In response to what has become known as “DExit”—the departure of a number of major companies from Delaware and the threat of further such moves—Delaware’s Senate Bill 21 was signed into law on March 26, 2025. The new law made significant changes and welcome additions to the safe harbor protections available to deals involving conflicted directors and controlling stockholders. However, for all its improvements, S.B. 21 is not likely to spell the end of challenges to controller transactions. Plaintiffs have successfully—and lucratively—challenged such transactions for years, and it is likely that they will continue to look for opportunities to do so.Below we give a high-level overview of S.B. 21 and discuss one aspect of S.B. 21 that plaintiffs may seek to exploit.
Overview of S.B. 21
At a high level, S.B. 21 makes more readily available safe harbors for controlling stockholder and conflicted director transactions, allowing those deals (except going-private controller transactions) to be immune from equitable relief and damages if approved by either a special committee of disinterested directors or a majority of disinterested stockholders. Going-private transactions involving a controller can similarly achieve these safe harbor protections by satisfying both prerequisites. S.B. 21 also both sharpens the definition of disinterested director and limits who can be counted as a controlling stockholder by setting a minimum stockholding requirement below which a stockholder cannot be deemed a controller. While M & F Worldwide Corp established special committee and disinterested stockholder vote protections for a decade prior to S.B. 21, those procedures have been revised under the new law in order to extend their benefits and add more certainty to dealmaking. (For a more detailed discussion of S.B. 21, please see our article here.)
However, these extended safe harbors do not block all paths by which a plaintiff could challenge a controller transaction. An obvious route for a plaintiff would be to argue that stockholders or directors were not fully informed when voting for a transaction. But there are also less obvious paths. One such path is to challenge a transaction that was not viewed as conflicted by the transaction parties—who thus saw no reason to implement S.B. 21’s safe harbors—by arguing that the transaction was in fact a conflicted one.
To see how a plaintiff may argue this, you need only turn to the text of S.B. 21. For a transaction to count as a “controlling stockholder transaction” and be subject to potential liability in the first place, the controller must have some sort of conflict. Prior to the passage of S.B. 21, to be conflicted, the controller must either have (i) stood on both sides of the transaction or (ii) received a “non-ratable benefit,” i.e., a financial benefit unique to the controlling stockholder.S.B. 21 maintains both these concepts, but plaintiffs will likely argue that it expands the concept of a non-ratable benefit: A controller is conflicted if it receives “a financial or other benefit not shared with the corporation’s stockholders generally.”
S.B. 21 did not construct guardrails around the term “financial or other benefit.” Even before S.B. 21, plaintiffs were focused on expanding the scope of “non-ratable benefits,” and we expect them to push even harder on the meaning of “financial or other benefit.” In particular, plaintiffs may argue that the statute’s use of “or other benefit” invites the Chancery Court to broadly include as a non-ratable benefit all manner of non-financial benefits.
Below, we analyze two recent “non-ratable benefits” cases from the pre-S.B. 21 era that will be relevant to upcoming decisions applying S.B. 21’s “financial or other benefit” formulation.
Does the Potential to Wind Down a Fund Constitute a “Financial or Other Benefit” to a Private Equity Firm?
The Delaware Chancery Court’s post-trial opinion in Manti Holdings, LLC v. Carlyle Group, Inc., 2025 WL 39810 (Del. Ch. Jan. 7, 2025), examined whether the sale of a portfolio company at the end of a private equity fund’s life counted as a “non-ratable benefit.” In 2008, a Carlyle fund acquired a majority of the outstanding shares of Authentix, an authentication technologies company. Nearly 10 years later, in 2017, Authentix was sold to BWE, and Authentix stockholders received $77.7 million plus potential earnouts; the sale of Authentix was alleged to have coincided with the planned end of the Carlyle fund. Plaintiffs sued and claimed Carlyle forced a “fire sale” of Authentix in order to wind down its fund in a timely manner and, in so doing, secured an unfair, non-ratable benefit for itself.
The court denied Carlyle’s early attempt to exit the litigation, finding on Carlyle’s motion to dismiss that plaintiffs adequately pled that Carlyle had acted to achieve a unique benefit, plausibly rendering it conflicted. For this, the court pointed to statements that emphasized Carlyle’s urgent need to sell Authentix and close out the fund in order to return money to investors. After trial, the court decided there was no unique benefit, applied the business judgment rule, and found for Carlyle. However, the court did not reject the principle that a unique liquidity benefit could have existed but rather held, based on a highly specific set of facts, that Carlyle had no need to quickly sell Authentix and therefore had not received a unique liquidity benefit.
Post-S.B. 21, plaintiffs may look for other “unique” non-ratable benefits, citing Manti Holdings. It would not be surprising if plaintiffs argue that the timing of future fund wind-downs—or other unique benefits to a PE fund—constitutes an “other benefit,” making a seemingly non-conflicted controller transaction a conflicted controller transaction. Given the uncertainty, PE funds should think creatively about how a plaintiff might argue that a non-ratable benefit was received. If an argument for such a benefit exists, the PE fund may want to consider setting up safe harbors.
Is a Tax Receivable Agreement a Source of Non-Ratable Benefit?
Umbrella Partnership Corporations, or “Up-C” transactions, have been an increasingly popular mechanism for private investors to take portfolio companies public while retaining some of the tax benefits of a traditional partnership model through a Tax Receivable Agreement (TRA), which allocates a majority of the tax savings (typically 85%) to the original investor. Of course, popularity breeds scrutiny, and the plaintiffs’ bar has not been shy in targeting companies with Up-C structures. In particular, plaintiffs have argued that early acceleration of the TRA as part of a change in control transaction is a “financial benefit” for purposes of the conflicted transaction analysis—and this question was squarely at issue in the Delaware Chancery Court’s motion to dismiss opinion in Firefighters’ Pension System v. Foundation Building Materials, Inc., 318 A.3d 1105 (Del. Ch. May 31, 2024).
The sponsor of Foundation Building Material (FBM) executed an Up-C IPO in early 2017 and retained control of FBM.As part of that transaction, FBM and the sponsor executed a TRA. In the event of a change in control, the sponsor could terminate the TRA and receive an early termination payment (ETP) equal to the present value of payments it would have received over the full life of the TRA.In early 2018, FBM began to explore a sale, ultimately leading to a merger that allowed the sponsor to terminate the TRA. Plaintiffs claimed, among other things, that the ETP diverted merger consideration to the sponsor in a manner that was unfair to the public shareholders and that the sponsor’s decision to sell FBM was influenced by the desire to terminate the TRA and receive the ETP.
As a threshold matter, the court ruled that the sponsor did not divert merger consideration from the minority shareholders by terminating the TRA. While it would receive a disproportionate share of the value, it was entitled to stand on its contractual right to that payment under the TRA and did not breach any fiduciary duty in doing so.
However, the court nonetheless found that the TRA payment constituted a non-ratable benefit to the controlling stockholder, who was therefore conflicted in choosing whether to hold or sell—meaning the entire fairness standard applied to that decision. In short, although both the sponsor and minority shareholders received the same merger consideration in the deal, only the sponsor received the ETP—and therefore received a non-ratable benefit. Investors should therefore consider whether future transactions involve acceleration of a TRA (or any other contract that benefits the controller more than the unaffiliated stockholders) and discuss with counsel whether, under the circumstances, it constitutes a “financial or other benefit” under S.B. 21.
Conclusion
S.B. 21 introduces significant changes regarding controllers and conflicted transactions. By both limiting what counts as a controlling stake and improving safe harbors, the bill would seem to narrow the opportunities for a plaintiff to challenge a transaction as conflicted. We expect, however, that plaintiffs will merely become more resourceful in asserting such claims. One such approach will be to leverage the revised definition of non-ratable benefit to argue that more transactions should be viewed as conflicted. In this new environment, it will be critically important for the private equity industry to strategically anticipate how plaintiffs might argue that a fund received a unique benefit as the result of what have previously been considered an unremarkable element of a transaction.
Private Equity Report Spring 2025, Vol 25, No 1