Delaware Supreme Court Rejects Constitutional Challenges to Controversial New Safe Harbors Adopted in Wake of Tornetta v. Musk Compensation Package Ruling
Retroactive Application of Safe Harbors to Transactions that Occurred Before Amendments Became Law Is Not Unconstitutional
In Rutledge v. Clearway Energy Grp. LLC, [1] the Delaware Supreme Court unanimously rejected constitutional challenges to the 2025 Amendments to the Delaware General Corporation Law that created safe harbor protections from liability for controlling stockholder transactions that are approved by a majority-of-the-minority stockholder vote and/or independent directors. We previously discussed these significant changes, which were enacted in Delaware Senate Bill SB 21 (the “Amendments”).[2] The Amendments represent a major change in Delaware law, by providing a safe harbor for controlling stockholder and similar interested party transactions that previously were treated as presumptively suspect and reviewed by Delaware Courts under stringent legal standards (“Controller Transactions”). The Delaware Supreme Court described the Amendments’ expansion of safe harbors to such transactions as “[t]he most significant” aspect of the new law.[3]
The Constitutional Challenges
Shortly after the Amendments became law, Thomas Rutledge—a stockholder of Clearway Energy, Inc. (“Clearway”)—filed a derivative action alleging that Clearway’s majority stockholder (Clearway Energy Group LLC, “CEG”) and former CEO breached their fiduciary duties by causing Clearway to overpay for a $117 million purchase of assets from CEG. In addition to his fiduciary duty claims, Rutledge raised two challenges to the constitutionality of the Amendments: First, Rutledge argued that the safe harbor provisions impermissibly divested the Court of Chancery of its equity jurisdiction under Delaware’s Constitution to prevent and/or award damages for conflicted transactions. Second, Rutledge argued that applying the law retroactively to transactions that occurred before the Amendments became law unconstitutionally eliminated vested causes of action.
The Delaware Supreme Court Rules that the Amendments Are Constitutional
The Delaware Supreme Court rejected both arguments. First, the Court held that the Amendments do not strip the Court of Chancery of its equity jurisdiction. The Court of Chancery continues to have equity jurisdiction over breach of fiduciary duty claims involving controlling stockholder and interested party transactions and can issue injunctions and award damages for such claims. All that changed is the legal standard and statutory framework under which such claims are reviewed—not the Court of Chancery’s power to adjudicate them. The Court ruled that Delaware’s General Assembly has broad authority to create and modify the Delaware General Corporation Law.
Second, the Court concluded that the Amendments’ retroactive application to transactions that occurred before the Amendments became law did not unconstitutionally eliminate vested rights and, in any event, satisfied due process in doing so because the Amendments had clear language showing a retroactive intent to further a permissible legislative objective of modifying the Delaware General Corporation Law.[4] The Court explained that the Rutledge plaintiff retained the vested right to pursue his breach of fiduciary duty claims—he simply had to prosecute those claims under the new statutory standards put in place by the Amendments. Further, the Court reasoned that the General Assembly satisfied due process because the Amendments (i) used clear language to confirm the intent to have the law apply retroactively and (ii) pursued a permissible legislative objective of creating and modifying the Delaware General Corporation Law.
What This Means for You
The Rutledge decision settles the issue of whether the expanded safe harbors for Controller Transactions are constitutional. They are. So, they are here to stay absent further action from Delaware’s legislature. But directors, officers, and stockholders in Controller Transactions should be aware of the following key takeaways:
Directors, officers, and controlling stockholders can shield themselves from liability for Controller Transactions by obtaining (i) fully-informed independent director approval, and/or (ii) obtaining majority-of-the-minority stockholder approval, as an up-front condition of the transaction. Both conditions are required for a going-private transaction.
Future litigation will focus on (i) whether independent directors approving a transaction are in fact fully-informed and empowered to negotiate and reject the transaction, (ii) whether a stockholder majority-of-minority vote was made an up-front condition, and (iii) whether the minority stockholder vote was truly informed and uncoerced by the controlling stockholder.
There will be an increase in appraisal rights cases challenging the fairness of a going private merger price, now that the Safe Harbors make it harder to challenge a Controller Transaction for breach of fiduciary duties.
Sadis & Goldberg’s litigators have deep experience representing stockholders and companies in corporate governance disputes, including M&A disputes and appraisal rights and shareholder rights litigation. If you have any questions about the issues raised in this article or any other shareholder rights issue, please contact Co-Heads of Litigation Douglas R. Hirsch (dhirsch@sadis.com) and Samuel J. Lieberman (slieberman@sadis.com), or Jim Ancone (jancone@sadis.com) and Frank S. Restagno (frestagno@sadis.com).
[1] Rutledge v. Clearway Energy Grp. LLC, __ A.3d __, 2026 WL 548504 (Del. Feb. 27, 2026).
[2] https://www.sadis.com/insights/please-dont-go-delawares-amendments-for-conflicted-transactions
[3] Rutledge, 2026 WL 548504, at *5.
[4] There is a narrow exception to retroactive application. The Amendments do not apply to “any action or proceeding commenced in a court of competent jurisdiction that is completed or pending … on or before February 17, 2025.” Id. at *7.
