Corporate Transparency Act Update: Drastic Reduction in Scope of BOI Reporting in March 21, 2025 FinCEN Guidance
On March 21, 2025, the United States Treasury announced a significant reduction in scope of the definition of “reporting company” under the Corporate Transparency Act, limiting the obligation to file beneficial ownership reports to foreign entities only and removing the obligation to file from U.S. persons and U.S. companies.
As noted in our previous online posts, following significant litigation regarding the constitutionality of the regulation, on February 19, 2025, FinCEN suspended reporting obligations under the CTA and promised further guidance on reporting obligations to be issued on or before March 21, 2025. On March 21, 2025, FinCEN issued an interim final rule:
The new rule exempts U.S. persons from having to disclose BOI under the regulations by narrowing the definition of a “reporting company”. This means that any entity created in the United States does not need to report beneficial ownership to FinCEN under the CTA, even if it has non-US persons as beneficial owners.
The rule is now narrowed to only foreign entities that are registered to do business in the United States by the filing of a document with a secretary of state or similar office. The rule reduces the scope of the CTA dramatically, as most foreign enterprises doing business in the United States will have created a legal subsidiary within the country in order to conduct business. As above, U.S. entities are exempt from reporting.
Entities in existence prior to Friday have 30 days to complete their BOI filings with FinCEN. Entities that come into existence after the issuance of the rule have 30 days following formation to complete their filing obligations.
FinCEN continues to accept comments to this interim final rule and intends on issuing a final rule later this year. The final rule may change the scope of the CTA, and litigation continues before the courts regarding the CTA. We will continue to follow the law’s progress and will provide updates as this regulation evolves.
Our prior posts on CTA developments can be found here:
Client Alert: Corporate Transparency Act Beneficial Ownership Information Reporting On Hold – Business Law
Client Alert: Supreme Court Allows Corporate Transparency Act Enforcement But FinCEN Notes Another Stay Prevents Current Implementation – Business Law
CTA Reporting Now Required, but FinCEN Waives Penalties and Indicates New Reporting Deadline Extension Likely Later This Year – Business Law
Selling a Business: A Practical Guide for a Successful Transaction
This guide is designed to help business owners and executives navigate the process of selling a business. It provides an overview of the sale process and practical tips for achieving the best possible outcome and addresses common challenges encountered during deals.
For many sellers, a transaction will involve unfamiliar procedures and terms where a lawyer can provide valuable guidance. The better the key concepts are understood, the better equipped one will be to make informed decisions and achieve a favorable result.
Sale Process
The timeline for the deal will likely include the following steps:
Selecting a business broker who is right for the business.
The buyer presents a proposal letter or letter of intent.
The buyer prepares an Asset Purchase Agreement (APA) for the parties to negotiate.
The seller’s board of directors and shareholders approve the APA.
Both the buyer and seller sign the APA at or before closing.
Additional steps, such as obtaining real estate title insurance, finishing due diligence, and preparing closing documents.
At closing, the buyer pays the purchase price, and the seller transfers the business.
Letter of Intent
The selected buyer will produce a written proposal letter or letter of intent naming the price, transaction structure, and key terms. It should be written to state that it is nonbinding, meaning that everything remains subject to negotiating and signing a more detailed, definitive purchase agreement. The letter of intent will often include a binding agreement to negotiate exclusively with the buyer for a period of time.
Due Diligence
The buyer will often do a thorough business review including financial statements, contracts, employee compensation and benefits, real estate, and other key aspects. Though the process can be time-consuming, it is typically better to provide the requested information rather than contest its necessity.
Review of Governing Documents
Early in the process, the selling corporation should review its articles of incorporation, bylaws, and any shareholder (buy-sell) agreements. The seller should identify anything that could affect the transaction, such as rights of first refusals or super-majority vote requirements. An attorney can help with this.
Structure – Sale of Assets
Most business sales are structured as asset purchases. In this structure, the selling corporation transfers its assets to a buyer-controlled entity. The buyer can form a new corporation to purchase the assets or use an existing entity. The seller keeps its corporate entity and dissolves it after the closing. Buyers do this to avoid any known or unknown liabilities the corporation may have.
Transferred assets include owned real estate, equipment, furniture, accounts receivable, prepaid assets, the goodwill of the business, the name of the paper, all website addresses, etc. In most cases, cash is retained by the selling corporation.
Some working capital liabilities may also be transferred to the buyer, such as accounts payable. Bank debt and other long-term liabilities are typically not assumed by the buyer. Liabilities not assumed by the buyer are paid off at closing and remain an obligation of the selling corporation.
The other transaction structure is for the buyer to purchase the corporation or LLC.
Purchase Price
Larger companies purchasing smaller companies typically pay all cash. Often 5 to 10 percent of the purchase price may be placed in an escrow account with a bank for an agreed-upon period of time.
The purchase price is for the enterprise value of the business without regard to bank debt and other long-term liabilities. This is frequently referred to as selling the business on a cash-free, debt-free basis. The seller will need to pay off any bank debt or other long-term liabilities out of the purchase price. Additional liabilities may include deferred compensation payments and any severance obligations.
The purchase price often includes a “net working capital adjustment” as well. Net working capital is current assets (excluding cash) minus current liabilities. Net working capital varies daily as revenues are received, expenses are paid, and liabilities and prepaid assets are accrued.
When a business is sold, the buyer and seller will usually agree on a “net working capital target.” The target is intended to be a normal amount of working capital that should be there as of the closing. If the actual net working capital at the time of closing exceeds or is less than the target amount, then the purchase price is increased or reduced dollar for dollar.
The seller will want to be careful about selecting the net working capital target because any shortfall at closing will reduce the purchase price. Different types of businesses have different working capital profiles. So, it is important to make sure the working capital definition and target fit for the business.
Asset Purchase Agreement
The buyer will prepare a detailed APA listing of the assets being purchased and the purchase price.
The APA will include several representations and warranties from the seller such as:
The selling corporation will have all director and shareholder approvals needed to sell the business.
The assets being sold will be free and clear of all liens when the transaction closes.
The seller’s financial statements are accurate.
There are no material liabilities that have not been disclosed to the buyer.
The list of employees and their compensation is accurate.
If the representations are not true at the time of the closing, the buyer is not required to complete the transaction.
If the buyer discovers a representation is not true after closing, the buyer may have a claim against the seller. For example, if the seller represents that the equipment is free and clear of liens, and it turns out there is a lien, the seller would be responsible for paying off the lien. The purchase agreement will include limits and procedures related to how and when the buyer can make a claim against the seller.
The seller can protect themselves by including disclosure schedules within the APA documenting any problems or facts contrary to the representations. If disclosed before the closing, the buyer cannot make a claim after the closing. This is where the due diligence review benefits both the buyer and the seller.
The APA will include a list of covenants or promises. The seller will promise to operate its business in the ordinary course between signing and closing. The seller will also agree to negative covenants promising not to do certain major actions between signing and closing, such as entering into a new contract or making a large dividend.
Board of Directors and Shareholder Approval
The board of directors should review and approve the definitive APA before it is signed. If a board decides that a sale of the company is the best decision, the directors have fiduciary duties to make an informed decision in the best interests of the shareholders. Hiring a business broker and soliciting multiple bids for the business is considered the gold standard to get the best possible price from the sale. The directors should carefully review the deal terms and transaction documents. Directors should also include their lawyers in the board meeting and ask to walk through the key terms of the legal agreements. An attorney can help prepare board minutes that document the process followed and the reasons for the transaction.
The APA must also be approved by the corporation’s shareholders (by a majority of the outstanding shares unless there is a super-majority vote requirement). The shareholder meeting takes place either at or before the APA is signed or between the signing and the closing.
In addition to approving the sale of all assets, the shareholders will often vote to dissolve the corporate entity after the closing. During the dissolution process, the corporate entity turns its assets into cash, pays its liabilities, and then distributes the net proceeds to shareholders.
Dissenters Rights
Most states have a corporations statute that includes dissenters’ rights. Early in the process, an attorney should review the corporations statute and advise whether the transaction is exempt from the dissenters’ rights provisions. In most states, dissenters’ rights do not apply when assets are sold for cash, and the proceeds are distributed to shareholders within one year. If dissenters’ rights apply and the transaction is not exempt, a dissenting shareholder has certain rights to go through a process designed to determine the fair value of their shares.
Real Estate
If the seller leases real estate, the lease must also be reviewed. Oftentimes it will be necessary to receive the landlord’s consent before transferring the lease to the buyer. If the seller owns the real estate, then the real estate will be transferred at the closing.
Title insurance will be obtained to confirm that the seller owns the real estate and to identify any mortgages, easements, or other liens or encumbrances on the property. The buyer will expect all mortgages to be paid at closing, so it gets a clean title to the property.
Often the buyer will obtain a survey of the property to show the precise boundaries and the building’s exact location.
The buyer will also typically hire an environmental consulting firm to examine the real estate for any contamination or asbestos. A Phase I assessment involves a tour of the property, a look at the history of the property, and a determination of whether there are any recognized environmental conditions that may require further investigation. If it looks like there may be serious issues, the buyer may proceed to a Phase II assessment which involves taking soil samples and testing them for contamination.
The buyer may also get a building inspection to inspect the structure, HVAC systems, roof, etc.
Net Proceeds to the Seller
The corporation selling the business closes the transaction and receives the cash purchase price. Out of the purchase price, the seller must pay off its bank loans and other long-term debt. It must also pay its transaction expenses, which include the business broker fee, attorney fees, accountant’s fees, real estate title insurance, etc. Any net working capital adjustment will also affect the net proceeds to the shareholders of the selling corporation.
Early in the process, the seller’s Chief Financial Officer and outside accountant should prepare an estimate of what the net proceeds will be after payment of expenses and taxes.
Escrow Account
The buyer will often withhold between 5 and 10 percent of the purchase price. That money will be put in an escrow account for a period of time. If the seller has misrepresented the business to the buyer, the buyer will take money from the escrow account to make itself whole. If the buyer does not have any legitimate claims, the money will be distributed to the seller at an agreed upon date, often 12 to 18 months after the closing.
For sellers, one tactic is to negotiate a staged release of the escrow funds. For example, 50 percent is to be released to the seller six months after the closing, with the remaining 50 percent to be distributed to the seller 12 months after the closing.
Employee Transition to Buyer
In an asset sale, the employees are the seller’s employees before the closing, and the buyer’s after the closing. The buyer will typically do the same new employee intake paperwork that it would do for any new employee. Employees may be required to fill out an employment application, a form I-9 to verify employment eligibility, etc. Employees will enroll in the buyer’s benefit plans. If the seller has a 401(k), then arrangements will be made to terminate that 401(k) or transfer balances to the buyer’s 401(k) or to individual employee IRAs.
A buyer in an asset purchase is not required to hire all the seller’s employees. Sellers should ask buyers about their intentions as part of the negotiation process and consider severance obligations and policies for any employees not hired by the buyer.
The Closing
At closing, the final documents are delivered, the buyer pays the purchase price, and the business is transferred. Often it is a virtual closing that does not require people to be physically present. The lawyers arrange for documents to be signed and delivered. After the documents are signed, the parties and/or their lawyers will join a conference call, agree that everything is completed, and direct the buyer to transfer the purchase price.
After the Sale
After the closing, the selling corporation then enters a wind-down period that may take 3 to 12 months. The corporation must pay all its creditors.
Bumps along the way
Every deal comes with its frustrations, which can include:
The sale process is taking longer than expected.
The buyer’s due diligence review may seem intrusive. Responding to requests is time-consuming, and it may seem like the buyer is requesting the same information repeatedly.
The buyer may be slow to commit to the future role of key members of the seller’s management team.
The seller may become frustrated with the buyer’s focus on environmental or other risks that have never been an issue in the past.
The buyer may seem overly concerned about contracts and vendor relationships that have not caused issues before.
Some buyers have a smooth and well-thought-out transition process with good communication. Others may have poor communication and may seem haphazard and reactive. A buyer may also be distracted by other deals in the process.
Tips for a Successful Transaction
Here are some tips that can help achieve a better result for the company, employees, and shareholders:
Keep the sale process moving. The longer things drag on, the more likely a bad event will happen. Whether external like market trouble, or internal, like losing key employees or advertisers.
Stay focused on operating the business. A deal can be a huge distraction that negatively impacts operations and earnings. Employees may lose focus, and deteriorating earnings during a sale process can be problematic.
Plan ahead for third-party tasks and lead times – for example, environmental assessments, real estate surveys, obtaining consent from landlords, getting shareholder approval, and paying off bank debt or bonds.
Review employment agreements, deferred compensation arrangements, or bonus or profit-sharing plans with a lawyer.
Be careful with capital expenditures. Using working capital to buy equipment could negatively affect net working capital at closing, and consequently the purchase price.
Create complete, detailed, and accurate Disclosure Schedules. Good Disclosure Schedules reduce the risk of post-closing claims from the buyer, helping preserve the net purchase price.
Have a good strategy and process for announcing the deal to employees and customers.
Manage shareholder expectations. Net proceeds will be reduced by debts, taxes, and transaction expenses. Even after the closing, there will be a wind-down period before final distributions are made.
Consider severance pay for employees who are not hired by the buyer. Some companies pay special bonuses to employees in connection with the deal.
Acknowledge that key members of the management team may be conflicted, disappointed, or even outright hostile to the deal. It could mean changes to their title, responsibility, autonomy, compensation, or even their job.
Work with a bank early on regarding payoff arrangements for bank debt. If more complex financing, such as bonds, are in place, a lawyer can help navigate the complexities of this process.
Be mindful of vacation and travel schedules for key individuals involved in the process to plan ahead and avoid delays.
Recent Division of Corporation Finance Guidance Relating to Regulation 13D-G Beneficial Ownership Reporting, Proxy Rules, and Tender Offer Rules
Since the beginning of the year, the US Securities and Exchange Commission’s (SEC) Division of Corporation Finance staff (Corp Fin Staff) has issued several important statements and interpretations, including a Staff Legal Bulletin on shareholder proposals and multiple new and revised Compliance and Disclosure Interpretations (C&DIs). Given the pace and importance of these recent changes, it is critical that public companies be aware of the significant policy shift at the Division of Corporation Finance and the substance of the updated statements and interpretations.
This is the first part of an ongoing series that will discuss recent guidance and announcements from the Corp Fin Staff. This alert will review the new and revised C&DIs released by the Corp Fin Staff relating to Regulation 13D-G, proxy rules, and tender offer rules.
Regulation 13D-G
On 11 February 2025, the Corp Fin Staff revised one C&DI and issued a new C&DI with respect to beneficial ownership reporting obligations. Revised Question 103.11 clarifies that determining eligibility for Schedule 13G reporting (as opposed to Schedule 13D reporting) pursuant to Exchange Act Rule 13d-1(b) or 13d-1(c) will be informed by all relevant facts and circumstances and by how “control” is defined in Exchange Act Rule 12b-2. This revised C&DI removed the examples previously given as to when filing on Schedule 13D or Schedule 13G would be appropriate.
New Question 103.12 states that a shareholder’s level of engagement with a public company could be dispositive in determining “control” and disqualifying a shareholder from filing on Schedule 13G. This new C&DI notes that when the engagement goes beyond a shareholder informing management of its views and the shareholder actually applies pressure to implement a policy change or specific measure, the engagement can be seen as “influencing” control over a company. Together, these revised and new C&DIs present a significant change in beneficial ownership considerations with respect to shareholder engagements.
Since the issuance and revision of these two C&DIs, the Corp Fin Staff has further indicated that the publishing of a voting policy or guideline alone would generally not be viewed as influencing control. However, if a shareholder discusses a voting policy or guideline when engaging with a company and the discussion goes into specifics or becomes a negotiation, it could be seen as influencing control. Additionally, the Corp Fin Staff explained that, while statements made by a shareholder during an engagement may indicate that it is not seeking to influence control, a shareholder’s actions may still be considered an attempt to do so.
For companies that actively engage with shareholders that report ownership of the company’s holdings pursuant to a Schedule 13G, the new and revised Regulation 13D-G C&DIs may have the unintended effect of causing additional time and resources to be spent engaging with a broader pool of investors if engagements with larger shareholders are canceled, postponed, or lessened in scope.
Proxy Rules and Schedules 14A/14C
Over the past several proxy seasons, there has been an increase in the number of voluntary Notice of Exempt Solicitation filings by shareholder proponents and other parties in what is often seen as an inexpensive way to express support for a shareholder proposal or to express a shareholder’s views on a particular topic. This can be seen as contrary to the intended purpose of a Notice of Exempt Solicitation filing, which was to make all shareholders aware of a solicitation by a large shareholder to a smaller number of shareholders. Many companies that had these voluntary Notice of Exempt Solicitation filings made in connection with a shareholder proposal have found them to be confusing to shareholders since there was limited information required by these filings and there was uncertainty about how to respond to materially false and misleading statements in them.
On 27 January 2025, the Corp Fin Staff revised two C&DIs and issued three new C&DIs relating to voluntary Notice of Exempt Solicitation filings. The new and revised C&DIs clarify that voluntary submissions are allowed by a soliciting person that does not beneficially own more than US$5 million of the class of subject securities, so long as the cover page to the filing clearly indicates this fact. Additionally, the notice itself cannot be used as a means of solicitation but instead should be a notification to the public that the written material has been provided to shareholders by other means. The Corp Fin Staff also confirmed that the prohibition on materially false or misleading statements contained in Exchange Act Rule 14a-9 applies to all written soliciting materials, including those filed pursuant to a Notice of Exempt Solicitation.
For companies that have had voluntary Notice of Exempt Solicitation filings made to generate publicity for a shareholder proposal or express a view on a particular topic, the new and revised Proxy Rules and Schedules 14A/14C C&DIs are intended to significantly limit the number of or stop these voluntary filings, which are simply made for publicity or to express a viewpoint.
Tender Offer Rules
On 6 March 2025, the Corp Fin Staff added five new C&DIs relating to material changes to tender offers after publication. According to Exchange Act Rule 14d-4(d), when there is a material change in the information that has been published, sent, or given to shareholders, notice of that material change must be promptly disseminated in a manner reasonably designed to inform shareholders of the change. The rule goes on to say that an offer should remain open for five days following a material change when the change deals with anything other than price or share levels.
In new C&DI Question 101.17, the Corp Fin Staff clarified that while the SEC has previously stated that an all-cash tender offer should remain open for a minimum of five business days from the date a material change is first disclosed, it understands this may not always be practicable. The Corp Fin Staff believes that a shorter time period may be acceptable if the disclosure and dissemination of the material change provides sufficient time for shareholders to consider this information and factor it into their decision regarding the shares subject to the tender offer.
New C&DIs 101.18–101.21 address material changes related to the status or source of the financing of a tender offer. In Question 101.18, the Corp Fin Staff indicated that a change in financing of a tender offer from “partially financed” or “unfinanced” to “fully financed” constitutes a material change that requires shareholder notice and time for consideration on whether a shareholder will participate. In Question 101.20, however, the Corp Fin Staff clarifies that the mere substitution of the source of financing is not material. The Corp Fin Staff did note that an offeror should consider whether it needs to amend the tender offer materials to reflect the material terms and the substitution of the funding source. While this may seem contrary to the Corp Fin Staff’s guidance in this C&DI, an immaterial change in the funding source could trigger an obligation to amend the tender offer materials to reflect other changes, such as the material terms of the new source of funding.
In Question 101.19, the Corp Fin Staff indicated that a tender offer with a binding commitment letter from a lender would constitute a fully financed offer, while a “highly confident” letter would not. The answer to Question 101.21 builds on the guidance from the previous three new C&DIs to establish that when an offeror has conditioned its purchase of the tendered securities on the receipt of actual funds from a lender, a material change occurs when the lender does not fulfill its contractual obligation and the offeror waives it without an alternative source of funding.
In light of these new C&DIs, companies planning tender offers should play close attention to the status of any necessary funding, as changes in unfunded, partially funded, or fully funded financing can trigger the need to disclose a material change to stakeholders as well as to amend the tender offer materials.
Conclusion
This publication is the first in a series that seeks to highlight these policy changes and help public companies stay up to date on the Corp Fin Staff’s guidance. Our Capital Markets practice group lawyers are happy to discuss how these policy and guidance changes can impact companies as they consider how to address the new and revised Regulation 13D-G, proxy rules, and tender offer rules C&DIs.
CTA Drastically Pared Back
As promised by the US Department of Treasury in early March, the Financial Crimes Enforcement Network (FinCEN) issued an interim final rule removing the requirement for US companies, their beneficial owners, and US persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA).
Now, only non-US entities that have registered to do business in the United States are subject to the CTA.
See our prior alert on Treasury’s March 2 announcement here.
Only Non-US Entities Subject to the CTA
The interim final rule, issued by FinCEN on March 21 and published on March 26, amends the BOI reporting rule to revise the definition of “reporting company” to extend only to entities formed under the law of a foreign country that have registered to do business in any US state or tribal jurisdiction by filing a document with a secretary of state or similar office. This category of entities under the original rule was termed “foreign reporting companies.” And, in a related move, the interim final rule also formally exempts domestic entities (formerly known as “domestic reporting companies”) from the CTA’s requirements.
No BOI Reporting of US Persons Is Required
Furthermore, reporting companies are not required to report the BOI of any US persons who are beneficial owners, and US persons are exempt from having to provide BOI with respect to any reporting company for which they are a beneficial owner.
Company Applicant Reporting Is Still Required
The concept of a “company applicant” has been retained for the foreign entities still subject to the CTA, but it applies only to the individual who directly files the document that first registers the reporting company with a state or tribal jurisdiction and to the individual (if different from the direct filer) who is primarily responsible for directing or controlling that filing. A company applicant may be a US person and is not exempted from being reported as a company applicant by virtue of being a US person.
New Initial Reporting Deadlines
Foreign entities that are “reporting companies” under the interim final rule and do not qualify for an exemption from reporting under the CTA are subject to new deadlines:
Reporting companies registered to do business in the United States before March 26 must file BOI reports by April 25.
Reporting companies registered to do business in the United States on or after March 26 have 30 calendar days to file an initial BOI report after receiving notice that their registration is effective (or public notice has been provided, such as through a publicly accessible registry).
Having filed an initial BOI report, a foreign entity that is a reporting company is subject to the 30-day deadline after March 26 to file an updated or corrected report as needed.
Next Steps
FinCEN is accepting comments on the interim final rule until May 27 and intends to finalize it later this year.
There are certain special cases that remain ambiguous under the interim final rule, such as that of a company that has been formed and exists simultaneously in the United States and in a foreign country. Based on the text of the interim final rule, such a company appears to not be a “reporting company,” as it presumably would fall within the new regulatory exemption for an entity that has been created by the filing of a document with a secretary of state or similar office under the law of a US state or tribal jurisdiction. But, as of now, the matter is not entirely clear.
With the changes wrought by the interim final rule, most companies are no longer subject to the CTA. For various reasons, the number of foreign entities that have registered to do business in the United States is small, and those companies may wish to consider restructuring their US activities to avoid a continued CTA obligation (although they may still need to file an initial report with FinCEN), such as by creating a US operating subsidiary.
SEC Climate Disclosures Rules One Step Closer to the Grave; GHG Emissions Disclosures One Step Closer to Becoming a Multi-State Compliance Issue
The slow death of the Securities and Exchange Commission’s (SEC) climate disclosure rules continued on March 27, 2025, with the SEC Commissioners voting to discontinue the defense of such rules before the Eighth Circuit, Iowa v. SEC, No. 24-1522 (8th Cir.), which is where the numerous complaints challenging the rules were consolidated.[1] The SEC’s action does not withdraw or terminate the rules, but while they remain in place, the SEC’s previous stay of the rules continues. It will be interesting to see if the Democratic attorneys general from a number of states who joined the litigation in support of the rules will continue to defend the rules without the SEC’s support.
While the SEC has made clear that it will not be pursuing its climate disclosure rules[2], companies may still need to comply with climate disclosure laws of other jurisdictions, including the European Union’s Corporate Sustainability Reporting Directive and California’s climate disclosure rules. In addition, legislation similar to California’s “Climate Corporate Data Accountability Act” (CA SB 253)[3] which was later amended by California Senate Bill 219[4] has been introduced in New York[5], Colorado[6], New Jersey[7], and Illinois[8] that would require companies with more than $1 billion in annual revenue and doing business in the particular state to annually report their greenhouse gas (GHG) emissions, similar to what California will require beginning in 2026.
To add to the list of considerations for companies to keep on their radar, U.S. Senator Bill Hagerty recently introduced federal legislation to “prohibit entities integral to the national interests of the United States from participating in any foreign sustainability due diligence regulation, including the Corporate Sustainability Due Diligence Directive of the European Union”.[9] While Senator Hagerty’s bill appears to be symbolic and unlikely to be enacted, it has a private right of action that could prove troublesome if the legislation should be enacted.
[1] See, Press Release 2025-58, Securities and Exchange Commission, “SEC Votes to End Defense of Climate Disclosure Rules” (March 27, 2025), https://www.sec.gov/newsroom/press-releases/2025-58.
[2] Securities and Exchange Commission, Final Rule “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” 17 CFR 210, 229, 230, 232, 239, and 249, adopting release available at https://www.sec.gov/files/rules/final/2024/33-11275.pdf.
[3] Cal. Health & Safety Code § 38532.
[4] Senate Bill 219, Greenhouse gases: climate corporate accountability: climate-related financial risk, Cal. Health & Safety Code §§ 38532, 38533, Bill Text available at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB219.
[5] New York Senate Bill S3456, “Climate Corporate Accountability Act,” available at https://www.nysenate.gov/legislation/bills/2025/S3456.
[6] Colorado House Bill 25-1119, “A Bill for an Act concerning requiring certain entities to disclose information concerning greenhouse gas emissions,” available at https://leg.colorado.gov/bills/HB25-1119.
[7] New Jersey Senate Bill 4117, “Climate Corporate Data Accountability Act,” available at https://legiscan.com/NJ/text/S4117/2024.
[8] Illinois House Bill, “Climate Corporate Accountability Act,” available at https://www.ilga.gov/legislation/BillStatus.asp?DocNum=3673&GAID=18&DocTypeID=HB&LegId=162463&SessionID=114&GA=104.
[9] Senate Bill 985, 119th Congress (2025-2026), ‘‘Prevent Regulatory Overreach from Turning Essential
Companies into Targets Act of 2025’’ or the ‘‘PROTECT USA Act of 2025,’’ Bill Text available at https://www.hagerty.senate.gov/wp-content/uploads/2025/03/HLA25119.pdf
Delaware Enacts Sweeping Changes to the Delaware General Corporation Law
On March 25, 2025, the governor of Delaware signed into law Senate Bill 21, over much opposition from the plaintiffs’ bar and some academics. The bill, which amends Sections 144 and Section 220 of the Delaware General Corporation Law, 8 Del. C. (the “DGCL”), seeks to provide clarity for transactional planners in conflicted and controller transactions, and seeks to limit the reach of Section 220 books and records demands. These amendments significantly alter the controller transaction and books and records landscape.
Background
Senate Bill 21 comes in the backdrop of heightened anxiety over whether Delaware will retain its dominance in the corporate law franchise. Businesses have cited a seemingly increased litigious environment in Delaware, and when coupled with a handful of high-profile companies redomesticating or considering redomesticating to other jurisdictions (see our blog article about the Tripadvisor redomestication here), other states such as Texas and Nevada making a strong push to accommodate for new incorporations and redomestications, and a series of opinions out of the Delaware Court of Chancery that were unpopular in certain circles, concern was growing of Delaware falling from its position as the leading jurisdiction for corporate law.
This is not the first time the Delaware legislature has acted to re-instill confidence in Delaware corporate law to the market. Senate Bill 21 also comes less than a year after Senate Bill 313 was signed into law. Senate Bill 313, coined the “market practice” amendments, sought to address the decisions in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024), Sjunde AP-Fonden v. Activision Blizzard, 124 A.3d 1025 (Del. Ch. 2024), and Crispo v. Musk, 304 A.3d 567 (Del. Ch. 2023), which many found surprising. And perhaps most famously, Section 102(b)(7), the director exculpation clause (now the director and officer exculpation clause following an amendment in 2022), was enacted in the wake of the Delaware Supreme Court’s decision in Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), which caused shockwaves throughout the corporate law community as well as the director and officer insurance market.
Senate Bill 21 Amendments
Section 144. Section 144 of the DGCL was revamped entirely from being a provision speaking on the voidability of conflicted transactions, into a statutory safe harbor for conflicted and controller transactions. The essence of the new Section 144 is defining what a controlling stockholder is, and providing different safe-harbor frameworks for conflicted transactions, controlling stockholder transactions, and controlling stockholder “go private” transactions for public companies.
Controllers are now statutorily designated as those persons (together with affiliates and associates) that (1) has majority control in voting power, (2) has the right to nominate and elect a majority of the board, or (3) possess the functional equivalent of majority control by having both control of at least one-third in voting power of the outstanding stock entitled to vote generally in the election of directors and the power to exercise managerial authority. The last category will likely be the subject of much litigation in the future, but the defined boundaries will limit a plaintiff’s ability to cast a person as a controller.
Under the new Section 144, controllers (and directors or officers of a controlled company) can shield themselves from a fiduciary claim in a conflicted transaction if (1) a committee of 2 or more disinterested directors that has been empowered to negotiate and reject the transaction, on a fully-informed basis, approve or recommend to approve (by majority approval) the transaction, or (2) it is approved by a fully-informed, uncoerced, affirmative vote of a majority of the votes cast by the disinterested stockholder. And in a “go private” transaction, both (1) and (2) above need to be accomplished. Such actions will grant the transaction “business judgment rule” deference. This is a significant change from recent Delaware Supreme Court precedent under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), and its progeny holding that a controller transaction providing a non-ratable benefit to the controller will be reviewed under the discerning “entire fairness” standard unless the transaction is conditioned “ab initio” (i.e., at the outset) on the approval of a majority of fully-informed disinterested director and fully-informed, disinterested and uncoerced stockholders. The legislature has spoken that the spirit and structure of MFW will only apply to “go private” transactions, whereas in a non-“go private” transaction the controller needs to meet just one of the MFW prongs, and a disinterested director cleansing does not have to be “ab initio.” Note also that Section 144 provides that controllers are not liable for monetary damages for breaches of the duty of care.
New Section 144 also creates a new presumption that directors of public corporations that are deemed independent to the company under exchange rules are disinterested directors under Delaware law (and, if the director meets such independence criteria with respect to a controller, the director is presumed disinterested from such controller). To overcome this presumption, there must be “substantial and particularized facts” of a material interest or a material relationship with a person with a material interest in the act or transaction. Note that NYSE and NASDAQ independence is a somewhat different inquiry from director disinterestedness under Delaware corporate law. To qualify as independent for exchange purposes, directors cannot hold management positions at the company, its parents or subsidiaries, and former executives are not considered independent for three years after their departures. See Nasdaq Rule 5605 and NYSE Listed Company Manual 303A.02. A director also does not qualify as independent if the director or their families received more than $120,000 in compensation from the company in any 12-month period in the prior three years. In contrast, disinterestedness of a director under Delaware law has been historically a much more fact-and-circumstances inquiry, where judges have looked to things like co-owning an airplane, personal friendships and other “soft” factors.
Section 220. Under Section 220, a stockholder is entitled to examine a corporation’s “books and records” in furtherance of a “proper purpose” reasonably related to the person’s status as a stockholder. The use of this potent tool has proliferated through the years, with stockholders of Delaware corporations becoming increasingly savvy, sophisticated and demanding with their books and records demands to investigate potential corporate wrongdoings before filing suit. Delaware courts have encouraged the use of Section 220, in many cases urging stockholders to use the “tools at hand” ahead of filing suit, presumably with the hope of curtailing bad claims clogging up the docket.
The amended Section 220 limits the universe of what a stockholder may demand under Section 220. Prior to the amendments, a stockholder could pursue materials, even if not “formal board materials,” if they make particularized allegations of the existence of such materials and a showing that an investigation of the suspected wrongdoing was “necessary and essential.” The statute, as amended, limits the ability for stockholders to pursue materials such as personal director or officer emails that may have relevant information, which could be allowed under the prior regime. Under the amended Section 220, if what the stockholder seeks is not part of the nine types of “books and records” spelled out in the statute, the stockholder cannot have access to it in a Section 220 books and records demand.
Questions Going Forward
The amendments to Sections 144 and 220 collide with or directly overturn several Delaware caselaw precedents. The landscape has changed, and we will see how Delaware corporations and its constituents respond. From a transactional planning perspective, the safe-harbors of Section 144 provide much-needed guidance, but with limited caselaw overlay interpreting the boundaries of the safe-harbors, the structuring is not without risk.
Turning back to the backdrop of Senate Bill 21: does this fix the “DExit” concern? Perhaps. But these amendments undoubtedly swing the pendulum to the corporation, controller and management. Whether it is swinging back toward the center is up for debate, but what is not debatable is that preserving the Delaware corporate law franchise depends upon balance. Through the legislative process there were some institutional investors that opposed Senate Bill 21. We will see what kinds of moves, if any, investors of Delaware corporations will make going forward.
Finally, is Section 144 an “opt out” provision? The DGCL is a regime of mandatory statutes, enabling statutes, and default statutes one can opt in or out of. Returning to Section 102(b)(7), this exculpation provision is a well-known example of an opt-in, where a corporation has the option to add that exculpation clause to the company’s certificate of incorporation. Section 203, on the other hand, is an “opt out” statute where a corporation can choose not to have certain restrictions on business combinations with interested stockholders. In the legislative process, several prominent corporate law professors sought to have Senate Bill 21 revised such that it would be a charter “opt-in,” meaning that the default is the status quo, and companies (with stockholder approval) can adopt the controller transaction safe-harbor and books and records limitations in the new Sections 144 and 220. This proposal was ultimately not accepted, but there has been some mention that the text of the new Section 144 suggests it is actually an “opt out” statute. If that is the case, and investors do feel strongly about the Senate Bill 21 amendments, we may see stockholder proposals in the coming years for amendments to the corporate charter to opt out of the new Sections 144 and 220. We will watch the SEC Rule 14a-8 proposals in upcoming proxy cycles to see if this is the case.
The Dealmaking Slowdown: A Time for Startups to Prepare
As the slowdown in dealmaking continues, both buyers and sellers are left to consider their options moving forward during this period of extreme uncertainty and market volatility. To put the current slowdown in perspective, EY had previously forecasted M&A activity to rise by 10% this year.[1] However, they recently adjusted that outlook, saying the M&A market entered a “watchful phase” in February of this year. Their data shows a downturn in the number and total value of deals of more than $100 million. The volume of those deals dropped by 5.9 percent YoY and 19.5 percent from just January of this year, and combined deal value also fell 53 percent YoY and 34 percent from January.
Whenever we see this kind of significant pause in dealmaking, buyers typically have the advantage, but not always. There are certain dynamics that can vary based on industry, the nature of the assets, and, of course, macroeconomic factors. Below, we look at the balance of power between buyers and sellers during a slowdown and how each side can best position themselves for success when conditions improve.
Who Has the Upper Hand?
Most of the time, the buyer is going to have the upper hand in this kind of situation. When there are fewer people willing to buy, those who are can often negotiate much more favorable terms. Buyers can also be highly selective, taking their time to conduct thorough due diligence on their targets and consider all options available. When the economy is in turmoil, it can also present an opportunity for buyers to target distressed or capital-constrained businesses.
While sellers are not usually in the driver’s seat when dealmaking is lagging, there are some opportunities for them to still have leverage. This is particularly true if they have an especially unique proposition or a high-performing and proven concept. There are also some areas that tend to be recession-proof or continue to grow despite contributing economic factors. Those startups who might have the best leverage are those who are not under pressure to sell as they can either wait until deal activity picks back up or negotiate more aggressively for more favorable terms.
What Can Sellers Do Now?
When it’s slow out there, sellers should make sure their fundamentals are solid. Focusing on cash flow and operational efficiencies can help to demonstrate a strong foundation to potential buyers, as well as looking at growth strategies that can move the business forward. It is also important for sellers to look at ways they can extend their runway. When mergers and acquisitions slow down, VC funding often follows suit. This means it is critical that startups ensure they have ample capital reserves to wait out the dealmaking doldrums until more favorable market conditions emerge.
Most importantly, sellers must remain consistently deal ready. The global economic and geopolitical factors that are contributing to this downturn are shifting rapidly, and that means that there could be an uptick in deal activity at any time as trade deals are struck, the markets stabilize, or conflicts and tensions are eased. While this will not happen overnight, founders should be ready to make a move when the timing and the buyer are right. Buyers will no doubt be using this time to do their diligence, so they are ready to move fast when conditions improve and look at the kinds of strategic investments that best fit their long-term goals. Founders would be wise to establish the kinds of connections today that will allow them to execute their exit plans once deals start flowing again.
[1] https://sgbonline.com/ey-ma-outlook-signals-cautious-us-deal-market/
ESG Update: Corporate Directors May Be Obligated to Assess Political Risk
Right now, much about the world is uncertain. Risks posed by political changes dominate the headlines and also weigh heavily on many decisions made by corporations, their advisors, and their stakeholders.
Businesses, of course, want to succeed even in chaotic environments. Success requires appropriate planning, and planning can help lead to predictability. Good corporate governance — making sure directors have appropriate information to timely assess compliance with legal obligations and fulfill duties they owe to the business, its employees, and stakeholders — can help mitigate downside impacts to businesses.
Delaware law obligates corporate directors to, among other things, take steps sufficient to assess corporate legal compliance. What has come to be known as “Caremark liability” attaches when directors fail to adequately oversee the company’s operations and compliance with the law. Below we frame out what Caremark liability is, how it applies to evaluating a politically uncertain environment, and outline six steps companies can take to appropriately manage risk.
Caremark Liability Defined
Caremark liability takes its name from the 1996 decision In re Caremark International Inc. Derivative Litigation, which established that directors of a Delaware corporation have a duty to ensure that appropriate information and reporting systems are in place within the corporation.
Caremark stems from an action where shareholders of Caremark International alleged that they were injured when Caremark employees violated various federal and state laws applicable to health care providers, resulting in a federal mail fraud charge against the company. In a subsequent plea agreement, Caremark agreed to reimburse various parties approximately $250 million. Caremark shareholders filed a derivative action against the company’s directors alleging that the directors breached their duty of care to shareholders by failing to actively monitor corporate performance.
Key points of Caremark liability under Delaware law include:
Duty of Oversight: Directors must make a good faith effort to oversee the company’s operations and ensure compliance with applicable laws and regulations.
Establishing Systems: Directors are expected to implement and monitor systems that provide timely and accurate information about the corporation’s compliance with legal obligations.
Breach of Duty: To establish a breach of Caremark duties, plaintiffs must show that directors either utterly failed to implement any reporting or information system or controls, or, having implemented such a system, consciously failed to monitor or oversee its operations.
High Threshold for Liability: Proving a breach of Caremark duties requires evidence of bad faith or a conscious disregard by directors of their duties.
Good Faith Effort: Directors are generally protected if they can demonstrate that they made a good faith effort to fulfill their oversight responsibilities, even if the systems in place were not perfect.
Caremark liability emphasizes the importance of proactive and diligent oversight by directors to prevent corporate misconduct and to demonstrate that directors are acting in good faith. Cases following Caremark emphasize that liability only attaches when directors disregard their obligations to companies, not when their business decisions result in “unexceptional financial struggles.”
Caremark claims remain difficult to plead but remain viable and, therefore, may lead to significant defense costs.
Is Caremark “ESG litigation”?
Yes. Since the November 2024 election, discussions of environmental, social, and governance (ESG) activities have been commonplace, with discussions of whether corporations should walk back prior commitments dominating the headlines. Caremark claims are distinct from claims frequently lumped together as “ESG litigation.” These “ESG litigation” claims typically involve either “greenwashing”-style product marketing claims (for examples, see here and here) or claims that investment managers, by factoring in ESG investment criteria, deprived investors of appropriate returns (two recent decisions are here and here). Caremark focuses on the “G” in ESG; it speaks directly to corporate governance and directors’ duties to monitor and oversee in good faith a corporation’s compliance with laws.
While the nomenclature of corporate governance may be shifting away from “ESG,” corporate officers remain obligated to oversee corporate operations and ensure compliance with the law. Caremark claims can be used to assess their efforts.
Corporate Governance and Political Risk
Political uncertainty in the United States is affecting regulated entities ranging from Fortune 100 corporations to law firms and from mom-and-pop importers to universities. Recent US Supreme Court decisions including Trump v. United States and Loper Bright v. Raimondo have fundamentally reshaped relations both between the branches of government and between the government and the regulated community.
Over time, members of the regulated community have increasingly faced pressure not just to comply with the law but also to take positions on political issues outside their immediate economic environment. While corporations may have systems in place to monitor risk incident to product liability or supply chain issues, they may not be monitoring risks related to the whipsawing of political positions on issues such as diversity, equity, and inclusion (DEI), the challenges posed by a dramatically slimmed (and thus less responsive) bureaucracy, or recissions of expected government funding.
These political issues can generate corporate risk. Good corporate governance practices can help cabin new corporate risks, thereby minimizing the potential for financial impacts on the corporation. Practices which could be evaluated include:
Ensure appropriate data-gathering and compilation. Political policies do not arise in a vacuum. Internal and external policy advisors, trade associations, and business contacts can help track potential political risks.
Review and assess policy positions and evaluate whether they continue to be appropriate on a regular basis. At the federal level, we have seen DEI-related activities move from being universally lauded to potential reasons for imposition of federal civil or criminal liability. Executive Order 14173, issued on January 21, directed the US Attorney General to develop an enforcement plan to target private sector DEI programs believed to be unlawful. Actions like designating corporate personnel tasked with understanding points of emphasis in government enforcement and mapping them across a corporate footprint may be appropriate.
Evaluate what corporate efforts are appropriate to use in marketing efforts in the current political environment. Recent years have seen sustainability reports become key tools to influence stakeholders ranging from consumers to employees. Businesses which previously leaned into social issues or community involvement in the ESG-era may want to deemphasize aspirational goals and/or provide additional data on their factual conclusions, practices, and achievements.
Review and assess places where rollbacks in federal, state, or local government spending could impact the viability of business operations. Investments reliant on federal grants or subsidies need to be reviewed.
Review corporate compliance programs in light of federal priorities. The US Department of Justice has listed initial federal compliance priorities including terrorism financing, money laundering, and international restraints on trade. As above, taking a systematic approach to understanding and evaluating points where corporate activities could be impacted by enforcement priorities may be appropriate.
Finally, the regulated community should conduct a thorough census of regulations or statutory laws that have the potential to negatively impact corporate operations. They should assess whether any impediments can be addressed through a forward-looking government relations strategy, especially given current efforts to streamline regulations and government operations, particularly related to environmental and energy issues. (For more, see here and here.)
When directors fail to consider and weigh political factors and shifts in governmental initiatives and program enforcement such as those listed above, stakeholders may ask why the board made no effort to make sure it was informed about an issue so intrinsically critical to the company’s business operation.
Can An Employer Require Employees To Invest In The Business?
Employee stock bonus, stock purchase, and stock option plans are extremely common. Most employees and prospective employees are undoubtedly happy to receive these types of equity compensation awards, but can an employer require an employee to invest in the employer’s business. The California Labor Code provides:
Investments and the sale of stock or an interest in a business in connection with the securing of a position are illegal as against the public policy of the State and shall not be advertised or held out in any way as a part of the consideration for any employment.
Cal. Lab. Code § 407. This would seem to be a problem.
Fortunately, Section 408(c) of the Corporations Code provides:
Sections 406 and 407 of the Labor Code shall not apply to shares issued by any foreign or domestic corporation to the following persons:
(1) Any employee of the corporation or of any parent or subsidiary thereof, pursuant to a stock purchase plan or agreement or stock option plan or agreement provided for in subdivision (a).
(2) In any transaction in connection with securing employment, to a person who is or is about to become an officer of the corporation or of any parent or subsidiary thereof.
A similar provision was added in 2015 with respect to domestic and foreign limited liability companies. Cal. Corp. Code § 17704.01(e).
This does not mean that corporations and LLCs are out of the woods in every case in which it is alleged that the employee was forced to invest. In Hulse v. Neustar, Inc., 2019 WL 13102321 (S.D. Cal. Dec. 18, 2019), the court denied the defendant’s motion for judgment on the pleadings because the plaintiff alleged that the defendant required the plaintiff to participate in an equity rollover that was separate and apart from the terms of the initial stock option plans pursuant to which the plaintiff acquired his equity.
Momentum on Voting on the Omnibus Delay and Updating Corporate Sustainability Reporting Requirements
Vote to delay
On 1 April 2025, the European Parliament approved the “urgent procedure” with regards to the “Omnibus” package of proposals to streamline corporate sustainability requirements.
The next step to vote on the “stop-the-clock” proposal will take place on 3 April 2025.
The approval of the urgent procedure of the Omnibus passed with a comfortable majority, but the division among political groups remains evident. If the stop-the-clock proposal is approved on 3 April 2025, co-legislators, being the European Parliament and the Council of the European Union, will begin negotiations to finalize the legal text.
Movement on substantive requirements
On 28 March 2025, Maria Luís Albuquerque, the European Commissioner for Financial Services and the Savings and Investments Union, sent a letter to the EFRAG Sustainability Reporting Board (EFRAG SRB) outlining the European Commission’s mandate for simplifying the first set of European Sustainability Reporting Standards (ESRS), which are the standards followed for Corporate Sustainability Reporting (CSRD). Commissioner Albuquerque emphasized the urgency of implementing these simplifications, highlighting their significance in the current geopolitical and economic context.
In response to this mandate, EFRAG has committed to a fast-track process aimed at substantially reducing mandatory data points and easing the practical application of the ESRS. The key dates are:
15 April 2025: EFRAG will inform the European Commission of its internal timeline to simplify the ESRS; and
31 October 2025: EFRAG has been tasked by the European Commission to provide its technical advice by this date so that the European Commission has time to adopt legislation in time for “companies to apply the revised standards for reporting covering financial year 2027, potentially with an option to apply the revised standards for reporting covering financial year 2026 if companies wish so”.
On this basis, it appears that the European Commission plans to adopt the revised and streamlined ESRS before the end of 2026, and that companies in the first wave of reporting would have the option to utilise the new ESRS should they wish to do so.
FinCEN Adopts Interim Final Rule Limiting CTA Reporting Requirements to Foreign Reporting Companies
US legal entities are no longer subject to the reporting requirements of the Corporate Transparency Act (CTA). On March 21, 2025, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of Treasury (Treasury), adopted an interim final rule that (i) narrows the CTA reporting requirements to entities previously defined as “foreign reporting companies,” (ii) extends the earliest reporting deadline to April 25, 2025 and (iii) exempts foreign reporting companies from having to report the ownership information of any US person who is a beneficial owner.
The interim final rule amends the definition of a “reporting company” to legal entities formed under the law of a foreign country and registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. The interim final rule did not eliminate any of the original 23 exemptions from the definition of reporting company.
If you read our previous reports to determine whether to file or update a report on behalf of an entity formed under the law of a US State or Indian tribe, you can feel comfortable that no such beneficial ownership information report will be required without further rule changes.In adopting the interim final rule, FinCEN acknowledged that it intends to issue a final rule this year, after review of public comments. The comment period for the interim final rule ends May 27, 2025.
Involved With a Delaware Corporation? Three Major Changes to Know
On March 25, 2025, Delaware Governor Matt Meyer signed Senate Bill 21 into law, effecting significant changes to the General Corporation Law of the State of Delaware (DGCL), the statutory law governing Delaware corporations. With over two-thirds of Fortune 500 companies domiciled in Delaware, it continues to be the preferred state of incorporation for businesses drawn to its modern statutory law, renowned Court of Chancery, and developed case law.
Consequently, below are three major takeaways for businesses incorporated in Delaware or individuals involved with a Delaware corporation—as a director, officer, or stockholder—here are three major takeaways:
1. Procedural Safe Harbor Cleansing Related Party Transactions
Under Delaware corporate law, related party transactions involving a fiduciary, such as where a director of a corporation stands on both sides of a transaction, are potentially subject to the entire fairness standard of review. This onerous standard of reviewing a fiduciary’s actions in certain conflicted transactions places the burden on the fiduciary to prove that the self-dealing transaction was fair—both in terms of the process (fair dealing) and substantive (fair price)—given corporate law theory that the fiduciary’s interests may not be aligned with maximizing stockholder value.
Senate Bill 21 establishes a safe harbor pursuant to Section 144 of DGCL for these conflicted transactions (other than take-private transactions) if the transaction is approved by either:
A majority of the disinterested members of the board or
A majority of the votes are cast by the disinterested stockholders—in each case, subject to certain additional requirements. Consequently, if transactional planners and corporations follow the new procedural safe harbor when entering certain related party transactions, they greatly minimize the likelihood of a successful challenge of any breach of fiduciary duty claim against the corporation’s board.
2. Limiting Who Qualifies as a Controlling Stockholder
Prior to the enactment of Senate Bill 21, whether a stockholder was a “controlling stockholder” and was therefore subject to certain rules under Delaware corporate law, was not set forth in DGCL. Rather, Delaware case law helped transactional planners to determine if a stockholder would be treated as such.
Senate Bill 21 codifies the definition of this term in Section 144 of DGCL. Under the revised Section 144, a “controlling stockholder” is a stockholder who:
Controls a majority in voting power of the outstanding stock entitled to vote generally in the election of directors;
Has the right to control the election of directors who control the board; or
Has the functional equivalent of majority control by possessing at least one-third in stockholder voting power and power to exercise managerial authority over the business of the corporation. This update provides transactional planners and corporations with clear guidelines over who qualifies as a controlling stockholder.
3. Narrowing Stockholder Information Rights
Over the past years, many Delaware corporations have been subject to an increasing number of “Section 220 demands” and related litigation that is often expensive for corporations to handle. Section 220 of DGCL provides stockholders with a statutory right to inspect a corporation’s books and records if the stockholder satisfies certain requirements.
Senate Bill 21 amends Section 220 of DGCL by narrowing what books and records of a corporation the stockholder is generally entitled to review after satisfying certain requirements. Specifically, the term “books and records,” as defined in Section 220 of DGCL, is now limited to certain organizational and financial documents of the corporation, including its annual financial statements for the preceding three years, board minutes, stockholder communication, and other formal corporate documents. Additionally, a stockholder’s demand must describe with “reasonable particularity” its purpose and requested books and records, and such books and records must be “specifically related” to the proper purpose.
In summary, Senate Bill 21’s amendments to DGCL give transactional planners and corporations additional clarity over cleansing conflicted transactions, who qualifies as a controlling stockholder, and the books and records a stockholder may access under Section 220.