Delaware Creates More Corporate Clarity and Overhauls Rules Governing Conflicted Transactions

In February 2025, the Delaware General Assembly introduced legislation to significantly amend Section 144 of the Delaware General Corporation Law (DGCL) to improve the legal framework surrounding transactions involving potential conflicts of interest among directors, officers, and controlling stockholders of Delaware corporations. The Delaware Governor signed the bill into law on March 25, 2025. Previously, Section 144 provided only that contracts or transactions between a corporation and an interested director or officer would not be “void or voidable” solely because the director or officer was present, participated, or voted at the meeting at which the board approved the contract or transaction. Old Section 144 did not address the fiduciary standards applicable to interested director or officer transactions, with such standards being developed extensively under Delaware case law. In contrast, new Section 144 establishes a specific procedural framework for corporate boards to follow that shields directors, officers, and controlling stockholders from fiduciary liability, and, in so doing, seeks to establish a balance between safeguarding the interests of the stockholders generally while protecting directors, officers, and controlling stockholders if they act within the framework prescribed by new Section 144.

The amendment applies retroactively with respect to all acts or transactions, except with respect to proceedings that were pending, on or before February 17, 2025.

Safe Harbor for Director, Officer, and Controlling Stockholder Transactions

New Section 144 is divided into three principal parts: Section 144(a) addresses acts or transactions involving or between the corporation and an interested director or officer; Section 144(b) addresses acts or transactions involving or between the corporation and a controlling stockholder, other than “going private” transactions involving a controller; and Section 144(c) addresses controlling stockholder transactions that are “going private” transactions. Sections 144(a), (b), and (c) each replace the old Section 144 “void or voidable” concept with a specific statement that an interested director or officer (or, in the case of Sections 144(b) and (c), a controlling stockholder) may not be subject to an order for equitable relief, monetary damages, or other remedy if the corporation satisfies the requirements of new Section 144.

The procedural requirements under new Section 144(a) are largely the same as under the prior statute, i.e., either (i) disclosure to the board of the director’s or officer’s interest in the proposed action or transaction and approval by a majority of the disinterested directors, (ii) disclosure to the stockholders of the director’s or officer’s interest in the proposed action or transaction and approval by a majority of the disinterested shares, or (iii) the act or transaction is otherwise fair to the corporation and its stockholders. However, new Section 144(a) introduces two new concepts. The first is that the interested director or officer may be involved in the initiation, negotiation, or approval of the act or transaction. Second, if the act or transaction is submitted to the stockholders for their approval, new Section 144(a) lowers the required approval threshold from a majority of the outstanding disinterested shares to a majority of the votes cast by the disinterested stockholders.

As such, compliance with the requirements of new Section 144(a) will act to shield an interested director or officer from fiduciary liability even if the director or officer proposes and initiates discussions concerning a transaction or otherwise participates in the negotiations of the transaction and in board deliberations.

New Sections 144(b) and (c) establish fiduciary standards applicable to controlling stockholder transactions or other matters in which a controlling stockholder’s interests differ from those of the stockholders generally. Prior to the adoption of new Section 144, a court generally would apply entire fairness—Delaware’s most stringent standard of review—to any transaction between a corporation and its controlling stockholder if the controlling stockholder received a non-ratable benefit. The only safe harbor to restore the business judgment rule—the least stringent standard of review—was under the framework established by Kahn v. M&F Worldwide Corporation and its progeny (“MFW Framework”). The MFW Framework required (1) conditioning the transaction on negotiation by a fully empowered special committee of disinterested directors and (2) approval by a fully informed, uncoerced vote of a majority of the outstanding shares held by minority stockholders. Additionally, the MFW Framework required that the controlling stockholder stipulate to these conditions prior to any substantive negotiations or discussions taking place. Absent use of the MFW Framework, the corporation had the burden to prove that the transaction was entirely fair to the company and its stockholders, which meant that it was unlikely the company would prevail at the motion to dismiss stage and, thus, that it would be forced into costly litigation over the fairness of the transaction.¹

Under new Section 144(b), however, a transaction with a controlling stockholder, other than a “going private” transaction, may not be subject to an order for equitable relief, monetary damages, or other remedy if the following requirements are satisfied: (1) the transaction is approved in good faith by a fully empowered special committee comprised of a majority of disinterested directors that does not include the controlling stockholder; or (2) the transaction is conditioned on and receives the approval of or ratification by an informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholders; or (3) the transaction is otherwise fair to the corporation and its stockholders.

New Section 144(c) applies to “going private” transactions and tracks the requirements of Section 144(b), except that the requirements of clauses (1) and (2) described above are conjunctive (i.e., both elements must be satisfied). In that regard, new Section 144(c) at first glance appears to be similar to the MFW Framework but in fact differs in several key aspects. First, the required special committee need not consist of entirely disinterested directors. Instead, only a majority of the special committee must consist of disinterested directors, provided that the controlling stockholder may not serve on the committee. Second, Sections 144(b) and (c) establish a stockholder approval threshold that is a majority of the votes cast by the disinterested stockholders. Third, the MFW Framework’s requirement that the controlling stockholder stipulate to use of the special committee and approval by the disinterested stockholders prior to substantive negotiations or discussions has been eliminated.

Clarity on What Constitutes a Controlling Stockholder, Control Group, and Controlling Stockholder Transaction

New Section 144 also provides definitions of “controlling stockholder,” “control group,” and “controlling stockholder transaction.” Specifically, a “controlling stockholder” is any person who, together with such person’s affiliates and associates, (i) owns or controls a majority in voting power of the outstanding stock entitled to vote generally in director elections, or (ii) has the functionally equivalent power to that of a stockholder that owns or controls a majority in voting power of the outstanding stock entitled to vote generally in director elections by virtue of owning at least one-third in voting power of the outstanding stock and the power to exercise managerial authority over the business and affairs of the corporation. New Section 144 defines a “control group” as two or more persons that are not controlling stockholders individually but that, by virtue of an agreement, arrangement, or understanding between them, constitute a controlling stockholder. Lastly, a “controlling stockholder transaction” is an act or transaction between the controlling stockholder or control group and the company (or its subsidiaries) or an act or transaction from which a controlling stockholder or control group receives a financial or other benefit not shared with the corporation’s stockholders generally.

Key Takeaways

The amendment to DGCL Section 144 represents a sea change in the fiduciary landscape applicable to controlling stockholder transactions, as well as to transactions involving interested directors and officers generally. It provides a specific framework for ensuring that directors, officers, and controlling stockholders are able to engage in interested transactions in a manner that provides meaningful protection to all disinterested parties while at the same time relieving Delaware corporations from some of the greatest burdens imposed by prior case law. Delaware corporations can now navigate complex transactions with greater confidence and with less execution risk, knowing that there is a clearer legal framework that supports a board’s efforts to maintain integrity and fairness in corporate dealings.

^[1] It bears noting that the ratification doctrine established by Corwin v. KKR Financial Holdings LLC, pursuant to which the business judgment rule is restored if the transaction is approved by the uncoerced, fully informed and disinterested holders of a majority of the corporation’s shares, is by its terms inapplicable to controlling stockholder transactions.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.