Delaware enacted a corporate law overhaul that aims to keep companies from following Elon Musk’s lead and leaving the state, which relies on incorporation fees to pad its budget.
Gov. Matt Meyer (D) signed the bipartisan bill (S.B. 21) Tuesday, the final step in a fast-tracked legislative response to a series of rulings out of Delaware’s Court of Chancery.
While the bill comfortably passed both chambers of the state legislature, the corporate law community is divided over whether it’s the right approach to address corporate giants’ concerns that Delaware judges had given too much ground to smaller investors.
1. What does the new law do?
The law’s target: judge-created guardrails around insider deals involving some of the world’s largest companies and richest people.
It narrows the definition for a “controlling stockholder” and lowers the hurdles one must clear to avoid court scrutiny of a potentially conflicted transaction. It also strengthens the presumption that board directors are independent of management and controlling stockholders, which will make it harder for shareholders seeking to challenge an acquisition or pay package as rife with conflicts.
The law also will limit access to internal company records commonly used by smaller shareholders to investigate those deals.
The amendments apply to litigation and books-and-records demands filed after Feb. 17.
2. What motivated the overhaul?
The law follows criticism that recent Chancery rulings involving controllers were inconsistent and made even routine transactions onerous and vulnerable to shareholder litigation.
Musk led many of those attacks himself after Chancellor Kathaleen St. Jude McCormick invalidated a $56 billion CEO pay package that Tesla’s board offered him; a ruling that is under appeal at the Delaware Supreme Court. He responded by reincorporating his companies in Texas and Nevada, and encouraging other executives to follow his lead.
Dropbox Inc. and TripAdvisor Inc. have left for Nevada, and billionaire hedge fund manager Bill Ackman has pledged to take Pershing Square Capital Management LP elsewhere. Meta Platforms Inc. also has begun discussing reincorporating outside Delaware.
The state has a lot to lose: It’s the corporate home to 2.2 million registered entities—over twice its population—and incorporated 81% of US IPOs last year, according to a statement from Meyer’s office. The corporate franchise represents more than one-third of the state budget at roughly $2.2 billion a year.
3. Who supported the legislation?
Meyer pushed to change the way business disputes are handled in Delaware shortly after taking office in January, saying he was acting on feedback from executives, corporate lawyers, and Chancery Court litigants. The legislation was drafted by a panel selected by Meyer that included attorneys from corporate defense firms that have represented Musk, Tesla, and Meta’s Mark Zuckerberg.
The law will ensure “clarity and predictability, balancing the interests of stockholders and corporate boards,” Meyer said Tuesday.
A team of five lobbyists hired by the American Investment Council—funded by private equity giants such as Blackstone Inc. and KKR & Co.—pushed lawmakers to approve the bill.
The Delaware House passed the bill on Tuesday evening 32 to 7, following a unanimous vote March 13 in the state Senate. Corporate law changes need a two-thirds majority in each chamber to get to the governor’s desk.
Public pension funds, law professors, and consumer and investor advocacy groups opposed S.B. 21, calling it “the billionaires’ bill” that strips smaller investors of their ability to hold corporate leaders accountable.
4. Will corporations stay in Delaware?
Whether the corporate law changes influence a decision to stay largely depends on where a company is in its life cycle, said Michael Navarro of Munsch Hardt. Established companies are more likely to take a wait-and-see approach to avoid the substantial administrative burden involved in moving a corporation and its subsidiaries, he said.
But Navarro, who practices in Texas and Nevada, called S.B. 21 a “Hail Mary” attempt to keep more nimble companies that don’t value Delaware’s well-developed corporate case law and business-expert judges as highly as the state’s boosters.
“Clients aren’t so sure the proposed statutory overhaul will really change the court’s attitude and philosophical stance on where the fulcrum is on the balance between majority shareholder control and minority shareholder protection,” he said.
Priya Cherian Huskins, a San Francisco-based partner at insurance brokerage and consulting firm Woodruff Sawyer, said mature public companies not led by founders or controlling shareholders may have a hard time motivating investors to approve reincorporation.
Founders or controlling investors looking to engage in transactions and make decisions without Delaware’s will make a stronger case for leaving. However, for investors, “If your watch word is, ‘I want to be protected even if I’m not empowered,’ you’re still going to prefer Delaware,” Huskins said.
5. Are more changes on the way?
The new law was developed so quickly outside Delaware’s normal process for drafting new corporate law amendments, said Richard Grant, a Dallas-based partner at CM Law PLLC, that lawmakers may have to draft more legislation to respond to unforeseen consequences.
For example, as the go-to place for corporate incorporations, Delaware’s also been an extremely popular venue for bankruptcy filings, he said.
Should a “DExit” gain speed, will some other state take over as a bankruptcy hub? Will lawmakers move to appease investors demanding control of special-purpose entities that isolate financial risk if the parent company goes bankrupt?
The problem with S.B. 21 is that “it does seem very reactionary, as opposed to very methodical,” Grant said.
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