expressly reference the business judgment rule, its safe harbor provisions codify pathways for transactions to receive business judgment deference rather than an entire fairness review. As provided above, in certain transactions, companies need only satisfy one of the two procedural protections, either approval by a committee of disinterested directors or a disinterested stockholder vote to obtain business judgment review. In going-private transactions, both approvals are explicitly required. In effect, the statute lowers the threshold for corporations to obtain deferential review, steering the ship toward the business judgment rule without naming the rule directly.
Governor Meyer, in signing the bill, emphasized that SB 21 would help Delaware remain “the best place in the world to incorporate your business” by ensuring clarity and predictability. While SB 21 signals Delaware’s intent to stabilize its corporate law and reassert its leadership, its effectiveness remains uncertain. The jury is still out on whether the legislation will stem the tide of corporate defection to other states.
At Bricker Graydon, we will continue to monitor legislative developments across jurisdictions and track how companies adjust their incorporation strategies. As states compete to attract local or foreign corporations, new ideas may emerge that go beyond statutory initiatives and overrides. For example, states could offer expedited dispute resolution tracks for corporate governance matters or create tailored compliance relief for emerging industries.
Choosing where to incorporate is no longer just about legal precedent, it’s about aligning with a jurisdiction that supports your company’s growth, governance style, and risk profile. Whether Delaware, Ohio, or another state, the right fit depends on your strategic goals.
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