‘Shakedown’: Controversial legislation changing Delaware corporate law passes state Senate with no debate

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Controversial legislation aiming to protect Delaware’s business incorporation franchise system easily passed the state Senate last week. It comes as alarm has grown in some political and legal spheres ever since billionaire Elon Musk yanked Tesla and SpaceX out of the state last year after losing a $56 billion pay package in the state’s Chancery Court.

Earlier this year, Meta, Dropbox and Pershing Square Capital Management, openly discussed re-incorporating elsewhere, leading Gov. Matt Meyer and state lawmakers to express concern that without legislative changes to Delaware’s code, there might be a “DExit,” or mass withdrawal, of companies leaving to incorporate somewhere else.

“This conventional wisdom, or this idea in the press that the Delaware franchise is somehow in trouble, is not really accurate,” Meyer told WHYY News in early February. “Having said that, to retain our competitive advantage in the 21st-century world, we need to take action, and we need to take action quickly.”

Delaware is the corporate home to 2.2 million registered entities and generates about $2.2 billion a year in state revenue.

“It felt like it was a moment we have not seen before,” said Senate Majority Leader Bryan Townsend, D-Newark, who sponsored the legislation. “In fact, in the weeks since we have confirmed in many ways from many perspectives that it’s a moment, a very long moment now, that we have not seen before.”

The bill defines a “controlling shareholder” within a company as someone who owns at least half of a company’s shares or a third of shares plus a managerial role. It reduces the amount of internal due diligence companies must do to review deals between powerful executives and their companies.

The legislation also restricts what are called “books and records” claims, which are requests a shareholder can make to executives for internal company documents. It is not retroactive to any court action before February 17, meaning it would not affect Musk’s appeal in the Delaware Supreme Court.

Critics, who span across the country, say the legislation has been rushed and refer to it as a “billionaires’ bill.” Several amendments have been added to the legislation since it was introduced in February.

Supporters of the bill say while there’s no evidence of a mass exodus of companies leaving the state, lawyers testifying in Wednesday’s committee hearing told lawmakers that by the time it shows up in the data, it will be too late.

James An, a lecturer at Stanford Law School, said the evidence shows that last year, “more public corporations moved to Delaware than away from Delaware.”

“This bill is a shakedown, pure and simple. That’s why each of you have been told that Delaware is on the precipice of disaster,” An said. “If you vote for SB 21, you will enable billionaires such as Elon Musk and other controlling shareholders to take advantage of pensions, retirees and ordinary investors. You will make these oligarchs richer and make it easier for them to buy media outlets and elections. You will make billionaires’ lives better, but you will make the lives of your constituents worse.”

The substitute bill language was made available to the public less than three hours before it was heard in committee Wednesday, drawing fire from open government advocates who filed an open records complaint with Attorney General Kathy Jennings. A Senate spokesperson said the substitution was done in accordance with the rules passed by lawmakers at the beginning of the session.

“The public has a right to observe and monitor the actions of our public officials,” said John Flaherty, director of the Delaware Coalition for Open Government. “A select group of inside lawyers who wrote the bill for the Committee knew what was in the bill. The public did not.”

Meyer has made several television appearances about shoring up Delaware’s franchise. He recently told CNBC hosts that he, Lt. Gov. Kyle Evans Gay and Secretary of State Charuni Patibanda-Sanchez, who have all been corporate attorneys, came together and surveyed the market to identify shortcomings. Townsend, who is also a corporate attorney, said legislative leaders, Meyer, Gay, Patibanda-Sanchez and advisors met in the beginning of February to discuss changing Delaware law in response to Mark Zuckerberg and other founders musing about incorporating their businesses in another state.

“We’ve talked to some controlled companies and legal counsel for controlled companies,” Meyer said. “We’ve talked to companies that are not controlled and their legal counsel, and what we’re hearing is that there is some loss of clarity, predictability and fairness in the Delaware courts.”

A lawyer for a law firm that represented Telsa — but not Musk — in the compensation case and an appeal now before the state Supreme Court helped write the legislation. He did no legal work on that case.

Some opponents of the bill say most public companies are not controlled by a founder or a family, and the legislation will turn off those companies from wanting to stay in Delaware or decide to incorporate there.

The Council of Institutional Investors, a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, weighed in on the issue on behalf of its shareholders in Delaware corporations. It manages the retirement savings and public pension funds, such as the Delaware Public Employees’ Retirement System.

CII General Counsel Jeff Mahoney said in an open letter that the association joins others in calling the legislation a “direct rebuke” to the state’s courts and body of law.

“Moving toward a more uniform, legislative approach to resolving corporate disputes by limiting the application of the experience and precedence of the Chancery Court risks weakening the attractiveness of Delaware as a place of incorporation for both companies and investors and is more easily replicable by other states,” Mahoney said.

The legislation now moves to the House for consideration.