DE-xit? Not So Fast – Major Updates to Delaware Corporate Law: What Startups and Investors Need to Know

On March 25, 2025, Delaware enacted significant amendments to the Delaware General Corporation Law (DGCL), acknowledging the growing animosity of businesses and investors alike that has risen out of certain decisions by the court of chancery. These changes are particularly relevant to early-stage companies, growth-stage ventures, and the investors who fund them.

The amendments—fast-tracked after their introduction on February 17, 2025—address mounting uncertainty in the legal landscape and are aimed at restoring the predictability and business-friendly posture that Delaware is known for. If your company is incorporated in Delaware (as most startups are), or if you invest in Delaware corporations, this update is for you.

Key Changes Startups and Investors Should Understand

1. Clarified Definition of “Controlling Stockholder”

Delaware law has long struggled with what it means to be a "controlling stockholder"—a key concept that affects everything from fiduciary duties to how conflicts are evaluated. The new amendments clarify that a stockholder is deemed controlling if they either:

• Hold a majority of the voting power or elect a majority of the board, or

• Hold at least one-third of the voting power and have the practical ability to exercise managerial control.

This clarity will help startups and boards assess control dynamics more precisely, particularly during financing rounds or M&A transactions.

2. Predictable Paths for Cleansing Conflicts of Interest

For founders and VCs navigating related-party transactions—such as when a major investor sits on the board or funds a down round—predictability is crucial.

The new rules codify two ways to “cleanse” conflicts involving controlling stockholders, directors, or officers:

• Approval by an independent board committee, or

• Approval by a disinterested stockholder vote.

If the transaction involves taking the company private, both mechanisms are required to invoke the protection of the business judgment rule.

For startups, this means you can structure deals more confidently, knowing exactly how to protect against litigation risk while honoring your fiduciary duties.

3. Enhanced Presumption of Director Independence

In stockholder litigation, much turns on whether directors are considered “independent.” The amendments now create a heightened presumption: if a public company director qualifies as independent under applicable stock exchange rules, they are presumed to be disinterested under Delaware law too—unless a plaintiff can plead detailed facts showing otherwise.

While this impacts public companies most directly, the principle may trickle down to late-stage private companies that model governance practices after public norms.

4. Refined Scope for Stockholder Inspection Rights

Startups often face stockholder demands for corporate records. Under Section 220 of the DGCL, stockholders with a “proper purpose” can request documents, which has historically led to discovery-like disputes.

The new amendments streamline the statutory framework by defining “books and records” to which a stockholder has inspection rights. These include:

a. The certificate of incorporation;

b. The bylaws then in effect;

c. Minutes from the past three years of all stockholder meetings and signed consents evidencing stockholder actions taken without a meeting;

d. Written communications to stockholders from the past three years;

e. Minutes from the past three years of any meetings of the board of directors or its committees, and records of their actions;

f. Materials provided to the board of directors or any board committee in connection with their actions;

g. Annual financial statements of the corporation from the past three years;

h. Contracts between the corporation and its stockholders; and

i. Director and officer independence questionnaires.

While these materials now define the statutory scope of inspection, the Court of Chancery may compel the production of additional documents where appropriate. Specifically, the court may require production beyond the statutory defined list if (a) the stockholder satisfies the evidentiary burden of demonstrating a compelling need for inspection, or (b) the corporation has failed to maintain the required books and records. In such cases, the court may order the production of the “functional equivalent” of the missing materials, provided they are necessary and essential to the stockholder’s proper purpose.

This change helps protect companies from fishing expeditions while still preserving transparency for investors with legitimate concerns.

5. Retroactive Application and Pending Proceedings

The amendments are effective immediately and apply to both past and future corporate actions—except for:

● Legal proceedings already pending or completed before February 17, 2025, and

● Stockholder inspection demands made on or before that date.

Why This Matters for Founders and Investors

Delaware's strength lies in its balance of protecting investors while giving boards the tools to run companies efficiently, and its quick-to-act legislature. These new amendments reaffirm that commitment and offer a roadmap for navigating control dynamics, governance conflicts, and stockholder relations with more clarity.

With all that said, it is not a slam dunk that Delaware has staved off the danger from other states that are looking to dethrone it as the top choice for corporate formation - a16z, the influential and prominent Silicon Valley venture capital giant recently announced it is leaving Delaware to reincorporate in Nevada – and urged its portfolio companies to follow suit. Delaware’s future as the king of incorporation remains in question but its legislature has demonstrated its commitment and capability to address threats to its primacy. For a comparison of benefits across state law (including Nevada and Delaware) click here. Stay tuned.

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