Controversial legislation looking to revamp Delaware’s corporate law structure clears its first two legislative hurdles in the General Assembly.
Senate Bill 21 has drawn staunch support and opposition from stakeholders, creating uneasy division within the corporate law world as Delaware fights to keep its status as the premier state for business incorporation.
Delaware is the corporate home to 2.2 million registered entities and incorporated 81% of U.S. Initial Public Offerings (IPOs) — when a privately-owned company offers shares to the public for the first time — last year.
The corporate franchise represents more than one-third of the state's budget at roughly $2.2 billion.
The legislation comes as a response to major companies completing or starting the process of reincorporating in other states, including Tesla, social media platform X (formerly Twitter), cloud-sharing platform Dropbox and Tripadvisor.
Additionally, Meta — the parent company of Facebook, Instagram and WhatsApp — has been in talks of moving its corporation to Texas and Bill Ackman, the billionaire CEO of Pershing Square Capital Management, announced plans to move his management company out of Delaware to reincorporate in Nevada.
Nevada, Montana, Wyoming, Ohio and notably Texas — with recently proposed Senate Bill 29 and House Bill 15 looking to strengthen Texas's authority over businesses incorporated in the state and support the development of a Texas-based stock exchange — are all vying to replace Delaware as the go-to business-friendly state.
The proposed changes also come amid six years of corporate law turmoil involving Tesla CEO Elon Musk, which includes a decision from the Delaware Court of Chancery's to block what would be the largest CEO compensation deal in U.S. history — a pay package worth $56 billion.
That decision is currently under appeal, and Senate Bill 21 sponsor Sen. Majority Leader Bryan Townsend (D-Newark) has repeatedly reiterated that if these legislative changes were approved, they would not retroactively affect the pending litigation.
Critics of the bill argue the proposed changes are jumping the gun and solely cater to the select group of billionaires who have publicly denounced Delaware's corporate law system, but leader of law firm Wilson Sonsini’s Delaware office Amy Simmerman told the Senate Judiciary Committee that the revisions are not in haste.
"I do think Delaware is still the force in corporate law, but there is a lot going on that we have to take seriously," Simmerman told members of the committee. "Before the proposed legislation was announced, I had 15 significant companies talking to me about reincorporating. They were either seriously considering the issue and well down the path or studying it very closely... At first, I was hearing mostly from public companies — many of them brand name companies — but then I started hearing from some private, pre-IPO companies as well. Contrary to what some commentators suggest, they were not all controlled companies. I’ve honestly never seen anything like this in my career."
She says most of the threatened moves stem from frustration around the difficulty of planning transactions that involve a conflict of interest.
This legislation would address that issue, along with raising the threshold necessary to pursue often expensive and potentially transaction-ending litigation and access to books and records.
Sen. Townsend says one of the main drivers behind the need for legislative changes are a 2024 Delaware Supreme Court decision in a case involving Match Group, Inc.
The high court held that a two part framework applies to all transactions in which a controlling stockholder stands on both sides of the deal. Meaning that a transaction must 1) be negotiated by an independent committee and 2) be approved by a fully informed vote of the majority of minority stockholders.
But Sen. Townsend says Delaware corporations have long been under the impression both guardrails only need to be met under a "squeeze-out" merger, where a parent company forces minority shareholders to sell their shares for cash.
This bill would effectively overturn the Delaware Supreme Court's decision in the Match Group case, but supporters say it will provide more predictability and fairness to execute potentially conflicted transactions that are not squeeze outs or going private transactions.
The legislation also amends how a controlling stockholder is defined and now includes additional changes from the Corporate Law Section of the Delaware State Bar Association.
Some of those revisions include requiring a board of directors to place only disinterested directors in charge of reviewing conflicted transactions, clarifying safe harbors apply only if the directors acted without gross negligence, clarifying that the traditional fiduciary duties to disclose material information to stockholders would not change and clarifying that when the safe harbors don't apply, the courts have the discretion they have always had under common law to assess whether a transaction is fair.
“Overall, the council has embraced the rationale behind the bill — to provide greater certainty as to what procedures can be followed by disinterested directors and disinterested stockholders to safeguard transactions from unnecessary litigation," Delaware State Bar Association Corporation Law Council Chair Srinivas Raju said.
Several opponents of the bill have brought up concerns around the changes promoting the subversion of the court system to resolve disputes, including Joel Friedlander, partner at Delaware firm Friedlander & Gorris.
“The Senate and Governor Meyer are trying to rewrite decades of carefully developed Delaware law to provide unprecedented protections for billionaire controlling shareholders. This rushed bill makes clear that when Delaware Court judgements inconvenience powerful CEOs, they can simply change the rules rather than follow the law. It now falls on the House to reject SB 21 for undermining the very legal stability and judicial expertise that have made our state the gold standard for corporate governance," Friedlander said in a statement.
The Council of Institutional Investors, a nonprofit, nonpartisan association advocating on behalf of shareholder rights, wrote a letter in opposition of Senate Bill 21, arguing the changes were drafted without Delaware's "typical deliberative approach."
"We share the concern of some commentators that the provisions of SB 21 are a 'direct rebuke' to the Delaware Courts and the body of case law developed by those courts. More specifically, some have estimated that the provisions of SB 21 would overturn at least 34 Delaware Court decisions made by different judges over a more than 40 year period," the letter reads. "In addition, and also concerning, the provisions of SB 21 would limit the Delaware Court’s discretion to provide equitable relief in future cases involving transactions between a company and its controller."
Delaware Law School Professor Emeritus and former Director of the Widener Institute of Delaware Corporate and Business Law Larry Hamermesh, brought forward as an expert witness by Sen. Townsend, refutes the idea that a mass amount of cases — excluding Match Group — would be overturned if the bill were to be implemented.
"I claim that this is a matter of incremental course corrections, not radical, throwing the courts under the Bus. Courts will still very much have a role. And you may have seen a list of supposedly 30-odd cases from the Delaware Supreme Court that are going to get overturned by this statute. I've looked at that list, and I'm happy to answer questions about it, but the large majority of those cases — they're not going to be overturned," he told the Senate Judiciary Committee.
A coalition of consumer and investor groups, including Public Citizen, Americans for Financial Reform and the Consumer Federation of America have publicly noted strong rejection to what they have dubbed the "Billionaires’ Bill."
"SB 21's harm would resonate nationally, lowering the bar for corporate accountability to Elon Musk's level. Gutting working families' rights to hold corporations accountable and defend their pensions will harm Delaware's economy far more than it helps," said Corey Frayer, Director of Investor Protection for the Consumer Federation of America in a statement.
The Delaware Healthcare Association, American Council of Engineering Companies, the Home Builders Association of Delaware, Central Delaware Chamber of Commerce, Delaware Volunteer Firefighters Association, New Castle County Chamber of Commerce and the Kent Sussex Leadership Alliance all testified in favor of the bill, largely citing the need to keep businesses from leaving Delaware to protect such a large portion of the state's revenue.
The bill narrowly cleared the Senate Judiciary Committee and passed unanimously in the State Senate among members present.
It now heads to the House for consideration, where if passed, it will head to a supportive Gov. Matt Meyer for signature.
“Since the turn of the last century, Delaware has been the most desired state for business owners — small and large — and stockholders, controlling and noncontrolling, to incorporate in the country. In part, it is because of our state’s ability to move swiftly to meet market demands,” Gov. Meyer said previously in a statement. “Today, we are in one of those moments. We must once again demonstrate why we retain an unparalleled reputation for clarity, predictability and fairness in global markets. That is why I am urging both chambers in the state’s legislature to move with the urgency this issue deserves and to pass Senate Bill 21 as quickly as possible.”
