Document Type

Article

Publication Date

2026

Abstract

Fearing that parties controlling corporations might incorporate elsewhere, Delaware has hurriedly enacted controversial legislation (SB-21) to reduce judicial scrutiny of dealings whereby such parties might further enrich themselves at the expense of public stockholders.

This article examines a basic problem with SB-21 that has been ignored in all the Sturm and Drang surrounding its enactment. Simply put, two key parts of the statute’s provisions addressing dealings by parties who control corporations are fundamentally at war with each other. These are the statute’s definition of controlling stockholder which focuses on the voting power to elect the directors and the statute’s provision allowing approval by so-called disinterested directors to preempt careful judicial scrutiny of transactions with a controlling stockholder.

The former only makes sense if one assumes that normally the power to elect directors gives control over those directors. The latter then turns around and seemingly trusts those same directors to protect the corporation and minority stockholders from the stockholder who elected the directors unless the directors have some other relationship with this stockholder undermining their ability to be objective.

This article explores three possible outcomes of this inconsistency: The good (interpreting the statute to follow the premise which underlies defining control in terms of the power to elect directors); the bad (interpreting the statute in a manner that will facilitate the tunneling of a disproportionate amount of corporate wealth to controlling stockholders who rely upon approval by the very directors they elect); or the ugly (judicial muddying the waters by working backwards from what the court thinks of the merits of the challenged deal to find the gross negligence, lack of good faith or lack of disinterest that will still allow the court to invalidate a transaction that court does not like despite the fact that these standards are designed to avoid the court evaluating the merits of the deal).

Publication Title

San Diego Law Review

Volume

63

Issue

2

First Page

245

Last Page

282

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