Why Should Delaware Care?
Taxes and fees from corporate filings account for nearly a third of Delaware state revenue. Delaware political leaders who proposed and passed a controversial change to the state’s foundational corporate code said those dollars hung in the balance.
Late on Tuesday, Gov. Matt Meyer signed into law a bill that eases regulations governing how powerful people can conduct insider deals within some of the biggest companies in the world.
The signing of the controversial Senate Bill 21 marked the end of a bitter debate in Delaware that had backers and opponents each arguing that their position was the one that would preserve the state’s lucrative corporate franchise industry – including the more than $2 billion it sends to the state’s General Fund each year.
The debate was highlighted in recent weeks by costly influence campaigns that included roadside political signs in Wilmington, postcard-sized mailers sent to homes across the state, newspaper ads and an army of lobbyists hired in Dover.
Senate Bill 21 includes provisions that, in sum, makes it harder for small investors to challenge deals in court that companies had previously struck with their founders or other powerful shareholders.
Opponents said it would allow those powerful shareholders to strike self-serving deals within companies at the expense of mom-and-pop investors.
But backers, including Meyer, called the bill a “course correction” for Delaware’s business courts whose recent rulings, they say, had given small shareholders too much latitude to challenge corporate deals.
Backers also said the bill was needed to pacify executives who may threaten to cancel their companies’ Delaware registrations and set up legal homes in other states.
House debate turns testy
That debate played out during an acrimonious hearing of the Delaware House of Representatives just hours before Meyer signed the bill into law.
The hearing, which showcased an ongoing tension in Dover between progressives in the House and its business-friendly base, featured a string of amendments sponsored by opponents, including Rep. Sophie Phillips (D-Newark) and Rep. Madinah Wilson-Anton (D-Bear).
In total, those amendments sought to blunt some of the bill’s provisions, or to change how and when they would be implemented.
“We’re really dealing in dangerous territory here,” Wilson-Anton said on the House floor.
Another opponent, Rep. Frank Burns (D-Newark), claimed that his amendment would ensure that the bill would not be perceived as allowing Facebook’s parent company, Meta, to dodge potential lawsuits brought by shareholders who had previously filed legal demands for company documents.
“The last thing that Delaware should have is the impression that by passing this law we intervened in some way that might have benefitted some company,” Burns said
Burns’ comments highlighted how the presence of high-profile legal cases, currently in front of Delaware judges, motivated much of the debate on the bill. Those cases include ones involving Tesla and its CEO Elon Musk, and Meta and its CEO Mark Zuckerberg.
Musk’s case, which involved a Delaware judge last year nullifying his $56 billion payout from Tesla, sparked a campaign from the world’s richest man against Delaware and its courts. It continued on Sunday when Musk posted on his social media site, X, that the legacy for the Delaware judge who ruled on his case, Chancellor Kathaleen McCormick “will be bankrupting the state of Delaware.”
In response to the opponents’ statements, a cosponsor of the bill, Rep. Krista Grifith (D-Fairfax), stood up on the House floor during the Tuesday debate to call their amendments “unfriendly” – a signal to lawmakers that the principal backers of the bill did not support them.
She further said the amendments lacked clarity and were not considered by Delaware’s Corporation Law Council – a group of private attorneys within the Delaware State Bar Association that typically write corporate law changes.
Finally, she said the amendments would not convince companies that may consider setting up a legal home in another state to remain in Delaware.
“The goal is to have companies stay here, not leave here,” Griffith said.
Delaware is the legal home to more than two million companies, including most big publicly traded companies. Because of that unique role, the state has become the de facto arbiter of global corporate governance, setting rules that company boards of directors and executives must follow – or risk a facing a lawsuit from shareholders.
Griffith’s comments follow announcements in recent months from several large companies – including Meta, Walmart, and Dropbox – that they will leave, or are considering leaving, Delaware. Those departures cost the state a $250,000 franchise tax that such big companies pay, plus fees for filing corporate documents. A departure also causes the state to miss out on its lucrative practice of claiming property that goes unclaimed from those companies – such as uncashed checks.
The House’s consideration of the opponents’ amendments was particularly tense during testimony from New York University law professor and former U.S. Securities and Exchange Commission commissioner Robert Jackson Jr., who served as a witness on behalf of an amendment introduced by Phillips. Throughout his testimony, supporters of the bill repeatedly interjected to argue that he wasn’t addressing the amendment, but rather criticizing the bill itself.
Ultimately, House Speaker Melissa Minor-Brown abruptly shut down his testimony after several tense warnings, saying, “Mr. Jackson, please excuse yourself!” A sergeant at arms then escorted a clearly shell-shocked Jackson from the House floor.
The acrimony came in sharp contrast to what occurred in the state Senate two weeks earlier, when the upper chamber approved the measure following a hearing in which no senator expressed outright opposition to the bill.
Still, in the end, the full House voted to approve the bill by a margin of 32-7, and two not voting.
Impact remains to be seen
Before the final vote, Rep. Cyndie Romer (D-Newark) called on House members to turn down what she called a “sky is falling,” hyperbolic nature of the debate. She said that threats that members votes would damage Delaware’s corporate culture, or its courts, only muddied discussions in a way that made it challenging for House members to decide on complex legal bills.
In a statement sent after his signing, Meyer said the new law would ensure that Delaware “remains the premier home for U.S. and global businesses.”
After the House approval, State Sen. Bryan Townsend, who was the primary sponsor behind the bill, said that he expected the law would “dramatically stem the tide” of companies considering leaving Delaware, but conceded that it wouldn’t stop every company.
Just this week, Simon Property Property, a multi-billion-dollar firm that owns and operates retail properties nationwide, including the Dover Mall, announced that it was seeking shareholder approval to move from Delaware to its corporate home in Indiana.
Meanwhile, opponents of Senate Bill 21 said they were dismayed at how the final debate over the bill played out.
“The Delaware House kicked out a former SEC Commissioner because it is intolerant of even a modicum of dissent. I think today showed that Delaware can’t be trusted with something as important as the regulation of internal corporate governance for the entire country,” said Joel Fleming, a partner at Equity Litigation Group, a Boston-based plaintiff firm that frequently files cases in Delaware’s Chancery Court.
When asked about proponent’s arguments that opposition to the bill was primarily driven by financial self-interest by plaintiff attorneys, Fleming agreed that they had an interest — but added that their clients had a larger one.
[The California Public Employees’ Retirement System] is the largest institutional investor in the country, and it said this is a bad idea. [The Council of Institutional Investors] has institutions that represent $5 trillion of assets under management. They came here to say no, and they were ignored. That is not going to be good for Delaware in the long term,” he said. “[Proponents] are listening to a small handful of lawyers that represent a particular subset of Silicon Valley founders who are controlling shareholders; that is a small fraction of Delaware’s customers and maybe 10% of publicly traded companies. They just sent a message to the other 90% that Delaware can’t be trusted.”