A Sea Change In Shareholder Litigation, or More Of The Same? What To Expect In 2026

Two significant developments during 2025—one in Delaware corporate law and the other in federal securities law—could materially impact shareholder litigation in 2026 and beyond.

In March 2025, following a number of controversial Delaware Court of Chancery decisions, the Delaware legislature passed S.B. 21, establishing safe harbors from litigation for certain board decisions and transactions that might otherwise be evaluated under the demanding entire fairness standard of review. Then, in September 2025, the SEC issued guidance permitting for the first time U.S. listed companies to include mandatory arbitration provisions in their bylaws or charter for federal securities law claims. S.B. 21 currently faces a constitutional challenge before the Delaware Supreme Court, and because Delaware law prohibits corporations from requiring investors to arbitrate securities claims, any Delaware corporation adopting mandatory arbitration will likely face legal challenges. While each of these developments have the potential to significantly change the legal landscape for Delaware and listed companies, their full impact remains uncertain and will likely gradually come into focus in 2026.

Below, we summarize these key developments and preview what to expect in the year ahead.

Delaware Developments: S.B. 21 Adoption and Constitutional Challenge

To address criticisms of several high-profile Court of Chancery decisions and maintain Delaware’s preeminence in corporate law, the Delaware legislature enacted S.B. 21 in March 2025. The legislation amended Section 144 of the Delaware General Corporation Law (DGCL) to provide three safe harbors exempting from legal challenge transactions or board decisions involving interested or conflicted directors or controlling stockholders when structured to meet certain conditions:

• The first safe harbor concerns transactions not involving a conflicted controlling stockholder where a majority of the directors are interested or conflicted, and is satisfied when material facts of the transaction and the directors’ interest are disclosed to, and the transaction is approved by, either a majority of disinterested directors or a majority of the disinterested stockholders.

• The second safe harbor concerns transactions involving controlling stockholders (other than go-private transactions), and is satisfied when material facts are disclosed and the transaction is approved in good faith by a majority of disinterested directors on a special committee or by a majority of the minority stockholders.

• The third safe harbor concerns go-private transactions involving a controlling stockholder; it is satisfied when material facts are disclosed and the transaction is approved in good faith by a majority of disinterested directors on a special committee and a majority of the minority stockholders.

S.B. 21 also provides statutory definitions of critical much-litigated terms, including “controlling stockholder,” “control group,” “interested” and “disinterested,” and it provides a heightened presumption of director independence for any director that the board has determined satisfies applicable stock exchange rules. The legislation further amends Section 220 of the DGCL to limit stockholders’ inspection rights to a narrow set of categories of books and records, and codifies caselaw on some procedural requirements and protections favorable to Delaware corporations providing books and records.

The Delaware legislature acted swiftly in passing S.B. 21 in order to halt the threatened exodus of Delaware companies to states perceived to be more corporate-friendly.[1] Meanwhile, amid the legislative change and ongoing uncertainty as to the ultimate impact of S.B. 21, 2025 saw a slight uptick in corporations reincorporating from Delaware to other jurisdictions, with 18 companies offering reincorporation proposals during the 2025 proxy season[2] (compared to about five reincorporation proposals per year in prior years).[3]  Still, the unusually high number of companies leaving Delaware in 2025 does not meet the predicted impending outflow of companies, which seems, in spite of the continued uncertainty may have been largely exaggerated.[4] Further, on December 19, 2025, the Delaware Supreme Court reversed the Court of Chancery’s rescission of Elon Musk’s Tesla compensation plan—a ruling many viewed as a significant impetus for S.B. 21’s passage.

Almost immediately upon its enactment, S.B. 21 was challenged on constitutional grounds. The Delaware Supreme Court took an interlocutory appeal in Thomas Rutledge v. Clearway Energy Group, et al., certifying two questions:

• Does Section 1 of S.B. 21—eliminating the Court of Chancery’s ability to award “equitable relief” or “damages” where safe harbor provisions are satisfied—violate the Delaware Constitution by divesting the Court of Chancery of equitable jurisdiction?

• Does Section 3 of S.B. 21—applying safe harbor provisions retroactively to breach of fiduciary claims arising before enactment—violate the Delaware Constitution by eliminating causes of action that had already accrued or vested?

On November 5, 2025, the Delaware Supreme Court heard oral argument on this challenge, focusing primarily on whether the legislature exceeded its constitutional powers by restricting the Court of Chancery’s jurisdiction. As of the date of this publication, the Court’s decision remains pending. Meanwhile, other cases pending in the Delaware Court of Chancery in which S.B. 21 is implicated have been stayed until the Delaware Supreme Court issues its decision on the constitutional challenge. As a result, the Delaware courts have not yet started to grapple with how to apply S.B. 21 in practice, making it unclear exactly how much of an impact it will have on shareholder litigation in Delaware going forward. For example, will the Delaware courts apply the safe harbors as written to dismiss cases where the statutory conditions are met, or will the courts find “fact issues” as to whether those conditions were fully satisfied, thus allowing cases to proceed to discovery and potentially trial? If the latter, will S.B. 21 lead to different case outcomes, or will shareholder litigation in Delaware continue much as it looked before S.B. 21 was passed? Assuming the Delaware Supreme Court upholds S.B. 21, Delaware courts will start providing the answers to these and other questions as they decide cases in 2026.

Federal Securities Law Developments: Mandatory Arbitration Clauses

In September 2025, the SEC issued a policy statement clarifying that the inclusion of a mandatory arbitration provision for investor claims under federal securities laws in an issuer’s charter, bylaws, or securities-related agreements will not affect whether the Commission accelerates effectiveness of that issuer’s registration statement.[5] This reflects a significant policy shift, as the SEC has historically opposed provisions in governing documents that risk waiving or impairing federal securities law protections. SEC Chairman Paul S. Atkins stated the Commission was not taking a position on whether companies should adopt mandatory arbitration, but providing clarity on the SEC’s position that such provisions are not inconsistent with federal securities laws.[6]

The SEC’s revised position rests on its review of Supreme Court jurisprudence addressing the intersection of federal securities laws and the Federal Arbitration Act of 1925 (the FAA), which “establishes ‘a liberal federal policy favoring arbitration agreements.’”[7] The SEC concluded that the anti-waiver provisions of the federal securities laws, which void any provision that waives compliance with the securities laws,[8] do not preempt the FAA’s policy in favor of arbitration agreements. In support, the SEC pointed to two Supreme Court decisions from the 1980s, Shearson/American Exp., v. McMahon,[9] and Rodriguez de Quijas v. Shearson/American Exp., Inc.,[10] both of which held that the anti-waiver provisions of federal securities law do not affect agreements to arbitrate. The SEC further concluded that there was no right to proceed through a class action under the federal securities statutes that would preempt application of the FAA, relying on the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant that no such right existed under federal antitrust statutes.[11]

However, the SEC’s position does not resolve whether companies can or should implement mandatory arbitration provisions. State law generally governs a corporation’s internal affairs and stockholder relationships, and enforceability of mandatory arbitration is a state contract law question.[12] The SEC acknowledged that the interaction of the FAA and state law with respect to mandatory arbitration provisions was outside the scope of its role, but did highlight Supreme Court jurisprudence suggesting that state laws that explicitly target the enforceability of mandatory arbitration agreements, or implicitly do so by “interfering with fundamental attributes of arbitration,”[13] could “be preempted by the [FAA].”[14]

The SEC’s change in position comes amid other recent changes to Delaware law. DGCL Section 115 historically allowed forum selection clauses in charters and bylaws for internal corporate disputes, provided claims could be brought in Delaware courts.[15] As part of a separate package of reforms passed in Senate Bill 95 (S.B. 95), which became effective as of August 1, 2025, these safeguards were extended to intra-corporate claims, which would arguably include securities claims brought by investors.[16] The SEC expressly noted that these amendments “may prohibit certificates of incorporation or bylaws from including an issuer-investor mandatory arbitration provision.”[17] In an October speech, SEC Chairman Atkins expressed disappointment with these amendments and encouraged Delaware to revisit the changes to DGCL Section 115.[18] While it has not yet issues a formal statement to the effect, the SEC has also suggested that the FAA may preempt state laws limiting mandatory arbitration clauses, rendering the Delaware prohibition irrelevant.

While it is too early to say how these issues will play out, further litigation in this area over such changes seems inevitable. A November letter from the Council of Institutional Investors—representing over 135 public pension funds, corporate and labor funds, and foundations and endowments—emphasized the group’s “long-standing membership-approved policy” opposing mandatory shareholder arbitration clauses.[19] The group highlighted that arbitrations are disfavored because they place limits on the discovery of evidence, in many cases take away the right to appeal, limit class-wide actions and the proceedings rarely enter the public record.[20] Perhaps because of these issues, to date no Delaware company has tried to adopt a mandatory arbitration provision. The only company to do so is Zion Oil & Gas, a Texas corporation, which changed its bylaws without need of a shareholder vote. Texas has no prohibition like the one in Delaware. Once a Delaware corporation adopts a similar provision, we would expect litigation challenging it.

Key Takeaways:

• S.B. 21 Constitutionality and Application: The Delaware Supreme Court should issue its decision on the constitutionality of S.B. 21 shortly. We expect it will uphold the legislation. Even if upheld, future litigation will likely challenge whether companies and boards have adequately satisfied the safe harbor requirements, leading to decisions that will provide further clarity to boards, management teams and their advisors as they consider how to manage potential conflicts in various contexts.

• Mandatory Arbitration Challenges: If companies adopt mandatory arbitration provisions following the SEC’s new policy, expect investor litigation challenging whether Delaware law permits such provisions and whether Delaware law is federally preempted.

• Consider Carefully: While many corporations no doubt find the idea of adopting mandatory arbitration of federal securities claims tempting (including because it would remove any class claims), such corporations should carefully assess whether requiring arbitration of investor claims serves the company’s best interests. Arbitration, for all its upsides, also has numerous downsides for issuers, including those identified by the Council of Institutional Investors.[21] Additionally, significant opposition from institutional investors and proxy advisors could harm the company’s reputation and affect the business overall. While mandatory arbitration, if widely adopted, has the potential to fundamentally change the face of securities litigation that has existed for decades, there are numerous reasons why companies might not adopt it all.

This article was prepared with contributions from Cleary trainee solicitor, Davawn Hartz.

[1] Jai Ramaswamy, Andy Hill and Kevin McKinley, “We’re Leaving Delaware, And We Think You Should Consider Leaving Too” (July 9, 2025), available here; see also Madlin Mekelburg, “Musk Shifts Tesla Incorporation to Texas After Investor Vote” (June 14, 2024), available here.

[2] Companies mostly contemplated reincorporating to other U.S. jurisdictions, with the majority proposing relocating to Nevada (12), followed by Florida (2), Texas (1), and Indiana (1). See Sam Nolledo, Sarah Wenger and Aaron Wendt, “The State of US Reincorporation in 2025: The Growing Threat and Reality of ‘DEXIT’” (October 9, 2025), available here; see also ISS Insights “The U.S. Reincorporation Race: Who’s in the Lead?” (July 16, 2025), available here.

[3] See Stephen M. Bainbridge “DExit Drivers: Is Delaware’s Dominance Threatened?,” pgs. 18-19, available here.

[4] Lora Kolodny, “Despite the highly publicized departure of Coinbase, only 28 companies have left Delaware this year” (November 14, 2025), available here; Gaurav Jetley and Nick Mulford, Analysis Group, Inc., “DExit: Reincorporation Data Seem to Support the Hype” (September 23, 2025), available here.

[5] SEC “Acceleration of Effectiveness of Registration Statements of Issuers with Certain Mandatory Arbitration Provisions, Securities Act Release No. 33-11389, Exchange Act Release No. 34-103988 90 Fed. Reg. 45125” (September 19, 2025), available here (Policy Statement).

[6] Id.

[7] CompuCredit Corp. v Greenwood, 565 U.S. 95, 98 (2012).

[8] 15 U.S.C. 77n contains the Securities Act’s anti-waiver provision, and reads “Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title or of the rules and regulations of the Commission shall be void. 15 U.S.C. 78cc(a) contains the Exchange Act’s anti-waiver provision, and reads “Any condition, stipulation, or provision binding any person to waive compliance with any provision of this title or of any rule or regulation thereunder, or of any rule of a self-regulatory organization, shall be void.”

[9] 482 U.S. 220, 220 (1987).

[10] 490 U.S. 477, 482 (1989).

[11] 570 U.S. 228.

[12] See, generally, Meyer v. Uber Technologies, Inc., 868 F.3d 66, 73 (2d Cir. 2017)

[13] Epic Systems Corp. v. Lewis, 584 U.S. 497, 498 (2018).

[14] Policy Statement, at 6.

[15] 80 Del. Laws, c. 40, § 5.

[16] 85 Del. Laws, c. 48, § 4.

[17] Policy Statement, at 3.

[18] Paul S. Atkins, “ Keynote Address at the John L. Weinberg Center for Corporate Governance’s 25th Anniversary Gala” (October 9, 2025), available here.

[19] Jeffrey P. Mahoney, General Counsel of the Council of Institutional Investors, “Letter to Chairman Atkins” (November 6, 2025) at 2, available here.

[20] Id. at 4-5.

[21] For additional information on mandatory arbitration, see our September blog post available here.