In late March, Delaware enacted S.B. 21, legislation calculated to encourage companies to incorporate in the state, and to stay in the stay, rather than incorporating or reincorporating elsewhere. The bill included measures that could affect corporate litigation in Delaware in ways that may undercut litigation efforts of shareholders (and their lawyers). The plaintiffs’ lawyers apparently are prepared to fight back.

Earlier this week, in a new lawsuit involving Acushnet Holdings Corp., plaintiffs’ lawyers filed a Delaware Chancery Court complaint that, among other things, challenges the constitutionality of S.B. 21. This new suit joins earlier litigation previously filed also challenging S.B. 21’s constitutionality, as discussed below.  A copy of the latest complaint, filed in Chancery Court on May 5, 2025, can be found here. (Hat tip to Anthony Rickey, of Margrave Law LLC, who posted the complaint in a LinkedIn post, here.)

Background

S.B. 21 was enacted on March 25, 2025, as discussed in detail here. The legislation does a number of things, but, as a general matter, the bill specifies safe harbor procedures for corporate transactions with conflicted controlling shareholders or conflicting directors and officers, and imposes restrictions on shareholder books and records inspection rights.

As discussed here, in early April 2025, in a case involving Dropbox, plaintiff shareholders filed a complaint that among other things asserted a constitutional challenge to S.B. 21. That complaint was filed under seal, so at least as of the time of the filing, the specifics of the constitutional challenge were not publicly available.

The Latest Constitutional Challenge

On May 5, 2025, a plaintiff shareholder filed a class action complaint in the Delaware Chancery Court on behalf of shareholders of Acushnet Holdings Corp., against the company’s controlling stockholders, as well as against certain Acushnet directors and officers. The gist of the complaint is that the company’s controlling shareholders arranged for the company to undertake share repurchases in order to allow the controlling shareholders to maintain control, while at the same time allowing the controllers to liquidate hundreds of millions of dollars of their holdings.

The complaint alleges that the controller defendants cannot shield their conduct in reliance on S.B. 21’s safe harbor provisions, because the provisions of the bill, codified in Section 144 of Del. General Corporation Law, “are unconstitutional because they purport to divest this Court of equitable jurisdiction below the constitutional minimum established by Article IV, Section 10 of the Delaware Constitution of 1897.”

The complaint goes on to argue that even if the safe harbor provisions were constitutional as applied to acts or transactions taking place after the statute was adopted, S.B. 21 further violates Article I, Section 9 of the Delaware Constitution of 1897 by “purporting to eliminate causes of action that had accrued or vested before the bill was adopted.”

Finally, the plaintiffs argue that Acushnet’s share repurchases “do not qualify for safe-harbor cleansing, even if Senate Bill 21 applies.” The complaint argues that under the bill controlling stockholder transactions are eligible for safe-harbor protection only if it is approved by either a majority-of-the minority vote or a committee of directors whom the board has determined to be disinterested with respect to the transaction. That, the plaintiff argues, did not happen here, and the procedures that were followed were not sufficient to bring the transactions within the S.B. 21 safe harbor.

Discussion

While S.B. 21 was pending, the plaintiffs’ bar made it very clear they opposed the legislation. And from the moment it was enacted, it was likely the bill would face constitutional challenge, as John Jenkins pointed out in a March 27, 2025 post on the DealLawyers.com blog (here). In a LinkedIn post (here), Columbia Law Professor Eric Talley enumerated the potential ways that the Delaware bill could be unconstitutional.

Many of the same unconstitutionality arguments that Professor Talley laid out in his March post appear in the new complaint involving the Acushnet controlling shareholders. It remains to be seen how the constitutional challenges to the legislation will fare, but the fact of the litigation itself does at least suggest the possibility that there could be more to the S.B. 21 story to be told.

It certainly does seem that there is always something interesting going on in Delaware these days.

Well Said: If you have not yet read District of Columbia District Court Judge Beryl A. Howell’s May 2, 2025, opinion in the Perkins Coie Executive Order lawsuit, I highly recommend that you take a few minutes to read it. I was particularly struck by this paragraph, from footnote 3 of the opinion:

Only when lawyers make the choice to challenge rather than back down when confronted with government action raising non-trivial constitutional issues can a case be brought to court for judicial review of the legal merits, as was done in this case by plaintiff Perkins Coie LLP, plaintiff’s counsel Williams & Connolly, and the lawyers, firms, organizations, and individuals who submitted amicus briefs in this case. As one amicus aptly put it, ‘[o]ur judicial system is under serious threat when determining whether to file an Amicus Curiae brief could be a career ending decision. But, when lawyers are apprehensive about retribution simply for filing a brief adverse to the government, there is no other choice but to do so…. If the founding history of this country is any guide, those who stood up in court to vindicate constitutional rights and, by doing so, served to promote the rule of law, will be the models lauded when this period of American history is written.’