Delaware’s Proposed Amendments to Corporate Law: A Step Towards Nevada’s Standards

On March 28, 2024, the Council of the Corporation Law Section of the Delaware State Bar Association approved legislation proposing amendments to the Delaware General Corporation Law (DGCL). These amendments aim to address issues raised in recent Delaware Court of Chancery opinions and, notably, align certain aspects of Delaware’s corporate governance standards more closely with those of Nevada.

Key Proposed Amendments:

1. Enhanced Protections for Directors: The amendments propose adopting the “intentional misconduct or a knowing violation of law” standard for director liability, a standard currently employed in Nevada. This change would provide directors with greater protection against personal liability, ensuring they are not held accountable for decisions made in good faith that result in unintended negative outcomes.
2. Transactions with Interested Directors: The proposed changes aim to offer clearer guidelines and protections for transactions involving interested directors, particularly when such transactions receive approval from disinterested directors. This approach mirrors Nevada’s framework, which allows for more streamlined processes in such scenarios. 

Comparative Insights from Nevada:

While these proposed amendments signify progress for Delaware, Nevada’s corporate laws continue to offer more robust protections for directors and officers:

• Majority-Conflicted Boards: Nevada does not mandate the formation of a special committee comprising disinterested directors in situations involving majority-conflicted boards. This flexibility facilitates more efficient decision-making processes.
• Fiduciary Duty Litigation: In Nevada, to succeed in a fiduciary duty lawsuit, plaintiffs must first overcome the business judgment rule—a principle that presumes directors act in the company’s best interests. Subsequently, they must demonstrate “intentional misconduct or a knowing violation of law,” setting a high bar for such claims.
• Franchise Taxes: Nevada’s favorable tax environment, characterized by the absence of six-figure franchise tax obligations, presents a significant advantage over Delaware for many corporations.

Judicial Considerations:

A noted concern with Nevada’s system has been the election-based appointment of state court judges, leading to perceptions of limited expertise in complex commercial matters. However, recent developments indicate improvements in judicial sophistication, enhancing confidence in Nevada’s legal adjudications.

Conclusion:

Delaware’s proposed amendments represent a meaningful shift towards adopting standards that have long been hallmarks of Nevada’s corporate law. By integrating provisions like the “intentional misconduct or a knowing violation of law” standard and refining approaches to transactions with interested directors, Delaware aims to bolster its corporate governance framework. Nonetheless, Nevada’s comprehensive protections and favorable legal environment continue to set a high benchmark in corporate law.