Why Should Delaware Care?
A major piece of state legislation will change the rules of its influential business court, making it more difficult to sue powerful, rich owners of companies. Proponents of the bill say it is necessary to ensure that Delaware remains the incorporation capital of America, which contributes about a third of the state budget independent of taxpayers.
The Delaware Senate on Thursday passed a controversial corporate law bill that proposes to change rules governing how deals get done by powerful people within some of the biggest companies in the world.
Backers of the proposal, called Senate Bill 21, include Gov. Matt Meyer, the Senate’s Democratic leadership and the corporate defense attorneys who represent big publicly traded companies. They call the bill a “course correction” that will bring the state’s business courts back into alignment with rulings from a decade ago.
They also contend that the bill needs to be expedited to stem threats from disgruntled executives who may cancel their companies’ Delaware registrations and set up legal homes in other states.
Opponents include prominent law professors, lawyers who represent pension funds, and even U.S. Sen. Elizabeth Warren (D-Massachusetts). By and large, they have argued that the bill removes constraints on the power of founders or other key officials within companies to engage in deal-making that they say could hurt small investors.
Many have also linked the bill to Elon Musk, contending that dismay with past Delaware court opinions from the bill’s backers follows a backlash against the state from the world’s richest person that erupted last year after a judge in Wilmington twice nullified his $56 billion pay package from Tesla.
In all, the bill has sparked competing online screeds written by prominent lawyers and national law professors, open letters sent to Delaware lawmakers contending that the state’s lucrative corporate franchise business is at risk, and even political signs posted around Wilmington suggesting the bill is in place to satisfy Musk.
Still, the sentiments from the national controversy largely did not enter into the Senate Chambers on Thursday, as no senator expressed outright opposition to the bill.
Top proponents testify
The bill unanimously passed the Senate Thursday afternoon following testimony from two proponents, who also are among the most influential figures within Delaware’s corporate franchise system. Those are Delaware Law School Emeritus Professor Lawrence Hamermesh and Delaware Corporation Law Council Vice Chair Srinivas Raju.
In his remarks, Hamermesh said the provisions behind the bill – such as newly defining what a “controlling” stockholder is – didn’t just appear in recent weeks. Many of the provisions, he said, were outlined within an article he had written three years ago with two retired Delaware judges.
“This bill has concepts that are not new,” he said. “They didn’t just come up this year. They didn’t come up in response to a perception of companies leaving Delaware.”
Senate Bill 21 now heads to the Delaware House of Representatives, where two lawmakers have told Spotlight Delaware they expect to see opposition to the bill.
“I am not surprised that this bill sailed through the Senate and I look forward to it getting a robust debate in the people’s House,” Rep. Madinah Wilson-Anton (D-Bear) said.
Last year, Wilson-Anton led the opposition in the House of Representatives to another bill that made changes to the state’s corporate law. That bill, Senate Bill 313, ultimately became law.
Last year’s debate and the current one highlights Delaware’s unique place in the world as an arbiter of global corporate governance overseen by lawmakers and judges, who hail from modest towns such as Smyrna, Bear, and Milford.
That position – which Delaware has because of its industry of corporate registrations and prominent courts – brings the state roughly a third of its government revenues each year.
What does the bill do?
The bill that passed the Senate on Thursday was a substituted version of the original that Senate Majority Leader Bryan Townsend introduced last month as a joint proposal with Meyer and Republican lawmakers.
It followed a string of television appearances from Meyer where he told national business news outlets that Delaware’s substantial corporate law needed some changes to allow the state to remain the pre-eminent legal domicile for millions of U.S. companies.
The bill now proposes to define “controlling shareholders” within a company as individuals who own at least half of a company’s shares or a third of shares plus a managerial role. It also lowers the amount of internal company scrutiny required to examine deals made by powerful shareholders with their companies.
Finally, the bill restricts so-called “books and records” claims, which are requests a shareholder can make to executives for internal company documents.
Delaware’s Court of Chancery has long been deferential to small shareholders and has increasingly allowed deeper requests for records, including emails and text messages.
Earlier this year, a Delaware judge ruled in a high-profile books and records case that former Meta executive Sheryl Sandberg had destroyed evidence that should have been preserved for the claim.
Filed in 2018, the claim involved a trade union pension fund that demanded that her company, then called Facebook, turn over reams of documents related to a controversy involving the British data mining company Cambridge Analytica.
An answer to the billion-dollar question?
After the bill’s introduction, critics suspected Musk would be a beneficiary of it given that his disputed $55.8 billion pay package from Tesla was pending an appeal before the Delaware Supreme Court.
The suspicions were inflamed after CNBC published a report that an attorney from a law firm that also represents Musk helped to draft the bill.
In the wake of the report, Townsend said his legislation had nothing to do with Musk, and that he has “no reason to believe it has any impact” on his billion-dollar pay package dispute.
“This legislation applies equally to every Delaware corporation, and it’s not retroactive, so it’s not about affecting any kind of pending litigation,” Townsend said in a reference to Musk’s pay dispute.
Others involved in the creation of the original bill were former Chief Justice of the Delaware Supreme Court Leo Strine Jr. and former Court of Chancery Chancellor William Chandler III.
In recent weeks, a draft form of an amended version of Townsend’s bill was made public on social media. The draft, which had been written by Raju’s Corporation Law Council, appeared to be an attempt to answer the question of whether the legislation could be applied to pending legal cases — and notably to Musk’s appeal. It said the bill was not retroactive to pending cases, but noted that judges could apply its provisions if they determined that they were in line with pre-existing case law.
Instead of calming the controversy around Musk’s pending case in Delaware, critics contended that the language muddied what they say was an already hasty piece of legislation.
On Wednesday, Townsend introduced a substitute to his original Senate Bill 21. The new legislation was based on the Corporation Law Council’s amended draft, except that it removed the contested language about whether it could apply to pending cases.
The new bill states that it does “not apply to or affect any action or proceeding commenced in a court of competent jurisdiction that is completed or pending.”
Townsend introduced his substitute bill just hours before the Senate Judiciary Committee considered the bill.
That short turnaround time has since sparked an additional dispute, with a Delaware open government group claiming in a complaint sent to the state Attorney General that the Senate committee violated the state’s open records law by failing to publicly release the substitute bill at least six hours before the committee meeting began.
“A select group of inside lawyers who wrote the bill for the Committee knew what was in the bill. The Public did not,” the complaint, filed by the Delaware Coalition for Open Government, stated.
A spokeswoman for the Senate said in a written response to Spotlight Delaware that the substitute bill takes the place of an original bill, and called it “business as usual to substitute bills between committee and floor vote.”