Delaware Supreme Court Hears Constitutional Challenge to SB 21: What Boards and Counsel Need to Know

Key Takeaways

• The Delaware Supreme Court heard arguments on SB 21’s constitutionality—a law that revises DGCL Sections 144 and 220, and applies retroactively. There are two core issues: (1) whether SB 21 impermissibly limits the Court of Chancery’s equitable jurisdiction; and (2) whether retroactive application violates due process.
• The outcome could reshape Delaware corporate law, impacting controller transactions, shareholder inspection rights and reliance on statutory safe harbors.
• Boards and counsel should act now: document independence and disclosure for controller transactions, review governance policies and prepare for either outcome.

On November 5, 2025, the Delaware Supreme Court heard oral argument in a case that could reshape Delaware’s corporate law landscape. At issue is Senate Bill 21 (SB 21)—a sweeping amendment to the Delaware General Corporation Law (DGCL) enacted in March 2025. The law revises Sections 144 and 220, clarifying when a stockholder qualifies as a controller and codifying statutory “safe harbor” protections for transactions involving controllers. It also narrows shareholder inspection rights under Section 220.

The constitutional challenge stems from a derivative suit over Clearway Energy’s asset purchase from its majority stockholder. Similar constitutional questions were raised in four other cases currently before the Delaware Court, but were stayed until the Delaware Supreme Court could answer the questions currently before it. The Court’s decision will determine not only SB 21’s fate but also the balance between legislative authority and Delaware’s tradition of equitable oversight.

Background: SB 21 and the Push for Predictability

SB 21 was introduced to restore predictability after a wave of decisions that unsettled corporate market practice. The Delaware Supreme Court’s ruling in In re Match Group (2024) was a key catalyst, imposing entire fairness review on all controlling stockholder transactions unless two cleansing conditions were met. Earlier amendments addressed that ruling, and SB 21 built on those changes by codifying a more flexible standard—business judgment rule applies if either an independent committee or a majority-of-minority vote approves the deal. Cases like In re Moelis and In re Activision Blizzard heightened concerns about compliance burdens and uncertainty, reinforcing the push for comprehensive reform.

These developments sparked talk of a “DExit,” with companies considering reincorporation in states like Texas or Nevada, where corporate law is generally viewed as more predictable and board-friendly. Tesla and Coinbase have already made the move. SB 21 aimed to restore certainty by:

• Amending Section 144 to create statutory safe harbors for conflicted and controller transactions and clarify controller status.
• Amending Section 220 to narrow shareholder inspection rights.
• Applying these changes retroactively to transactions predating the bill’s passage.

The Constitutional Debate

The Delaware Supreme Court accepted two certified questions:

1. Does eliminating the Court of Chancery’s ability to award equitable relief or damages when a transaction complies with the statutory safe harbor violate Delaware’s Constitution by divesting the Court of Chancery of its equitable jurisdiction?
2. Does retroactive application of SB 21 violate due process by eliminating causes of action that already accrued or vested?

Arguments Against the Constitutionality of SB 21

Appellant’s counsel argued that SB 21 impermissibly curtails the Court of Chancery’s constitutionally protected equity jurisdiction. He emphasized that Delaware’s Constitution guarantees the court’s authority to grant equitable remedies for fiduciary breaches and is a cornerstone of Delaware’s corporate law. He noted that the legislature has never previously tried to take remedies away from the Court of Chancery. Eight corporate law professors echoed this view in an amicus brief, warning that SB 21 prioritizes rigid statutory formalism over judicial flexibility. According to the appellant, this rigidity undermines predictability by creating uncertainty over when fairness standards apply. The appellant also challenged the retroactivity provision, asserting that accrued fiduciary claims are vested property rights that cannot be extinguished by legislation.

Arguments in Support of the Constitutionality of SB 21

Appellees counter that SB 21 does not strip the Chancery Court of jurisdiction but establishes a review framework for fiduciary duty claims—an area historically subject to legislative action. They argue there is no vested right in a common-law standard of review and that even if SB 21 affects vested rights, the legislature can impose new obligations serving the public interest, which this law does by promoting clarity and reducing litigation risk. Adopting the appellant’s theory, they warn, could destabilize Delaware law and invalidate numerous statutes governing equitable matters. The State of Delaware, acting through Governor Matthew Meyer, intervened in support of SB 21’s constitutionality and argued that the Court of Chancery’s equity powers should supplement, not supplant, statutory law. Two business groups and a group of law professors also submitted amicus curiae briefs in support of appellees.

Market and Academic Reactions

Concerns raised during oral argument—such as limits on equity jurisdiction and the retroactivity provision—mirror those voiced by other stakeholders. During legislative debate, critics warned that SB 21 risks eroding Delaware’s hallmark flexibility and investor protections, branding it a “billionaires’ bill.” Legal scholars argued the law prioritizes statutory formalism over fairness and could weaken Delaware’s competitive advantage as the leading corporate law jurisdiction.

Conversely, proponents—including many corporate practitioners and business groups—support SB 21 for its predictability and reduced litigation risk, critical to retaining Delaware’s corporate franchise amid “DExit” fears. Some commentators go further, framing SB 21 as a necessary modernization of Delaware law to address evolving governance challenges.

In short, while few new constitutional theories have emerged beyond those in Clearway, the debate underscores the tension between preserving Delaware’s equity tradition and meeting business demands for certainty.

Practical Implications for Corporations and Counsel

Until the Delaware Supreme Court rules, boards and advisors should proceed with heightened diligence. To avoid entire fairness review under In re Match Group (2024), both of two stringent conditions must be satisfied: approval by an independent special committee and a majority-of-minority stockholder vote. While earlier amendments to the Delaware General Corporation Law addressed aspects of that ruling, if upheld, SB 21 will provide a more comprehensive legislative response aimed at restoring flexibility and predictability.

Under SB 21, the business judgment rule will apply if a transaction is cleansed through either an independent board committee or a majority-of-minority vote, eliminating the rigid requirement that both conditions be met. Still, companies considering transactions with controlling stockholders should carefully document independence, good faith and full disclosure to satisfy statutory safe harbors under SB 21. Counsel should also review governance policies and shareholder agreements to ensure compliance with amended Section 144 and anticipate potential challenges under Section 220’s narrowed inspection rights.

If SB 21 is upheld, reliance on statutory cleansing mechanisms will become a critical risk-management tool; if struck down, expect a return to more rigorous entire fairness review and possible litigation over transactions executed during the interim. In either scenario, proactive planning and robust recordkeeping will be essential to mitigate uncertainty.