Play Live Radio
Next Up:
0:00 0:00
Available On Air Stations

Corporation law updates pass General Assembly amid mixed reception from law professionals

Delaware Legislative Hall in Dover.
Roman Battaglia
Delaware Public Media
Delaware Legislative Hall in Dover.

The Delaware legislature passes its annual bill updating the Delaware General Corporation Law (DGCL), but opponents argue the changes are more controversial than years prior.

Every year, the Delaware Corporation Law Council sends a series of recommended corporate law updates to the General Assembly for consideration in order to help maintain Delaware’s status as the most favorable state for businesses to incorporate in.

The bill's prime House sponsor, State Rep. Krista Griffith (D-Fairfax), notes corporate franchise taxes make up around a third of Delaware's revenues, and the industry as a whole makes up close to half.

"The franchise represents the largest combined source of state revenue: $2 billion in corporate franchise taxes and fees, over $600 million in abandoned property — the state of our incorporation is how those funds come in — an income tax from thousands of jobs across multiple industries. This represents close to $3 billion, or 45% of our General Fund revenues," she said.

But this year’s bill is particularly contentious due to an amendment that would allow a company to make agreements with stockholders without the full approval from its board of directors.

The proposed change is a response to a February Chancery Court decision — known as West Palm Beach Firefighters' Pension Fund v. Moelis & Company (Moelis) — ruling those exact private agreements are not legal under current corporate code, unless the power to do so is outlined within a company's certificate of incorporation.

Griffith says corporations have long been utilizing these types of private contracts with stockholders, and this code change simply "bring[s] the law into conformity with how corporations have been operating."

"It had been long standing practice by corporations to be able to enter into shareholder agreements that were private contracts with shareholders. Those agreements were not included in a certificate of incorporation, which is a public document," she said. "The [court] decision caused confusion and uncertainty in the marketplace as practitioners believe, based on the interpretation of the general corporation law and case law, that this was not required — that these rights were able to be put in an agreement and not the certificate of incorporation."

But the Moelis decision is expected to be appealed to the Delaware Supreme Court, and State Rep. Madinah Wilson-Anton (D-Newark) argues time should be given to the justice system to properly litigate.

“I think it’s inappropriate for us to step in at this time of the process. I think we should allow our courts to decide on this issue. Historically, we have not codified language that is contrary to a decision," Wilson-Anton said.

She called up witness Charles Elson, founding director of the University of Delaware's Weinberg Center for Corporate Governance, who agreed passing legislation like this is largely unprecedented.

"I think it certainly, if you think about it, lessens the role the Supreme Court plays in resolving disputes. That's why you have a Supreme Court," Elson said. "[The] point was, if someone is dissatisfied with the lower court ruling, it can always go to the Supreme Court of the state and attempt to affect the ruling. Now, once that Supreme Court has ruled, if you disagree with the opinion — you think the Supreme Court's approach was problematic — that's typically where you see a legislative response."

Elson worries allowing these types of private agreements shifts power towards controlling shareholders and could undermine the role of a board of directors.

"If you don't know about a shareholder agreement, then there's no way you can adequately invest with surety that you have some sort of control over the company in which you invest, which means that people still won't invest," he said.

Elson also notes two Chancery Court judges have spoken in opposition of the change, as well as close to 60 corporate law professors, who expressed their concerns via a letter to the Delaware General Assembly.

In an April letter to the Delaware State Bar Executive Committee, Chancellor Kathaleen McCormick, head of the Court of Chancery, wrote she feels the process is moving too quickly amid the ongoing court case.

"The Proposal has moved forward at a pace that forecloses meaningful deliberation and input from diverse viewpoints. It reflects the broadest set of substantive amendments since the1960s," she wrote. "It is controversial. It preempts the Delaware Supreme Court’s opportunity to act as the final arbiter of Delaware law, striking at two cases still being litigated before the Court of Chancery."

Vice Chancellor Travis Laster, who ruled in the Moelis decision, also questioned the pace of the legislation in a personal LinkedIn post and noted the change is more substantive than prior updates.

"This is not the annual tweaking of the DGCL. That's a cosmetic procedure by comparison. This is major surgery," he wrote.

But former head of the Chancery Court William Chandler also spoke during the bill’s debate, arguing it’s not the current judges’ place to speak in opposition of the changes and the legislature should trust the Delaware Corporation Law Council.

“I believe in placing my trust in that institution because it has worked so well, and it has never ever failed the state of Delaware. It’s vital to the state, I think, that this body approves the legislation that’s now pending before it," Chandler said.

"I was taught judges need to stay in their own lane. Judges need to be judging cases in the court room, applying the law that [the General Assembly] give[s] them. Judges don't need to intrude upon the process of making law, because if they do, they have now become really powerful. They've now become makers of the law, as well as the appliers — adjudicators of the law. That, to me, is probably even more worrisome — more concerning to me — than whether this legislation passes at all," he added.

Griffith also notes the legislation would not go into effect until August 1, 2024, and any civil action or proceeding completed or pending on or before that date would not be affected by the bill if it is signed into law.

During the bill's debate, Wilson-Anton motioned to table the bill, which ultimately failed.

The bill passed 34-7 and heads to Gov. John Carney’s desk for signature.

Before residing in Dover, Delaware, Sarah Petrowich moved around the country with her family, spending eight years in Fairbanks, Alaska, 10 years in Carbondale, Illinois and four years in Indianapolis, Indiana. She graduated from the University of Missouri in 2023 with a dual degree in Journalism and Political Science.