Delaware SB 21: What Founders and Early-Stage Companies Should Know

Delaware Senate Bill 21 (“SB 21”) has been making waves in the corporate world, and for good reason. This proposed legislation would make significant changes to the Delaware General Corporation Law (“DGCL”), which governs the vast majority of U.S. companies, including startups and venture-backed businesses. The bill aims to address concerns about companies leaving Delaware for other states (a trend some call "DExit") by offering more protections for corporate insiders. However, it’s also sparked controversy for potentially limiting stockholders rights, which compelled the lawmakers to recently amend the original version of the bill released on February 21, 2025  

For founders and early-stage companies, SB 21 could have real implications for how you manage your business, interact with investors, and protect yourself from legal risks. Here’s a breakdown of the bill, its recent revisions, and what it all means for you.  

What Does SB 21 Do?

At its core, SB 21 focuses on two major areas: protecting insiders in certain transactions and restricting shareholder rights to access company records. Let’s unpack the key provisions:  

1. Safe Harbor for Conflicted Transactions (Section 144)

• The bill creates a "safe harbor" for directors, officers, and controlling shareholders involved in transactions where they have a financial interest.  
• If these transactions are approved by disinterested directors or a special committee—or if they’re deemed fair to the corporation—those insiders are shielded from lawsuits.  
• For example, if a founder wants the company to buy their other business or license their intellectual property, this safe harbor could help protect them from claims of self-dealing—provided the process follows the rules laid out in the bill.  

2. Limits on Stockholder Inspection Rights (Section 220)

• SB 21 would make it harder for minority shareholders to inspect company records. 
• It narrows the types of documents stockholders can request (excluding informal communications like emails or texts), limits certain requests to a three-year lookback period, and requires shareholders to  describe the specific records they are requesting and why they need the information.  
• For startups, this could reduce time spent responding to investor demands for information but might also make some investors uneasy about transparency.  

3. Redefining Controlling Shareholders

• Controlling shareholders, like directors, owe certain fiduciary duties to the corporation and the minority shareholders. The bill clarifies who qualifies as a "controlling shareholder," setting thresholds at owning at least 50% of shares or one-third combined with managerial control. This provides more certainty to large shareholders about when they owe fiduciary duties. 
• It also lays out a safe-harbor approval process for transactions involving controlling shareholders but doesn’t require both minority shareholder approval and independent board approval—just one or the other.  

4. Retroactive Application

• One of the more controversial aspects of SB 21 is that it would apply retroactively to transactions that occurred before its enactment (except for pending Section 220 lawsuits). This means founders and boards could gain legal protections for past decisions if those decisions meet the new requirements.

What Changed in the Revised Bill?

The original version of SB 21 faced heavy criticism from shareholder advocates and legal experts who argued it gave too much power to insiders at the expense of minority investors. In response, Delaware lawmakers introduced revisions on March 3, 2025, to address some of these concerns:  

• Stronger Approval Requirements: The revised bill tightens the rules around how conflicted transactions are approved. For example, if most of the board is conflicted, at least two disinterested directors must serve on any special committee approving the transaction.  
• Clarified Safe Harbor Protections: The new draft adds language specifying that approvals must be made without gross negligence and based on all material facts—a move aimed at ensuring fairness in decision-making processes.  
• Minor Adjustments to Transparency Rules: While limits on stockholder inspection rights remain in place, lawmakers clarified some procedural safeguards to reduce ambiguity about how those rules will be enforced.

Despite these changes, critics argue that the revisions don’t go far enough to restore balance between management and shareholders. Many still see SB 21 as favoring insiders over minority investors.

What Does This Mean for Founders?

If you’re a founder or part of an early-stage company incorporated in Delaware (as most are), SB 21 could have both advantages and drawbacks:  

• Easier Governance: The safe harbor provisions could simplify decision-making when you’re involved in transactions that might otherwise raise red flags (e.g., licensing your IP back to your company). As long as you follow proper procedures—like getting approval from disinterested directors—you’d be less likely to face legal challenges down the road.  
• Less Investor Oversight: By limiting shareholder inspection rights, SB 21 could reduce distractions caused by overly demanding investors digging into company records. However, this might also make some minority investors wary about transparency—something to consider if you’re raising capital from VCs or angel investors who value oversight rights.
• Potential Backlash from Investors: While founders may welcome reduced scrutiny, investors might view these changes as a red flag, especially if they feel their ability to monitor governance is being curtailed. This could impact trust and future fundraising efforts.

What’s Next?

SB 21 had its first hearing in Delaware’s Senate Judiciary Committee on March 12, 2025. If it passes through committee and both legislative chambers later this month—likely with additional tweaks—it’s expected to be signed into law by Delaware’s governor shortly thereafter.

For founders and early-stage companies, now is a good time to consult with your legal counsel about how these changes might impact your business practices moving forward. While SB 21 offers potential benefits like reduced litigation risk and streamlined governance processes, it also raises questions about transparency and investor confidence that shouldn’t be overlooked.

As this legislation evolves, staying informed will be critical—not just for protecting your company but also for maintaining strong relationships with your investors along the way.

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