Why Should Delaware Care?
Taxes and fees from corporate filings account for nearly a third of Delaware state revenue. Worried about recent announcements for major corporate departures from Delaware, leaders are proposing significant changes to the state’s foundational corporate law to stem the tide, which could have unintended consequences too.
Supporters and opponents of Delaware’s controversial corporate law bill have a few days left to try and change the minds of lawmakers in the state’s House of Representatives on a measure that could shift the balance of power within some of the biggest companies in the world.
The bill has sparked a national debate that has reached an unprecedented size for a corporate law change in little Delaware. Opponents say the measure, Senate Bill 21, allows powerful investors to strike self-serving deals with companies at the expense of mom-and-pop investors.
But backers, including Gov. Matt Meyer and the Senate’s Democratic leadership, have called the bill a “course correction” for Delaware’s business courts whose rulings, they say, have given small shareholders too much latitude in recent years to challenge corporate deals, such as spin-offs or acquisitions.
Backers of the bill also say it is needed to pacify corporate executives who may threaten to cancel their companies’ Delaware registrations and set up legal homes in other states.
Last week, Meyer called for a swift passage of the measure.
But, in a surprise move, the House did not schedule a vote on the proposal Thursday as had been expected, pushing it instead to next week.
A spokeswoman for Speaker of the House Melissa Minor-Brown said she postponed the vote in order to give lawmakers “time to review the bill and make a thoughtful decision.”
Minor-Brown’s decision is in contrast with the Delaware Senate, which unanimously passed the bill last week, one day after it was sent out of committee.
Because Senate Bill 21 is changing the Delaware General Corporation Law, it must pass a two-thirds majority, which in the House is 28 members. That means that opponents would have to successfully convince 14 representatives to oppose it – a high hurdle considering the bill is likely to receive full support from the chamber’s 14 Republicans.
A small wrinkle in the vote would also include the likely absence of Democratic Rep. Stell Parker Selby, who has been absent for the entirety of the legislative session so far due to a reported injury.
Opposition tries to rally
Following the Senate’s vote, Rep. Madinah Wilson-Anton (D-Bear), a critic of the legislation, promised that there would be “a robust debate in the people’s House.”
That debate appeared to begin on Tuesday, when another critic, Rep. Sophie Phillips (D-Newark), introduced an amendment that has been favored by several nationally prominent law professors.
In its original form, Senate Bill 21 would make dozens of changes that, in sum, would make it harder for small investors to challenge deals in court that companies had previously struck with powerful shareholders, such as their founders.
Phillips’ proposed change would make the bill only apply to companies if a majority of their shareholders vote to “opt in” to its provisions.
On Wednesday, one of the professors that favors the change spoke to the House Judiciary Committee. Columbia Law School’s Eric Talley argued the bill, without Phillips’ amendment, would amount to a rebuke of Delaware’s revered judiciary because it would overturn previous cases.
His comments were followed by remarks from more than 20 other opponents of the bill, largely from the legal industry, who spoke during a public comment period.
One attorney said the bill would undo Delaware exceptionalism. Another said it would allow companies to rip off shareholders.
A handful of proponents also spoke at the hearing, with comments that largely pointed to the Delaware government’s reliance on the more than $2 billion in revenues it brings in from the state’s corporate franchise industry.
Without passing Senate Bill 21, they said, companies could leave Delaware for other states, putting at risk government services, including its schools and police.
Lobbying efforts heat up
Over the next four days, any lawmaker perceived as a fence sitter will almost certainly face a barrage of advocacy from proponents and opponents of Senate Bill 21, including from several prominent lobbying firms that have been contracted in recent weeks by local chambers of commerce, business groups, law firms, and even Walmart.
All of those companies appear to support Senate Bill 21.
According to data from the Delaware lobbyist database, 21 people are lobbying on the bill, and Dover-based Ruggerio Willson & Watson has secured most of the lobbying work.
Founder Rhett Ruggerio confirmed to Spotlight Delaware that he is lobbying in favor of Senate Bill 21 and on behalf of companies, such Richards Layton & Finger, and the American Investment Council, an industry group that represents private equity firms.
One company that has hired a lobbyist but not one from Ruggerio’s firm is an entity called Alliance to Protect Delaware’s Future. The group’s website does not state who is behind it, but state lobbying records lists its address at the same office building that houses Richards Layton & Finger, among other businesses.
In addition to lobbying, the group recently paid Spotlight Delaware to run pro-Senate Bill 21 advertising. In their ad, the group lists its entity name as Alliance to Protect Delaware’s Future, Inc.
The Delaware government’s business search page does not show a company existing with that name, or a variation of it, as of Thursday.
How the bill came to be
In recent weeks, Richards, Layton & Finger has been at the center of the debate over Senate Bill 21, after CNBC reported that an attorney with the firm was among those who drafted the bill. The story also noted that Richards Layton Finger has defended Elon Musk in Delaware, leading to suspicions that the richest person in the world had influenced the legislative process.
Others who helped draft the original bill include former Chief Justice of the Delaware Supreme Court Leo Strine Jr., former Court of Chancery Chancellor William Chandler III, and Delaware Law School professor Lawrence Hamermesh.
Today, both Strine and Chandler work for top law firms that regularly defend corporations against lawsuits from small shareholders.
On Wednesday, CNBC again reported on the origins of Senate Bill 21. This time, the story claimed that Meyer had met with attorneys for Meta, one day after the Wall Street Journal reported that the company’s CEO, Mark Zuckerberg, was considering moving his company out of Delaware.
Meyer again met with Meta representatives the following day, according to the report – that time with company executives.
Two weeks later, Senate Majority Leader Bryan Townsend introduced Senate Bill 21 and characterized it as a joint proposal with Meyer and Republican lawmakers.
CNBC’s reporting was based on emails obtained through an open records request.
