Business Vantage Point Blog

When a controlling stockholder causes a corporation to engage in business with the stockholder or another entity the stockholder controls, the transaction raises questions about the controlling stockholder’s fiduciary duty to the corporation. Is the transaction really in the best interests of the corporation, or is the controlling party merely trying to further its own interests at the expense of the minority shareholders? Non-controlling stockholders seeking to challenge such actions in Delaware will now have a much steeper hill to climb, in light of a recent ruling issued by the Delaware Supreme Court in Rutledge v. Clearway Energy Group, affirming the broad protections for controlling stockholders set forth in a Delaware statute passed in 2025.

Delaware Legislation Provides Safe Harbors for Self-Interested Controller Transactions

Delaware courts were long protective of the minority shareholder in these “self-dealing” scenarios, generally subjecting self-interested transactions to the heightened scrutiny of “entire fairness” review. “Entire fairness” is Delaware’s most exacting corporate law standard of review, sitting on the opposite end of the spectrum from Delaware’s most deferential standard, the “business judgment” rule. A court’s determination of which standard of review to apply can often decide the litigation’s eventual outcome. Application of entire-fairness review to a self-interested transaction therefore increases the likelihood that the controlling stockholder will ultimately be found liable for breaching its fiduciary duty.

Over many years and multiple decisions, Delaware courts developed a framework by which entire-fairness review applied to self-interested transactions unless the corporation engaged in two separate “cleansing mechanisms” in advance of pulling the trigger on the proposed transaction. First, the transaction needed to be approved by an independent special committee free to negotiate the transaction without the influence of the controlling stockholder. Second, the transaction would also need to be approved by a free and informed vote of the minority stockholders. Only if both of these requirements were satisfied would the court apply the deferential business-judgment rule to the challenged transaction.

In 2025, the Delaware Legislature passed a bill substantially reducing the court’s traditional protections for minority shareholders in self-interested transactions and increasing protections for the controlling stockholder. The law, Senate Bill 21 (SB 21) — which amended Section 144 of the Delaware General Corporation Law (DGCL) — protects controlling stockholders, officers and directors from liability for breach of fiduciary duty in connection with a self-interested transaction so long as at least one of the two “cleansing mechanisms” is employed. So, if either an independent special committee or an informed vote of the minority shareholders approves the transaction, the controlling stockholder, officer or director on both sides of the transaction is immune from liability for breach of fiduciary duty. And only if neither mechanism is utilized is the transaction subject to the exacting entire-fairness review.

Supreme Court’s Decision Affirms Constitutionality of Section 144 Amendments

A minority shareholder brought suit challenging the constitutionality of SB 21 shortly after its enactment. In Rutledge, the minority shareholder sued the corporation’s CEO and its controlling stockholder in connection with a self-interested deal and challenged the new statute, arguing that it represented an unlawful restraint on the Delaware Court of Chancery’s jurisdiction in violation of the Delaware Constitution. But even though SB 21 effectively undid the minority-protecting jurisprudence the Delaware courts had developed and applied over many years, the Delaware Supreme Court denied the plaintiff’s challenge to the new law. Instead, the court determined that SB 21 constituted a valid and constitutional exercise of the legislature’s authority that merely altered the standard of review applicable to a minority shareholder’s claim for breach of fiduciary duty, but did not deprive the minority shareholder of the right to assert such a claim.

The end result is that Delaware law now offers substantially greater protections for controlling stockholders, directors and officers in connection with self-interested transactions, so long as the transaction is approved by a special committee or minority stockholder vote. Minority shareholders seeking injunctive relief or damages with respect to such transactions face a significantly tougher challenge, and will likely need to take the affirmative position at the outset of litigation that whatever “cleansing mechanism” the corporation utilized did not meet the statutory requirements. Where a special committee was utilized, that may include arguing that the committee did not act in good faith, or that its members were not in fact disinterested in the transaction. Where the transaction was approved by the minority shareholders, the dissenting shareholder could argue that the voting shareholders were not fully informed, were coerced, or were not appropriately disinterested.

However you slice it, SB 21 and Rutledge substantially strengthen the controlling stockholder’s position with respect to self-interested transactions.