Delaware's Corporate Law Overhaul: Insiders vs. Investors

Ladies and gentlemen, buckle up! Delaware, the corporate capital of the world, is on the brink of a seismic shift. The state's legislature is rushing through a bill that could tilt the balance of power between corporate insiders and institutional investors. This is a game-changer, folks, and you need to pay attention!



The proposed changes, known as Senate Bill 21 (SB 21), are a direct response to the high-profile departures of companies like Tesla and Meta Platforms. Elon Musk, the billionaire CEO of Tesla, has been a vocal critic of Delaware's courts after a judge struck down his $56 billion compensation package. Musk's move to Texas, along with Meta's consideration to do the same, has sent shockwaves through Delaware's political and legal establishment.

The bill aims to broaden safe harbor protections for corporate owners and directors while narrowing shareholder access to company books and records. This is a massive shift, folks! It could make it easier for controlling shareholders to push through transactions that may not be in the best interest of all shareholders. And it could make it harder for institutional investors to hold corporate insiders accountable for their actions.

The proposed changes to Section 144 of the Delaware General Corporation Law are particularly concerning. The bill redefines "controlling shareholders" as individuals who own at least half of a company’s shares or a third of shares plus a managerial role. This change would exclude some major stockholders, such as Elon Musk, who owns 21% of Tesla stock, from being classified as controllers. As a result, Musk would not have been subject to the same level of scrutiny in his compensation case, which was struck down by a Delaware judge for being unfair to the company and its shareholders.

The bill also lowers the threshold for corporate action by controlling shareholders, requiring them to receive approval from shareholders or independent board members—but not both in most cases. This change had been applicable to Musk’s case and could make it easier for controlling shareholders to push through transactions that may not be in the best interest of all shareholders.

The proposed changes to Section 220, which regulates shareholder access to corporate books and records, are equally alarming. The bill would strip the ability for plaintiff lawyers to obtain communications in most cases and limit record requests to a three-year window while increasing the procedural hurdles to gain access to documents. This could make it more difficult for institutional investors to hold corporate insiders accountable for their actions, as they would have less access to the information needed to build a case.

The potential long-term implications for corporate governance are significant. If the bill is passed, it could lead to a shift in the balance of power towards corporate insiders, who would have more control over corporate decisions and less accountability to shareholders. This could result in a decrease in shareholder value and an increase in corporate misconduct, as insiders would have fewer incentives to act in the best interest of all shareholders.

The push for these legislative changes is driven by the need to retain Delaware's status as the premier legal home for companies, the financial impact on the state's budget, and the broader trend in corporate law and governance towards balancing the interests of controlling shareholders and institutional investors. The proposed changes reflect a shift towards empowering controllers and constraining shareholder enforcement, which is evident in the specific amendments to Delaware's corporate law.

The bill is expected to be signed into law by Governor Matt Meyer, a Democrat who met with corporate leaders about their concerns about precedent-setting court decisions governing corporate conflicts of interest and urged lawmakers to quickly pass changes to the law. They did, sending the bill through both chambers within two weeks of its introduction, despite shareholders’ lawyers and pension funds slamming it as a giveaway to billionaires and corporate insiders.

The House approved it Tuesday night, 32-7, after a unanimous Senate earlier in March. Delaware’s experienced corporate law courts and their well-developed body of corporate case law have become the go-to destination to settle all sorts of business disputes as the legal home of more than 2 million corporate entities, including two-thirds of Fortune 500 companies. The state also reaps billions of dollars from the activity, making lawmakers nervous that corporations could flee Delaware and undercut a major source of revenue.



The data shows that in the 12 months since Musk’s decision to re-incorporate his companies in Texas, 85 more companies have incorporated in Delaware. This suggests that the perceived threat of companies leaving Delaware may not be as significant as proponents of the bill claim, and that the bill could be seen as a giveaway to billionaires and corporate insiders.

The proposed changes to Delaware's corporate law could have a significant impact on the balance of power between corporate insiders and institutional investors. The bill could empower corporate insiders by reducing the level of oversight and accountability they face, while making it more difficult for institutional investors to hold them accountable for their actions. The potential long-term implications for corporate governance are significant, and could result in a decrease in shareholder value and an increase in corporate misconduct.

So, what does this mean for you, the investor? It means that you need to pay close attention to the companies you invest in. If they are incorporated in Delaware, you need to be aware of the potential changes to the state's corporate law and how they could impact your investments. You need to be vigilant, folks, because the corporate landscape is changing, and you don't want to be caught off guard!

Stay tuned, folks, because this is a story that's far from over. The battle for the soul of Delaware's corporate law is heating up, and you don't want to miss a single moment of the action!