The Delaware Supreme Court is weighing whether Senate Bill 21 violates the state constitution by restricting the Court of Chancery’s equitable powers, while the chancery recently allowed oversight failure claims to proceed in a case where directors allegedly ignored years of reports about sexual assault and harassment. In a written Q&A with CCI, Kristen Swift of Kaufman Dolowich and Rebecca Boon of Bernstein Litowitz Berger & Grossmann discuss what changes for compliance officers depending on the upcoming supreme court decision, explain why “ignorance is most certainly not bliss” when serious misconduct allegations arise and offer specific steps to avoid the “nominal response” label that can trigger liability.
Delaware’s courts are addressing two significant corporate governance questions: whether 2025 legislation designed to streamline controller transactions passes constitutional muster, and how oversight duties apply when boards face allegations of serious workplace misconduct. For compliance and governance professionals, both cases offer practical lessons, though the implications may vary considerably depending on your company’s ownership structure.
The Delaware Supreme Court is weighing whether Senate Bill 21 (SB21), enacted in March 2025 to provide “safe harbor” for certain controller transactions, violates the state’s constitution by restricting the Court of Chancery’s equitable powers. Separately, the chancery recently allowed claims to proceed against real estate brokerage eXp World Holdings involving a case in which directors and officers are accused of ignoring years of reports about sexual assault and harassment. The court found it “reasonably conceivable” that leadership’s response was “nominal” and involved “deliberate heel-dragging,” reportedly the first time the Delaware Chancery Court has applied oversight failure claims specifically to sexual misconduct allegations.
To understand what these developments mean in practice, CCI spoke with Kristen Swift, office managing partner of Kaufman Dolowich’s Delaware office, who attended oral arguments in Rutledge v. Clearway Energy Group, the case involving SB 21, and Rebecca Boon, a partner at Bernstein Litowitz Berger & Grossmann, who represented the plaintiff pension fund in the eXp case. Swift represents the corporate defense perspective; Boon advocates for shareholders. Despite their different vantage points, both offer concrete guidance for governance professionals.
“We might see death by a thousand cuts to chancery’s authority unfold over the next several years if the court’s jurisdiction — essentially, what sets the court apart from all others — is up for revision,” Swift warns about the Rutledge decision’s potential implications. On eXp, Boon emphasizes what’s at stake: allegations of “a board which, when it learned of alleged physical assaults against [employees and agents], chose to prioritize protecting the alleged wrongdoers over a safe workplace.”
CCI: Delaware is facing simultaneous pressure from companies threatening to leave and courts expanding fiduciary duties. When the decision on SB 21 comes down, what will it tell us about which direction Delaware has chosen — protecting corporate flexibility or protecting shareholders and stakeholders?
KS: I’m not convinced that the pressure from companies seeking to leave is real, even though it’s certainly being treated that way. Delaware’s incorporations are up last year from the prior year. A handful of companies have re-incorporated to other states, but leaving Delaware as the corporate home seems to be the outlier and not the norm. Nonetheless, the General Assembly and corporate bar are looking toward legislation to curb attorney fee awards in stockholder class litigation, which arguably can be seen as an ongoing effort to preserve its status as the obvious and competent choice.
Vice Chancellor Will submitted two certified questions from Clearway Energy to the Delaware Supreme Court:
- Does Section 1 of Senate Bill 21, codified at 8 Del. C. § 144 — eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where the safe harbor provisions are satisfied — violate the Delaware Constitution of 1897 by purporting to divest the Court of Chancery of its equitable jurisdiction?
- Does Section 3 of Senate Bill 21— applying the safe harbor provisions to plenary breach of fiduciary claims arising from acts or transactions that occurred before the date that Senate Bill 21 was enacted — violate the Delaware Constitution of 1897 by purporting to eliminate causes of action that had already accrued or vested?
Several cases have been staying while we await the outcome of these questions.
Given how the certified questions are framed, it would probably be an overreach to classify the answers from the court as definitively protecting corporate flexibility over shareholders, or vice versa. I read the first question as more — is the court going to protect the Court of Chancery as we know it? The heart of the first questions comes back to the Court of Chancery’s role and authority. If the Supreme Court determines that statutory impairment of the Court of Chancery’s equitable jurisdiction in this specific context, or even more broadly, is allowable and not unconstitutional, then I think it’s safe to say that the Court of Chancery could be open to other similar cuts to its ability to exercise equity. We might see death by a thousand cuts to chancery’s authority unfold over the next several years if the court’s jurisdiction — essentially, what sets the court apart from all others — is up for revision.
The second certified question really speaks to a due process concern, and I also see it from a statute of limitations vantage if you want to litigate these cases. There was a lot of discussion over when SB 21 would go into effect if it was passed. I think everyone did their best to answer that question in a fair way, but there are obvious concerns that need to be addressed about losing rights or claims.
RB: The courts have not been “expanding fiduciary duties.” To the contrary, the courts have faithfully applied the fiduciary law, including many Delaware Supreme Court precedents that had stood for decades. The data is anything but clear that more than a small handful of controlled companies has left or threatened to leave the state.
CCI: Walk us through what changes for a chief compliance officer or general counsel if the court strikes down SB 21 vs. if it upholds the law. What are the concrete differences in how you’d advise your board on a conflicted transaction?
KS: Every board and board adviser should have their eyes on this case. SB 21 applies the standard business judgment rule if a transaction goes through some independent review by a committee or majority-of-minority votes. If the statute is unconstitutional, entire fairness reigns supreme. Boards should always strive to keep solid records. I come from a healthcare background, so I tell my clients what I learned in that setting: If you did not document it, then it did not happen!
RB: The Supreme Court’s decision in Rutledge v. Clearway is likely to have a direct effect only on controlled companies, or those with substantial concentrated ownership. In the case of a widely held public company without a controller, the effect is likely to be nil. In the case of a controlled company, the answer is a return to deal structuring with MFW in mind: the best protection in that limited category of cases is an independent and well-functioning special committee and a majority of the minority vote. In other words, take heed of the Delaware fiduciary law decisions that made up the landscape prior to SB 21 and plan with those decisions in mind.
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Read moreDetailsCCI: Shifting to another recent Delaware case that connects to broader governance themes, the chancery court recently allowed a shareholder lawsuit against eXp World Holdings to proceed. The case involves allegations that directors and officers failed to adequately respond to credible reports of sexual assault and harassment at company events. The court found it “reasonably conceivable” that leadership’s response was “nominal” with “deliberate heel-dragging” and ran “parallel to a campaign of concealment.” This is reportedly the first time the chancery court has upheld oversight failure claims specifically stemming from sexual misconduct, building on the McDonald’s case from 2023. What does an adequate response actually look like in the case of serious misconduct allegations? What are the specific steps compliance and governance teams need to take to avoid that “nominal response” label — and potential liability?
KS: At this stage of the case, I think it’s important not to read too much into the decision. The case survived a motion to dismiss; Delaware has a lesser pleading standard than federal courts or other states of “reasonably conceivable.” Sufficient facts were pled to meet that comparatively low standards. I think this is an interesting case from a governance and HR perspective. A company should have a reporting system in place to investigate misconduct and a similar system to uniformly apply the outcome of its investigation, regardless of the types of misconduct at issue and regardless of the type of employment relationship the alleged bad actor has with the company.
In this case, there is an allegation that the company’s code of business conduct and ethics did not apply to the accused real estate agents because they were independent contractors, allowing them to skate outside of the lines that were drawn. Much more concerning than that, there’s an allegation that in 2020 the CEO at the company had written notice of the alleged misconduct and ignored that misconduct. The board was said to respond with an investigation only after a whistleblower raised the issue again two years later. I think the takeaway here is that ignorance is most certainly not bliss. Directors and officers can’t mimic the ostrich by burying their heads in the sand hoping that if they ignore it, then it will just go away. I would suggest that companies are best off responding immediately to any allegations by hiring an external HR company and compliance law firm as neutral third parties to assist with investigations. The best place to start when allegations of serious misconduct arise is to ask: what if it’s true? If the misconduct already occurred, there is no winding back of the clock, so the best approach is to investigate, identify whether the allegations are valid and re-examine policies that would have allowed that type of misconduct to exist and change them.
RB: To borrow from the corporate context, there is “no single blueprint” when dealing with allegations of this type. But one thing is certain, and that is that doing nothing is not acceptable. At the least, a well-functioning corporate compliance or legal department would immediately investigate to determine whether the allegations were credible; involve the audit or other oversight committees if the allegations were determined to be credible, and report to them in any event; and if the allegations were determined to be credible, address the matter with the board. An example is the board’s reaction in the McDonald’s case. There, the board took at least nine different major steps to address the alleged misconduct at an enterprise level within a month of being on notice of the red flags. Those steps included a significant policy overhaul, increased training, a cultural assessment and engaging multiple outside experts including the Rape, Abuse & Incest National Network (RAINN) and an outside law firm to advise the company. The McDonald’s board also made addressing the misconduct a strategic priority and addressed it in board minutes.
CCI: These cases seem to pull in opposite directions — SB 21 was about giving boards more protection, while eXp expands when they can be held liable. But maybe there’s a common thread here. Do these cases, taken together, reveal anything about Delaware’s current thinking on fiduciary duties and corporate governance?
KS: I have the utmost faith that the Delaware courts are going to reach the right and just result under the law. I think we see that here, both in the certification and acceptance of the questions in Clearway, with the judiciary acknowledging that there are urgent questions that need to be addressed so boards and their advisers can continue to fulfill their roles, and eXp underscores that corporate negligence is always on the table for a lawsuit. SB 21 does not suggest that corporate negligence would be condoned by the Delaware courts. I don’t see the cases as pulling in opposite directions.
RB: SB 21 was not about giving boards more protection but instead providing “protection” for a small group of boards, specifically in the controlled company context. And eXp doesn’t expand the fiduciary doctrine, it merely applies that doctrine in an area that has not been well developed, although there have been several notable cases in this area, beginning with Fox, which were not litigated. Finally, we would direct you and your readers to the allegations of the eXp case: those allegations put in stark relief concerns about physical danger to employees and agents and a board which, when it learned of alleged physical assaults against those individuals, chose to prioritize protecting the alleged wrongdoers over a safe workplace.
CCI: If you’re sitting in a compliance committee meeting or advising your board this quarter, what are the two or three specific things you should be doing right now — both to prepare for the Clearway decision and to incorporate the lessons from eXp?
KS: I would be educating the board about the potential changes that could be forthcoming, and when in doubt as to whether a conflict is in play, to act like entire fairness applies. I generally take the approach that you’re not going to get penalized for doing the most, but if all you can say in your defense is that you did the least, then it’s not much of a defense. My advice is to do all you can do to ensure compliance, to ensure you have the broadest shield possible to hold up when the arrows are slung.
RB: 1. Taking workplace safety complaints seriously. 2. In the controlled company context, or the context of a company with concentrated ownership, rethinking the well-developed fiduciary law doctrines for addressing self-dealing transactions in controlled deals.
