The last several months have marked an extremely busy time in Delaware corporate law, with regard to decisions out of the Delaware courts, proposed legislative responses, and shifting market practices. In recent weeks in particular, the Delaware Supreme Court issued a much-anticipated ruling addressing controlling stockholder conflicts of interest that is important for companies with significant stockholders. The Council of the Corporation Law Section of the Delaware State Bar Association (the DSBA) has also proposed an extensive set of amendments to the Delaware General Corporation Law (the DGCL) that address several recent cases, particularly relating to mergers and acquisitions and stockholder agreements. Those amendments still must be adopted by the Executive Committee of the DSBA, enacted by the Delaware legislature, and signed by the Delaware Governor before they become law. This alert is designed to provide an overview of the most pertinent information about these developments.
Match and Controlling Stockholder Structuring
In In re Match Group, Inc. Derivative Litigation,1 the Delaware Supreme Court affirmed several rules developed in Delaware Court of Chancery decisions. First, for most types of transactions in which a controlling stockholder gains a special benefit compared to stockholders as a whole, the exacting entire fairness standard of review, instead of the business judgment rule, will apply in ensuing stockholder litigation. The entire fairness standard generally makes litigation challenging to get dismissed at the pleadings stage, and the underlying litigation generally involves an assertion that the defendants breached their duty of loyalty and some sort of remedy should be available for stockholders. Perhaps most famously, this is the standard that applied in the recent litigation over Elon Musk’s compensation at Tesla. Second, the Supreme Court affirmed that in order for a controlling stockholder conflict transaction to be subject to the deferential business judgment rule, it must be subject to both 1) approval by a fully empowered independent board committee and 2) a fully informed, uncoerced minority vote, with both requirements declared as conditions to the transaction before substantive economic negotiations begin.
Because the Supreme Court had asked in the Match litigation for supplemental briefing as to whether proper use of an independent board committee process or minority stockholder approval could be sufficient to restore the protections of the business judgment rule outside of a controlling stockholder squeeze-out of minority stockholders, many had hoped that the Court would ease the burdens on controlling stockholder transactions. The litigation appears, however, to have been fought over what prior Delaware case law provided rather than the practical implications of that case law. Apart from the above matters, the Match ruling also provides that when an independent board committee is used as part of this framework to cleanse controlling stockholder conflicts, all members of the board committee must be independent as defined under Delaware law—not simply a majority of the committee, as the Court of Chancery had held. These rules from the Match case will significantly shape transaction planning for companies with large stockholders.
Recently Proposed DGCL Amendments
The proposed DGCL amendments would provide for a number of important rules, all of which are generally designed to address recent case law:
Conclusions
The Match case will prove consequential in many transactions involving companies with large stockholders. The proposed DGCL amendments, meanwhile, would have significant impacts for both private and public companies and ease the rulings of the recent cases. We will monitor the status of the proposed DGCL amendments and provide further updates as appropriate.
For more information on this or any related matter, please contact any member of Wilson Sonsini's corporate governance or corporate governance litigation practices.
[1] 2024 WL 1449815 (Del. Apr. 4, 2024).
[2] 2024 WL 747180 (Del. Ch. Feb. 23, 2024).