Delaware courts have long refused to second-guess corporate management’s decision-making when it is disinterested, but applied close scrutiny when management operates in the presence of a conflict of interest. As a result, much of Delaware case law has centered around determining whether management was conflicted, and if so, whether it had taken appropriate steps to neutralize the conflict.

Delaware is famously the domicile of formation for a large majority of publicly traded companies in the United States. Delaware law consequently exerts influence on capital markets and commercial relations throughout the global economy. That nationally significant body of law develops along two principle lines—in the Legislature through statutory amendments to the Delaware General Corporation Law (DGCL) and in Delaware’s courts through the case-by-case advancement of corporate and equity jurisprudence.

In March 2025, the Delaware Legislature enacted sweeping changes to the DGCL in Senate Bill 21 (SB 21), among which were the creation of new safe harbor provisions that make it more difficult for stockholders to sue corporate management for self-dealing. In Rutledge v. Clearway Energy Group, Appeal No. 248, 2025, a trial court certified questions to the Delaware Supreme Court, asking it to rule on the validity of SB 21’s safe harbor provisions and retroactivity clause under the Delaware Constitution. The Supreme Court found the law constitutionally valid. As a result, the case has been remanded back to the trial court to apply and interpret the safe harbor provisions.

Delaware courts have long refused to second-guess corporate management’s decision-making when it is disinterested, but applied close scrutiny when management operates in the presence of a conflict of interest. As a result, much of Delaware case law has centered around determining whether management was conflicted, and if so, whether it had taken appropriate steps to neutralize the conflict.

In the last several years, a number of significant Delaware decisions have come down in favor of stockholder-plaintiffs who alleged corporate management was conflicted when it undertook a challenged transaction. Most of those cases specifically involved a conflict of interest by a controlling stockholder—a type of conflict toward which Delaware case law has shown a special vigilance. At the same time, other jurisdictions—notably Texas and Nevada—have made efforts to attract incorporations by enacting management-friendly changes to their own corporate codes. Following those recent plaintiff-friendly Delaware decisions, a handful of Delaware entities changed their legal domicile, while others threatened to do so.

SB 21 was enacted as a reaction to this threat of “DExit,” expressly intended to preserve Delaware’s dominant position as the situs of corporate formation. SB 21 narrowed the definition of a controlling stockholder while enacting statutory safe harbor provisions drawn from the conflicted-controller case law. Under the pre-SB 21 case law, a conflicted-controller transaction would be treated as unconflicted (and thus insulated from judicial scrutiny without the need for a trial) by the so-called cleansing mechanisms of obtaining the approval of both a disinterested committee of independent directors and the vote of the disinterested stockholders.

SB 21 sets up statutory versions of the independent committee and disinterested stockholder vote cleansing mechanisms. But, SB 21 prescribes that both mechanisms are only necessary to insulate a conflicted-controller transaction that cashes out the minority stockholders. Any other transaction can be cleansed and rendered immune from judicial scrutiny with application of either mechanism. Moreover, the statutory language leaves it unclear whether the requirements for satisfying each of the statutory cleansing mechanisms are as strict as for the judicially created ones. And, SB 21 made its effect retroactive for all suits filed after the bill introducing it was announced on February 17, 2025, irrespective of when the underlying acts occurred.

Rutledge involves a corporation in the clean energy industry. An LLC controls a majority of the corporation’s voting stock, while the remaining minority sells on the New York Stock Exchange. The corporation purchased assets from the controller, after which a stockholder challenged the transaction, alleging that the corporation overpaid by tens of millions of dollars. The transaction was approved by a committee of directors whose members the full board had deemed independent of the controller, but was not submitted to a stockholder vote. The transaction happened before SB 21 was enacted, but the suit was only commenced afterward.

Because the Rutledge transaction was one between a corporation and its controlling stockholder, both judicially created cleansing mechanisms would be necessary to negate the conflict under pre-SB 21 law. But, since the transaction didn’t cash out the minority stockholders, post-SB 21, a committee alone is sufficient to cleanse the conflict so long as it meets the criteria for a properly functioning independent committee under the statute.

As a result, the applicability of SB 21 is potentially dispositive at the pleading stage. Without SB 21, the transaction was not cleansed and the claim will almost certainly go to discovery and trial. With it, the controller can likely prevail on a motion to dismiss unless the plaintiff can show that the committee fell short of statutory requirements for cleansing. Because Rutledge case was filed shortly after SB 21’s retroactivity date, by its terms the statute applies, even though the underlying acts occurred beforehand.

As a result, the Rutledge stockholder-plaintiff challenged the constitutionality of SB 21 on two grounds. First, he argued that SB 21’s safe harbors amount to a limitation on the Court of Chancery’s equitable jurisdiction – a jurisdictional grant that the Delaware Constitution protects. Second, because the conduct at issue occurred before SB 21 was enacted, he argued the retroactivity provision has deprived him of a vested right in violation of Delaware’s Bill of Rights. Because those discrete constitutional challenges were potentially dispositive and would have a similarly striking effect on numerous other cases before the Court of Chancery, the stockholder-plaintiff requested and the trial judge granted the unusual step of certifying the constitutional challenges as questions to the Delaware Supreme Court prior to deciding the case.

The Supreme Court rejected both arguments. In a unanimous opinion written by Justice Traynor, it explained that SB 21 modifies the standards of fiduciary conduct – how violations are measured and proven, and what remedies are available for the violation—without changing the Court of Chancery’s jurisdiction to decide questions. For similar reasons, it found that SB 21’s retroactive effect did not deprive the stockholder-plaintiff of any vested right, as it only modified the rules of decision to be applied. The stockholder-plaintiff retains the ability to sue on the conduct in the same court for the same rights. Additionally, changes even to vested rights are often permissible when they are incidental to broader enactments in pursuit of legitimate legislative policies, as SB 21 was. As a result, the Delaware Supreme Court upheld SB 21’s safe harbors and retroactivity, answering the certified questions, and remanded the case back to the trial court to be decided under the new statutory framework.

That result does not fully decide the case. On remand—unless the parties settle the case—the controller-defendant will presumably move to dismiss the case on the basis of the safe harbors, while the stockholder-plaintiff can be expected to argue that the committee lacked independence or otherwise failed to satisfy the statutory requirements. There is a wealth of case law addressing challenges to the functioning of special committees under the pre-SB 21 judicially created cleansing mechanisms. With Rutledge and similar cases, we may ask whether and to what degree the framework for examining the efficacy of a committee differs between the statutory mechanism and its judicially created antecedent.

Just over a century ago, New Jersey enacted a series of laws—the “Seven Sisters Acts”—seeking to regulate the conduct of corporations formed under its laws. Rather than succeeding in that goal, the effect was largely to spur corporations to decamp to Delaware. The fear that the same fate will befall Delaware – DExit ­– hangs over discussions of SB 21. In the Rutledge appeal, Governor Meyer intervened as a party, defending the enactment, and expressly emphasized SB 21’s importance to protecting Delaware’s dominant position by reference to quotations from legislators relating to the bill’s introduction and passage. In this view, SB 21 “sought to address recent judicial rulings that the legislature believed had injected uncertainty and imbalance into Delaware’s corporate law.”

This ultimately points to the tension facing the trial court with Rutledge on remand, and other similar post-SB 21 conflicted-controller cases currently before the Court of Chancery. Was SB 21, a modest corrective designed to promote clarity, balance, predictability, and consistency, disapproving of just some "recent judicial rulings”? Or, as its critics have presented it, was SB 21 a fundamental reordering of relations within the corporate contract, favoring management and stripping non-controlling stockholders of their rights? By eliminating the constitutional questions, the Delaware Supreme Court’s Rutledge decision placed that matter squarely before the Court of Chancery to decade. Accordingly, the coming year is likely to see major developments in Delaware corporate doctrine as courts, now assured of SB 21’s constitutionality, begin to apply it.

Michael B. Gonen, a senior associate with Duane Morris, is a litigator whose practice focuses primarily on corporate and commercial litigation in Delaware’s Court of Chancery. Prior to entering private practice, Gonen served as judicial clerk to Judge Karen Valihura of the Delaware Supreme Court; Judge Paul Wallace of the Delaware Superior Court; and Judge Jeffrey Trauger of the Bucks County Court of Common Pleas.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.