The End of the Beginning in Corporate Law: SB 21 and the Ab Initio Requirement

How did Delaware’s SB 21 reform change corporate law? In corporate circles and the general media, critics framed the reform as a concession to powerful controlling shareholders, while proponents defended it as a necessary response to judicial overreach. Most of the public debate focused on the high-profile provisions concerning who counts as a controlling shareholder and which transactions trigger heightened scrutiny.

But a more revealing change largely escaped attention: SB 21 also eliminated corporate law’s timing requirement. Before SB 21, controllers seeking to cleanse conflicted transactions had to adopt procedural safeguards from the outset (“ab initio”), before deal negotiations began. If a controller initially approached the CEO or board to discuss deal terms, and only later started negotiating with a special committee of independent directors and committed to a majority-of-minority shareholder vote, the transaction remained subject to entire fairness review. Over the preceding decade, the ab initio requirement became one of the most consequential prerequisites in conflicted-transaction litigation. Yet the legislature omitted it without explanation. And neither practitioner nor academic commentary has supplied a theory of why timing matters.

In a new paper, I provide that theory. The rise of the ab initio requirement is best understood as part of corporate law’s broader shift from substantive fairness review to process-based protections. If the law credits internal corporate procedures as mimicking market dynamics and cleansing conflicts of interest, ensuring that special committees and shareholder votes are truly empowered and fully informed becomes essential. The central challenge is distinguishing meaningful oversight from cosmetic, check-the-box compliance with the process.

The ab initio requirement served as an administrable indicator of whether the cleansing procedure had integrity. For one, ab initio is harder for corporate insiders to falsify, and easier for judges to administer, relative to other integrity-forcing mechanisms. Ab initio is harder to fabricate after the fact because it turns on a fixed and observable moment: when the controller formally conditions the deal on procedural safeguards. And it is easier for judges to administer because it hinges on a time-stamped event, rather than asking courts to conduct a subjective inquiry into the quality of negotiations. This matters when evaluating the concern (raised by SB 21 proponents) that litigation under the pre-SB 21 regime was too costly. Sure, the ab initio requirement invites litigation. Sure, it calls on plaintiff attorneys to dig through internal corporate communications. But the same is true for every process-integrity requirement. The relevant question is which integrity-forcing mechanism allows more effective screening of lawsuits.

Eliminating the ab initio requirement is also inconsistent with the negotiation research. A rich body of literature demonstrates that early communications anchor expectations, and early commitments are hard to unwind. The early phases of negotiations are therefore not merely exploratory; they are formative in shaping final outcomes. Procedural safeguards introduced midstream may be ineffective at dislodging anchoring and path-dependence dynamics in transformational transactions such as controller freezeouts. To illustrate, consider two scenarios. In scenario A, a special committee hires financial advisors who provide valuations and set internal walkaway points before the controller presents a price. In scenario B, the committee starts operating only after the controller signals her desired price. All else equal, committee A is more likely to be insulated from anchoring effects, while committee B is more likely to conduct its negotiations within a narrow band of “the controller’s offer ± x%.”

To complete the normative assessment, the paper reconstructs three potential justifications for eliminating the ab initio requirement. The first is the “tender-bypass argument,” which maintains that ab initio was originally designed to prevent controllers from exploiting a loophole in the differing legal treatment of merger freezeouts and tender-offer freezeouts. By equalizing the legal treatment of mergers and tender offers, SB 21 rendered the ab initio requirement superfluous, or so the argument goes. The second is the “foot-fault litigation argument,” which frames the ab initio requirement as a magnet for costly litigation over formal missteps, rather than substantive investor protection. The third is the “substitute forces argument,” which contends that even without a rigid timing requirement, directors’ reputational concerns and institutional investors’ voting pressures will keep corporate insiders in check. The paper critically evaluates each potential justification and finds them all wanting.

Importantly, aside from eliminating ab initio as a formal prerequisite (by amending Section 144 of the DGCL), SB 21 also cabined shareholder inspection rights (by amending Section 220). Taken together, these two changes risk undermining corporate law’s ability to ensure the integrity of processes meant to protect investors.

What, if anything, can courts do to preserve effective investor protection in a post-SB 21 world? My paper offers four practical implications.

First, courts can and should still scrutinize when procedural safeguards were implemented—consistent with the revised statute, even without a formal ab initio requirement—by grounding their review in general fiduciary principles. The inquiry would be looser than the old ab initio rule: not whether safeguards were in place at the first possible moment, but whether they were implemented early enough to serve their cleansing function.

Second, courts should distinguish between types of conflicted transactions in that respect: scrutinizing the timing is more appropriate in freezeouts than in non-freezeout transactions. Third, when scrutinizing timing, courts should adopt a more functional test for defining when negotiations fully begin (and forgo the “soccer game” analogy).

But even if courts were to heed all three lessons and continue to scrutinize the timing of procedural safeguards, they may have fewer opportunities to do so in practice, because SB 21 also curtailed shareholder inspection rights. Past successful challenges often hinged on minority shareholders using inspection powers to uncover internal communications revealing that controllers made backchannel overtures before formally committing to procedural safeguards. This is where the fourth and final policy implication comes in: Going forward, courts may need to interpret the revised inspection rights provision more liberally in the freezeout context by recognizing a “compelling need” to access informal communications relevant to process integrity.

The deep dive into the ab initio saga also surfaces broader lessons about the role of specialized business courts, the systemic value of litigation, and the interdependencies between securities regulation and corporate law. At minimum, it makes it difficult to claim that SB 21 “did not change much” and “merely returned corporate law to where it was ten years ago.” Ten years ago, corporate law had an ab initio requirement. Now it does not.

To be sure, one could claim that SB 21’s elimination of ab initio as a formal prerequisite was a calculated tradeoff: corporate law lost some capacity to ensure process integrity but reduced the costs of litigation going forward. But if this is the argument, it must rest on a theory of timing capable of assessing how much process integrity (and investor protection) is lost in the tradeoff. My paper aims to provide a first step toward such a theory.

The full article is available for download here.