Delaware Court of Chancery Examines Fiduciary Duties of PBC Directors in a Change-of-Control Transaction For the First Time

On July 29, 2026, the Delaware Court of Chancery dismissed with prejudice the stockholders’ complaint in Drakes Landing Associates, L.P. v. Tilden Park Capital Management, L.P.,[1] holding that the plaintiffs failed to rebut the statutory safe harbor for directors of a public benefit corporation (PBC). This is the first Delaware Chancery decision to address the balancing test of PBC director fiduciary duties in a change-of-control context.

The dispute arose out of a financing transaction at MPower Financing, PBC, a Delaware PBC (the “Company”), in which two of the Company’s largest lenders obtained control of the Company. The plaintiffs alleged that the special committee formed to evaluate the transaction, although independent and disinterested, nonetheless breached its fiduciary duties and that the lenders aided and abetted the breach. The Court found that the plaintiffs failed to plead facts sufficient to rebut the safe harbor protecting PBC directors under DGCL Section 365(b). The Court also addressed the applicability to PBCs of Revlon, concluding that the duty to maximize the sale price of a corporation does not apply to the conduct of PBC directors, but leaving open the question of whether a modified form of enhanced scrutiny might still apply as a standard of review.

Legal Background

Under DGCL Section 365(a), PBC directors must “balance the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation” (the “Balancing Requirement”). Section 365(b) provides a statutory safe harbor: a PBC director’s fiduciary duties are satisfied with respect to a decision implicating the Balancing Requirement if such director’s decision is (i) informed, (ii) disinterested, and (iii) “not such that no person of ordinary, sound judgment would approve.”

Under Delaware law, Revlon generally is triggered when the board of directors of a traditional Delaware corporation decides to sell or effect a change of control of the company. Revlon can be understood as either imposing a standard of conduct on directors of traditional corporations (i.e., they have a duty to maximize the sale price of the corporation) or a standard of review (i.e., when Revlon is triggered, courts will apply enhanced scrutiny in reviewing the decisions of directors).

Delaware courts, until this litigation, had yet to address how Revlon applies, if at all, to directors of PBCs. Some practitioners have viewed the PBC’s fiduciary mandate to balance the pursuit of its mission and the pecuniary interests of stockholders as a structural defense against unwanted suitors, a so-called “sweet pill” that permits (or even requires) directors to refuse to sell a PBC to a proposed purchaser that offers a higher price but declines to support the mission of the Company.

The Case

MPower Financing, PBC (the “Company”) is a Delaware PBC that provides student loans to international students. Two of the Company’s major lenders, Tilden Park and King Street (the “Funds”), held $108.9 million of the Company’s debt and approximately 25.5% of its common stock. Tilden Park also designated two of the Company’s nine directors. Early in 2025, the Company “found itself in a short-term financial pinch.” The Funds proposed a financing transaction that would involve, among other things, a right to convert their existing and new debt into equity at $2.25 per share, which was a substantial discount to the Company’s previous financing round in 2021. If exercised, the Funds would end up owning 85% of the Company. The board formed a special committee of independent and disinterested directors to evaluate the transaction. The special committee engaged separate legal counsel and a financial advisor and instructed the financial advisor to search for other deals, though it was not clear whether other offers were submitted. The special committee approved the transaction. Stockholder approval was not sought; plaintiffs alleged that both Company counsel and the CEO had recommended a stockholder vote, but they did not allege that stockholder approval was expressly required under the Company’s governing documents.

Plaintiffs allege that the financial advisor did not make a serious effort to identify alternative sources of financing, that the Tilden Park designees exercised influence over the Special Committee, and accordingly, that the Special Committee failed to discharge its fiduciary duties in a change-of-control scenario.

Defendants moved to dismiss the complaint on several grounds, including that any complaint grounded in Revlon fails as a matter of law because its “stockholder value-maximizing philosophy” does not apply to PBCs and that the special committee’s approval of the transaction was protected by the safe harbor in Section 365(b) of the DGCL.

The Court’s Holding

The court ruled in favor of the defendants.

Revlon Analysis. Regarding the Revlon claim, the court distinguished between Revlon as a standard of conduct and as a standard of review. As a standard of conduct, the court reasoned that Revlon’s exclusive focus on stockholder wealth maximization is “inconsistent” with Section 365(a)’s balancing mandate. As a standard of review, the court held that aspects of enhanced scrutiny might apply through what it termed “PBC enhanced scrutiny.” However, it did not decide whether PBC-enhanced scrutiny actually applied to this complaint because it held that plaintiffs failed to rebut the statutory safe harbor in Section 365(b).

Safe Harbor. The court’s dispositive holding rested on Section 365(b). Plaintiffs bore the burden of pleading facts supporting a reasonable inference that the safe harbor was not met. The court found they failed on all three prongs.

Disinterestedness. Plaintiffs conceded that all three special committee members were disinterested and independent.

Informed decision-making. The court reasoned that, even under enhanced scrutiny, because PBC directors must consider and balance a broader scope of interests than their traditional corporation counterparts, a plaintiff challenging a PBC director’s decision as uninformed must plead facts showing an unreasonable failure to become informed as to all three Section 365(a) interests: stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct, and the specific public benefit. Plaintiffs’ allegations focused exclusively on the inadequacy of the market canvass, going only to stockholders’ pecuniary interests, just one of three Section 365(a) interests. They made no allegations regarding the other two interests. While they argued in their answering brief that “no balancing of interests” occurred, the court rejected this argument because (1) a plaintiff cannot amend a complaint through an answering brief, and (2) it deemed the argument entirely conclusory. The court held that this conclusory assertion, raised for the first time in briefing, was insufficient under either a business judgment or enhanced scrutiny standard.

Waste. The court held that prong (iii) of Section 365(b) requires plaintiffs to prove corporate waste (i.e., a transaction that is so one-sided that no reasonable person would enter into it), which is a high bar to establish, and plaintiffs did not attempt to argue that this fact pattern constituted waste.

Takeaways

This case contains many important takeaways for both directors of PBCs and investors and stockholders in PBCs.

• Litigants challenging the decisions of PBC boards must address Sections 365(a) and 365(b) directly. The plaintiffs’ complaint failed to allege any facts that are uniquely relevant to PBCs. The complaint used the word “public benefit” once, in describing the type of legal entity that MPower was, did not include any facts or assertions related to the specified public benefit of MPower set forth in its charter or to the stakeholders materially affected by MPower’s conduct, and did not include any facts or assertions related to whether and how the board applied the Balancing Requirement. Challenges to PBC board decisions must directly address whether directors actually considered each element of the Balancing Requirement. Challenges focused solely on stockholder value that might be sufficient for traditional corporations will be insufficient for a PBC.
• The significance of each element of the Balancing Requirement. The court noted that, to support a claim that directors did not act reasonably to inform themselves as required under the safe harbor (assuming enhanced scrutiny is applied), a plaintiff must show that “the directors did not do so as to the three interests” under the Balancing Requirements. In this case, the plaintiffs failed because they alleged only that the special committee “failed to consider the stockholders’ pecuniary interests” and did not allege that the special committee failed to inform itself with respect to the other two elements of the Balancing Requirement. The court’s reasoning suggests that a director could defend against such a claim by showing that he or she considered any of the three interests in the Balancing Requirement, even if not all. However, as noted above, the plaintiffs here ignored the Balancing Requirement in its entirety in their complaint and, moreover, only addressed one of the interests. Accordingly, the PBC structure should not be viewed as minimizing the board’s and management’s other fiduciary duties or the importance of good governance; PBC directors should ensure that each element of the Balancing Requirement is actively considered and documented in connection with material decisions.
• Revlon. The court’s discussion of Revlon has attracted a great deal of commentary, given that this is a case of first impression. While the court did not rely on its conclusions related to Revlon, it is an important signal for how Delaware courts may apply Revlon to PBCs in the future: while PBC directors are not required to maximize sale price, a clear takeaway is that Delaware courts will be willing to apply a greater level of scrutiny to fundamental transactions involving PBCs. A PBC should not be viewed as a “get out of jail free” card, enabling managers to manage the company in any method they see fit without any guardrails, even in change-of-control scenarios. Accordingly, directors of PBCs, like directors of traditional corporations, should treat change-of-control transactions and similar fundamental transactions with heightened care and apply best governance practices, including taking appropriate steps to address conflicts and requiring fulsome and accurate disclosures of all conflicts that a director might have in connection with such a transaction, both to the full board and any special committee evaluating the transaction, and, where stockholder approval is sought, to the stockholders.
• PBC as a “sweet pill.” In addition, the court’s analysis that directors of PBCs are not obligated to always maximize the sale price in a Revlon change-of-control scenario, while not binding on future courts, is consistent with the conceptualization of the PBC as a “sweet pill” in a change-of-control scenarios; while enhanced scrutiny may apply, unlike in a traditional corporation, the directors will not be obligated to sell the PBC to the highest bidder if it does not also satisfy the other elements of the balancing test.
• Compliance with the PBC statute. The case reinforces the importance of understanding that, while a PBC is similar to a traditional Delaware corporation in many respects, Delaware law does impose some important different, or additional, obligations on PBCs and directors. Accordingly:
• Board minutes and consents (which generally are required to be produced in response to books and records requests) should document that the board is considering the Balancing Requirement in making decisions and actively incorporating all three interests into its discussions.
• In the course of its monitoring and oversight responsibilities, the board should ensure it is staying informed as to how the PBC is advancing its specified public benefit and the impact of its decisions on stakeholders materially affected by the PBC’s conduct.
• The biennial PBC reporting requirement should not be viewed as a marketing exercise, but rather as a legal obligation that serves as an opportunity for the board to demonstrate to stockholders that it is discharging its fiduciary duties to promote the public benefit and consider the impact of the PBC’s activities on stakeholders.

Morrison & Foerster’s PBC and M&A Capabilities

Morrison & Foerster has deep experience advising boards, special committees, and investors on M&A transactions, corporate governance, and the unique fiduciary and regulatory considerations applicable to public benefit corporations. Our team regularly counsels clients on deal structuring, change-of-control transactions, stockholder litigation, and the evolving legal landscape for PBCs in Delaware and beyond. For questions about how this decision may affect your business, please contact the authors below.

[1] Drakes Landing Associates, L.P. v. Tilden Park Capital Management, L.P., C.A. No. 2025-0898-NAC (Del. Ch. July 29, 2026).