Why should Delaware care?
Constitutional challenges have emerged to a state law that changed the rules for Delaware’s influential business litigation, 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.
A constitutional challenge to Delaware’s hard-fought corporation law change, which critics had derided as a “billionaires bill,” is likely headed to the state’s Supreme Court after Gov. Matt Meyer intervened in the case last week.
In March, Meyer signed Senate Bill 21 into law, following a bruising debate inside and out of the legislature.
Meyer and other backers had called the bill a “course correction” for Delaware’s business courts whose rulings, they said, had given small shareholders too much latitude in recent years to sue companies over decisions made by founders and other big shareholders.
Such lawsuits regularly occur in Delaware’s Court of Chancery because the state is the legal home to more than 2 million companies and about two-thirds of Fortune 500.
In the months since SB 21 became law, several lawsuits have emerged in the state’s business court challenging its constitutionality.
Last week, Meyer formally intervened in one of the challenges in order to defend the new law. That case involves a plumber’s union pension fund suing Dropbox Inc. on claims the tech company’s recent move to Nevada from Delaware was a “self-interested defensive measure” designed to quash lawsuits from mom-and-pop investors.
The plumber’s union further claimed that Dropbox can’t use SB 21 – and its new protections for companies from shareholder lawsuits – as a defense because, they said, the new law “is unconstitutional.”
In the governor’s motion to intervene in the case, Meyer’s attorneys said the constitutional challenge, if victorious, could undermine the predictability of Delaware’s corporate franchise.
The multi-billion-dollar Delaware corporate franchise is a web of legal, regulatory, and incorporating industries that support companies that base their legal home in Delaware.
Taxes and fees derived from the franchise also provides the state with more than one-third of its annual budget.
The judge in the Dropbox case, Chancellor Kathaleen McCormick, now faces a decision of whether to formally certify the constitutional question, which would send it to the Delaware Supreme Court.
In a letter to McCormick, the governor’s office’s attorneys said Meyer is prepared to intervene in any case that challenges the constitutionality of the new law.
In a prepared statement, a spokeswoman for Meyer’s office said the governor is working to ensure “Delaware’s laws are clear and result in predictability.”
“It is the State’s job to intervene as a party to legal challenges to SB 21 to advocate for the sustainability of the franchise,” she said.
Meyer’s spokeswoman, Mila Myles, declined to answer several questions about the case, including whether Meyer received an analysis of the constitutionality of SB 21 before signing it into law; and whether the governor’s outside attorneys on the case, from the Wilmington-based law firm Potter Anderson, are working in a pro-bono capacity.
In all, the developments indicate that the winter controversy over Delaware’s corporate changes will continue through the late spring and into the summer.
Beyond the constitutional questions, the debate over SB 21 also is being kept alive by a Supreme Court challenge to a ruling McCormick made last year to invalidate an estimated $56 billion pay package that Tesla awarded to its CEO, Elon Musk — the world’s richest man.
In arguing that Supreme Court justices should overturn the ruling, the appellants said in written briefs that the court should give “great weight” to SB 21’s protections against shareholder lawsuits, even though the law “is not expressly applicable retroactively.”
The question of whether SB 21 could be applied to past cases — and specifically to Musk’s pay dispute — was a notable controversy during the legislative debate over the bill earlier this year.
An early draft of the bill caused confusion when in one sentence it said the rules could not be applied retroactively. Then, in the next, it said judges hearing cases that emerged before February still could make a decision that is in line with the new rules — if they can support it with pre-existing case law.
Rather than easing the controversy, the language caused critics to contend that the new language muddied what they said was already a hasty piece of legislation.
Ultimately, lawmakers scrapped the language and passed a law that explicitly states that cases filed before February would not be subject to SB 21.
