‘Major surgery’: Controversial bill revising Delaware corporate law heads to Gov. John Carney

Supporters say the changes are not an extensive rewrite of current Delaware law. It allows secret side deals with a powerful stakeholder.

The Delaware General Assembly in session at the Legislative Hall in Dover, Delaware

Legislative Hall in Dover, Delaware. (Johnny Perez-Gonzalez/WHYY)

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The Delaware House passed controversial legislation Thursday that would change how some of the most influential companies are governed, putting the measure in the hands of Gov. John Carney.

The bill has garnered significant opposition from the legal community in Delaware and across the country, including the top judge of the state’s powerful Chancery Court. Under the proposal, a Delaware company could make a side agreement with a single shareholder without a full vote of the board of directors. That deal could turn over the company’s control to that powerful individual and permanently deprive the board of its decision-making authority.

The House approved it 34-7. The measure faced stiff opposition from several House Judiciary Committee members this week, but the Senate approved it without opposition earlier this month.

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House sponsor Krista Griffith (D-Fairfax) said the amendments are necessary to protect Delaware’s place as the top destination for businesses to incorporate.

“The franchise represents the largest combined source of state revenue, $2 billion in corporate franchise taxes and fees, over $600 million in abandoned property,” she said. “The state of our incorporation is how those funds come in, and income tax from thousands of jobs across multiple industries.”

The Delaware State Bar Association drafted the bill earlier this year. Srinivas Raju, the chairman of DSBA’s Corporation Law Council, told House committee members that these agreements are a common practice already in widespread use and don’t represent a significant overhaul of the state’s current law.

But the rewrites come after recent Chancery Court decisions, including a case called Moelis where Vice Chancellor Travis Laster struck down a side deal allowing investment bank Moelis & Co. to give its founder the ability to override duties of the board.

Laster, who has called the legislation “major surgery,” said in his decision that companies must comply with Delaware law.

“Market participants must conform their conduct to legal requirements, not the other way around,” the ruling said.

Rep. Madinah Wilson-Anton (D-Newark) and Republican Rep. Michael Smith called experts to testify on both sides of the issue.

Wilson-Anton said she’s seen memos dating back years warning that the stockholder agreements were unenforceable.

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Her expert, Charles Elson, founding director emeritus of the Weinberg Center for Corporate Governance at the University of Delaware, said one of the concerns with these stockholder agreements is a lack of transparency.

“If you buy into a company, and there’s already a side agreement that effectively lays out how the company is going to be managed and function and you’re unaware of it,” he said. “And the problem of these things remaining no secret, if you will, is the danger of a minority buying in and discovering that the cards have already been stacked, so to speak.”

Former Chancellor William Chandler defended the Corporation Law Council on the writing of the bill. DSBA and the bill sponsors have disputed the view that the revisions are a sweeping overhaul of current law.

“I believe in placing my trust in that organization because they have never, ever failed,” he said. “I trust the Corporate Law Council in doing the right thing.”

Chandler said, “The corporate market isn’t ‘feeling good’ about Delaware,” and questioned McCormick and Laster’s objectivity on cases related to the bill’s amendments to state law.

“As Chancellor, I will tell you I was taught judges need to stay in their own lane,” he said. “Judges need to be judging cases in the courtroom, applying the law that you give them. Judges don’t need to intrude upon the process of making law.”

Rep. Franklin Cooke (D-Newport), who voted yes on the legislation on the floor, said in the committee hearing it was late in the session for such a complex issue. The session ends June 30.

“I know how complicated this is, because it’s very complicated to me, and I don’t appreciate it on June 18th,” he said.

Moelis has yet to be appealed to the Delaware Supreme Court, leading critics to contend the legislation is effectively reversing a Chancery Court decision before it could be appealed. Lawsuits filed before August 1 would not be affected if the bill becomes law.

Chancellor Kathleen McCormick, who drew the ire of tech billionaire Elon Musk in January for nullifying his $56 billion pay package, wrote a letter to the executive committee of DSBA, criticizing the process and calling it “the broadest set of substantive amendments since the 1960s.” That case is still in litigation.

Musk’s company, Telsa, has since voted to move its incorporation to Texas, igniting concerns among some in the state, including on the Delaware Finance Advisory Council, about the perception of the state’s corporate climate. About two-thirds of America’s top companies are incorporated in Delaware.

Delaware’s corporate tax income in 2023 totaled about $384 million and the state has collected around $357 million as of this month.

Critics say the legislation could also potentially allow these contracts to be litigated under non-Delaware law in a non-Delaware forum, even though it’s a Delaware corporation. Raju said internal governance issues would still be decided by the First State’s laws, and courts across the country routinely deal with cases involving Delaware companies.

“It’s well-established law,” he said.

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