Is Delaware SB 21 Constitutional?

Probably.

Those of us who labor in the corporate law and governance vineyard spend most of the spring preoccupied with the Delaware legislature’s effort to rollback a series of Chancery Court decisions on conflicted controller transactions. SB 21 was the result (I’ve got a free explainer on SB 21 here).

The bill made four key changes:

1. A new definition of "controlling stockholder" requiring either majority voting power ownership or at least one-third ownership plus managerial authority.

2. Revised standards for cleansing conflicted controller transactions that modify the framework established in Kahn v. M & F Worldwide Corp.

3. Automatic exculpation for controlling shareholders from monetary damages except for duty of loyalty breaches, bad faith actions, or improper personal benefits.

4. A narrower definition of "director independence" with heightened presumptions for directors of publicly traded companies.

According to the invaluable Chancery Daily newsletter, there are currently seven cases pending in the Chancery Court challenging the constitutionality of SB 21. (The claims all arise under the Delaware constitution, not the US.)

Delaware Supreme Court Rule 41(a)(1) provides that Delaware state courts (including Chancery Court) can “certify to [the Supreme] Court for decision a question or questions of law arising in any case before it prior to the entry of final judgment if there is an important and urgent reason for an immediate determination of such question or questions by this Court and the certifying court has not decided the question or questions in the case.”

In one of those cases, Rutledge v. Clearway Energy Group, Inc., Vice Chancellor Lori Will availed herself of that rule and certified two questions to the Delaware Supreme Court (a copy of the order is available from Chancery Daily here):

• Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144—eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the Safe Harbor Provisions are satisfied—violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?

• Does Section 3 of Senate Bill 21— applying the Safe Harbor Provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted—violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?

On June 11th, the Delaware Supreme Court accepted the certified questions for decision. According to Chancery Daily, Delaware Governor Matt Meyer has moved to intervene in Rutledge to support the bill.

Let’s focus on the more important issue, which is the certified question, since that will determine the constitutionality of SB 21’s safe harbor going forward.