Why Should Delaware Care?
A new law changed the rules of in Delaware’s influential business court, making it more difficult for stockholders to sue powerful people within big companies. Proponents of the law said it was necessary to ensure that Delaware remains the incorporation capital of America, which contributes about a third of the state budget independent of taxpayers.
Twenty years ago, the Delaware News Journal sought to demystify one of the state’s storied institutions with an article titled, “The ‘That’s Not Fair’ Court.”
The article described how judges in the Delaware Court of Chancery relied more on their sense of fairness than on written laws when deciding complex cases, including those involving the biggest companies in the world.
Now, the question of how far that sense of fairness – or in legal terms, equity – can go sits at the center of the most consequential fight in Delaware corporate law in years. And it is one that the state’s Supreme Court is likely to settle in the coming weeks.
On Wednesday, the Supreme Court’s five justices heard arguments about the constitutionality of a new law — commonly called SB 21 after its enabling legislation — that sits at the center of that controversy.
Passed last spring amid escalating assaults on Delaware’s corporate brand sparked by Elon Musk, SB 21 limited the ability of Chancery Court judges to determine fairness around certain claims of self-dealing within companies.
Such lawsuits regularly occur in the Court of Chancery because Delaware is the legal home to more than 2 million companies, including a who’s who of Fortune 500 companies. One high-profile example involved a challenge to a multibillion-dollar pay package that Tesla approved for Musk, its CEO, in 2018.
Advocates of SB 21 called the bill a course correction that would re-align the state’s business courts with its rulings from a decade ago.
But critics derided it as a “billionaires bill.” Some also said the law amounted to a removal of the Chancery Court’s constitutionally granted authority to say what is fair in a business dispute.
On Wednesday, an attorney challenging the new law echoed that claim during arguments in front of the Delaware Supreme Court. The attorney, Gregory Varallo, said lawmakers should have passed a constitutional amendment if they wanted to reduce what he described as the immutable power of the Court of Chancery to oversee a “complete system of equity.”
“The fact that the Constitution protects that system of equity is part of the genius of the Constitution,” said Varallo, a partner at Bernstein Litowitz Berger & Grossmann in Wilmington.
Varallo also offered the justices an unusual acknowledgement. He stated that his stance was unpopular — and that he understood “well the pressures on this court.”
The comments were a likely reference to a consensus of big business groups that say SB 21 is good law and is necessary for Delaware to remain the world’s preeminent corporate domicile. The state’s unique corporate position provides its general fund with more than a third of its annual revenue.
Following Varallo, an attorney defending SB 21 characterized his opponents arguments as unprecedented, and if adopted would imperil several existing Delaware laws that go back decades. He also argued to the justices that changing the rules of corporate law does not equate to removing the Chancery Court’s jurisdiction.
“No Delaware case has held that a change in the rules is the same as wiping out jurisdiction merely because it makes some plaintiff’s claims harder,” said the Washington, D.C.-based attorney Jonathan C. Bond of Gibson Dunn.
Also arguing in favor of SB 21’s constitutionality was William Savitt, a lawyer that one law publication once gushingly called “a rockstar” at a firm that gives corporate America a voice.
Last spring, Delaware Gov. Matt Meyer hired Savitt’s firm, Wachtell, Lipton, Rosen & Katz, to represent the state in legal challenges to SB 21 for a budget rate of $100,000.
By comparison, Wachtell Lipton charged Twitter $90 million in 2022 to ferry that company through its arduous, four-month-long acquisition by Elon Musk.
In his arguments Wednesday, Savitt said equity in business disputes fills in the gaps that legal statutes leave open. But, he said, equity must follow the statutes created by the legislature, “not displace the law.”
“No natural reading of the words (of the Delaware Constitution) support plaintiff’s position,” he said.
Savitt’s arguments followed written briefs filed in the case in September, in which the state’s team argued that Senate Bill 21 followed “a long tradition of amendments” to the state’s corporate law.
During the Wednesday arguments, the Supreme Court justices offered few clues about where they stood. To the backers of SB 21, one questioned why the state’s Constitution would distinguish between “laws and powers,” if the legislature could simply override the court’s conception of equity.
Another questioned the law’s challengers whether the Constitution’s plain text — which says the court’s powers are vested by the laws of the state — would not suggest that lawmakers do have the authority to define legal boundaries of equity.
The court is likely to publish a ruling in the coming weeks.