The (State) Constitutionality of Delaware SB 21's Safe Harbors for Conflicted Controller Transactions

Anticipating tomorrow's Delaware Supreme Court oral argument

Delaware’s SB 21 is the most consequential corporate law reform in decades. It responds to perceived instability and uncertainty in the judicial review of conflicted transactions—particularly those involving controlling stockholders—by establishing statutory safe harbors for interested deals that follow specified cleansing procedures. As with any reform that touches both the substance and the review of fiduciary duty claims, SB 21 has inspired intense debate, which in this case has included arguments about its constitutional validity.

For an explainer covering the background to SB 21 and its main provisions, see my article Delaware Senate Bill 21: What It Does and What Questions Remain Open.

On Wednesday, November 5, the Delaware Supreme Court will hear oral argument in Rutledge v. Clearway Energy Group LLC, in which plaintiff argues that SB 21 violates the Delaware Constitution.

The central question before the court is whether the safe harbors created by SB 21 are within the Delaware General Assembly’s power under the state’s constitution—or whether they improperly strip the Court of Chancery of its equity jurisdiction.

In my view, SB 21 is a measured codification of long-standing equitable principles and review frameworks, squarely within the legislature’s authority and consistent with a constitution that sets the Court of Chancery’s jurisdiction but does not insulate substantive corporate law from legislative revision.

This post explains what SB 21 did to create safe harbors for controlling stockholder transactions, canvasses the principal constitutional objections and defenses, and concludes that SB 21 is not unconstitutional.

For Prior BainbridgeOnCorporations.com coverage of SB 21 see this compilation post:

ICYMI: Delaware SB 21 Posts