My post of March 14 discussed pending legislation in Delaware to stop the migration of companies from that State to jurisdictions less protective of shareholder rights (such as Texas and Nevada). These new laws have just been passed, with Delaware expressly saying that they were intended to keep Delaware as the “premier” jurisdiction for business.
These changes, briefly summarized below, affect different constituencies differently: control persons will have greater latitude to effect deals that are in their interest; other shareholders will have a more difficult time challenging deals that are thought to be too favorable to control persons; and, lawyers will continue to be really necessary in the complex area of corporate governance, because the new laws make changes but do not eliminate the need for careful corporate process.
Assume a transaction occurs which has economic benefit for persons in control; there are several ways for control people to avoid getting sued by disgruntled shareholders. The shareholders by majority vote of disinterested parties can approve it after full disclosure. The directors by majority vote of disinterested parties can approve it after full disclosure. If challenged as detrimental and unfair to minority interests, the courts can review the action and decide whether or not it was entirely fair.
These standards sort of remain, but the roadmap has been altered: now for most interested party transactions you need board approval of a majority of only the independent board members, and the interested members count towards a quorum; you can have a disinterested committee make that determination; in only special cases is it necessary to get both board-level and shareholder approval. In determining whether a director is independent a clear standard has been set: not a party to nor interested in the transaction nor has a “material relationship” with the control people. And now a minority shareholder not given proper process when a transaction was authorized is able to ratify and consent to it afterwards (think Musk, though he has already gone to Texas).
Another subtle change is that the old law required an affirmative vote of all shareholders to okay a transaction; now the vote of a majority of only those shareholders who actually cast a vote is sufficient. This alone is a major loosening of standards as many shareholders don’t get around to voting about anything, and that apathy no longer will constitute a negative note.
New law also makes it harder for suspicious shareholders to uncover the details of a transaction; the ability under law to demand documents about a transaction has been shrunk to a specific list. To get background papers you need to make a court showing justifying suspicion.
The above is not a complete outline and there are nuances; you may suspect I am happy to state the following but it is true: you need to hire a lawyer for this stuff.