Pendulums: The Impact of SB21 on Delaware Securities Class Actions

“Life is like a pendulum, it has its swings and rhythms.”
-Albert Camus, French Philosopher

The Delaware Chancery Court and state legislature have always had a love-hate relationship with the shareholder plaintiff bar. Plaintiffs must start the litigation that keeps their courts and defense law firms in business and that yields the case precedents and legal predictability that help make Delaware the dominant state for incorporations. However, when the plaintiff bar gets too successful, the Court and legislature are not shy about pruning back.

As a result, Delaware law swings like a pendulum in different areas. Counsel loads up on successful types of shareholder suits until, at some point, the corporate hue and cry forces the Court or legislature to respond by cutting things back, most often by affording management more deference and giving challenged transactions less scrutiny. Eventually, the plaintiff bar moves on to a more promising area, and the pendulum swings back and forth there.

Delaware’s Shareholder Pendulums

During the past decade, we’ve seen pendulum swings for derivative suits, appraisal proceedings, and other types of matters. Now, we’re seeing it swing for breach of fiduciary duty class actions.

In typical breach of fiduciary duty cases, shareholders challenge the adequacy of consideration received in corporate transactions, claiming they received too little due to fiduciary duty breaches by insiders and/or controlling shareholders. These cases are often preceded by record requests under Section 220, a provision of Delaware law allowing investors to obtain internal company records that often bolster their claims. While procedurally similar to federal securities class actions, settlements in these matters are distributed to investors who previously tendered their shares, eliminating the need to provide proof of claim forms.

In 2023, the $1 billion recovery in the breach fiduciary duty class action against Dell, Inc., highlighted how costly these cases can be for Delaware companies (and lucrative for the plaintiff bar).  But that recovery was the tip of a bigger iceberg. We’re now seeing about two dozen such class action settlements each year.

The public dust-up between Tesla, Inc., shareholders and the Chancery Court judge over Elon Musk’s compensation, and the huge fee request by plaintiff’s counsel, prompted a more serious corporate response than usual. It started a Delaware Exit (“Dexit”) movement in which, following shareholder approval, companies reincorporate themselves in other states. In the case of Tesla, the company reincorporated in Texas, where its headquarters is located.

Besides Tesla, companies that have left or are considering leaving Delaware for other states, particularly Nevada and Texas, include big names such as AMC, Dropbox, Meta, Pershing Square Capital Management, TripAdvisor, and Affirm Holdings. It reminds one of Edgar Allen Poe’s short story, “The Pit and the Pendulum,” where at the end, the hero is suddenly pulled out of the pit and avoids being cut.

SB21: The Class Action Pendulum Swings Back

Against this backdrop, the Delaware legislature passed, and the governor signed, Senate Bill 21 (SB 21) into law at the end of March.

SB21 does several things to swing the fiduciary duty class action pendulum back the other way, namely making it more difficult to bring such cases. It reduces the target claimant pool by redefining “controlling shareholder” to be less inclusive and expanding those considered “disinterested” insiders. It expands the “safe harbor” for transactions involving conflicted insiders, and for those reviewed, ensures judges apply a standard of greater deference to management. SB21 also cuts back on the fuel for such cases, requiring that Section 220 record requests satisfy a new more rigorous “proper purpose” test. For those satisfying it, SB21 cuts back on the scope of what companies must produce in response.

Going forward, SB21 makes it much harder for the plaintiff bar to file and win Delaware breach of fiduciary duty class actions. Over time, we expect to see fewer suits and smaller outcomes.

Impact on Other Areas

Ironically, SB21 could have the unintended effect of swinging the pendulum back towards more Delaware appraisal suits.

After his obituary was mistakenly published, Mark Twain famously quipped: “The reports of my death are greatly exaggerated.” The same may be said for appraisals, which the plaintiff bar and investors largely wrote off until earlier this year, when Endeavor Group Holdings, Inc., was hit with both a breach of fiduciary duty class action and appraisal proceedings following its “go private” deal with Silver Lake, a controlling shareholder.

Delaware class actions and appraisal suits offer competing legal paths for shareholders who are short-changed in such transactions. By narrowing the class action route, SB21 may push more investors towards appraisal, reviving that moribund shareholder recovery mechanism.

However, it remains to be seen whether SB21 will be enough to stem the tide of Delaware companies heading for the doors. Companies may prefer to escape the pit rather than stay and risk being cut by the next pendulum swing.

FRT’s 2025 Securities Class Action Intelligence Report analyzes the many hundreds of shareholder class actions filed, settled, or disbursed from 2020-24, including breach of fiduciary duty cases we monitor in Delaware. Get your copy for a closer look at how class actions are changing and how your firm can prepare for the future.