Delaware Gov. Meyer signs corporate law overhaul legislation over fears of a ‘DExit’ of franchise dollars

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This story was supported by a statehouse coverage grant from the Corporation for Public Broadcasting.

Delaware Gov. Matt Meyer signed into law legislation that makes controversial changes to the state’s corporate law shortly after a tense House debate Tuesday. It reduces the legal guardrails for founders or powerful executives making deals inside massive companies.

Delaware is the corporate home to 2.2 million registered entities. The profitable corporate franchise represents more than one-third of the Delaware state budget at roughly $2.2 billion.

Meyer said in a statement that the overhaul will ensure “clarity and predictability, balancing the interests of stockholders and corporate boards.”

The bill passed the House 32-7, with two absent. It passed the Senate without opposition and no debate earlier this month.

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. His appeal is currently before the Delaware Supreme Court.

Meyer and state lawmakers started meeting to draft the legislation earlier this year shortly after Meta, Dropbox and Pershing Square Capital Management openly discussed re-incorporating elsewhere, leading to concern that without legislative changes to Delaware’s code, there might be a “DExit,” or mass withdrawal, of companies leaving to incorporate somewhere else.

Supporters of the legislation say the changes are needed if executives are concerned that recent Chancery Court rulings give too much power to small investors. Opponents of the bill have nicknamed it the “billionaires’ bill” and argue it allows founders or powerful executives to strike deals at the expense of minority stakeholders.

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 for deals between powerful executives and their companies when there’s a conflict of interest.

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 Feb. 17.

The legislation has sparked vociferous debate, with robust public comment and a lobbying effort that included campaign mailings and newspaper opinion pieces.

Amendments fail during House debate

The debate in the House took on a sharp tone at times as members voted on several amendments, which the sponsors argued would keep some protections for small investors. All the amendments failed to garner the necessary votes to succeed.

An amendment offered by Rep. Sophie Phillips, D-Bear, would have allowed companies to “opt-in” if they wanted to adopt the new changes made by the legislation. She said the amendment was needed because of the negative publicity the legislation had drawn to Delaware.

“Whether you agree or disagree, a lot of Delaware voters believe that this is a bad bill and a bad look for our state,” she said. “I know my district does.”

She called Robert Jackson, New York University law professor and former U.S. Securities and Exchange Commission commissioner, to speak in favor of the amendment. Some House members objected that his comments did not relate solely to the amendment. House Speaker Melissa Minor-Brown abruptly ended his testimony after accusing him several times of talking too much about the bill itself.

Bill sponsor state Rep. Krista Griffith, D-Fairfax, called the amendment unfriendly, saying it would be burdensome for companies and that it had not been reviewed by the Delaware State Bar Association’s Corporation Law Council.

“Our goal is to have companies stay here, not leave here,” she said. “The amendment in effect adds additional layers that would incentivize these companies even more to leave.”

Other amendments by Reps. Frank Burns and Madinah Wilson-Anton, both D-Newark, were also voted down. Burns said his amendment was aimed at making sure that corporations like Meta, the parent company of Facebook, don’t evade legal actions brought by minority shareholders.

“I am aware of two actions against Meta where books and records discoveries were going on, and they can continue, but what they were looking into can now never be brought to bear under the SB 21 rules,” he said.

That amendment also failed to pass. The law takes effect immediately.