Is ‘DExit’ a real threat to Delaware’s $2B-a-year incorporation kingdom, and will proposal protect or destroy ‘the franchise’?

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

In the parlance of Delaware political and legal insiders, “the franchise” is king.

Without the franchise, the state couldn’t pay for public schools, police, prisons, social and health programs, beach replenishment, farm preservation or so much more.

Without the franchise, taxes would be significantly higher, or the state would need to slash services.

The franchise is Delaware’s system, which currently has 2.2 million businesses — and two-thirds of the Fortune 500 — incorporated in the nation’s second-smallest state. Amazon, JPMorgan Chase, Nvidia and the corporate parents of Google and Facebook and Instagram are among about 1,350 Large Corporate Filers who fork over $250,000 apiece in franchise taxes.

All told, those “incorporation revenues” are projected to directly generate $2 billion for the state treasury this year. That accounts for 29% of the state’s general fund revenue.

But today, fear is rampant in Delaware that the business-friendly franchise that some also call the “golden goose” is in serious danger of being cooked — that a mass corporate exodus or “DExit” is imminent.

Trepidation has grown over the last year since Elon Musk pulled Tesla and SpaceX out of Delaware and castigated the Delaware Chancery Court, which has long been considered the franchise’s crown jewel for its deft and reliable resolution of complicated business disputes.

“Absolute corruption,” Musk tweeted in December after the court’s chief judge rejected his $56 billion pay package from Tesla for the second time. The file-sharing platform Dropbox has announced it’s divorcing from Delaware, and other major companies such as Meta Platforms, the parent of social media giants Facebook and Instagram, say they might do the same.

So this month, new Gov. Matt Meyer, legislative leaders and a cadre of legal luminaries decided to neutralize the perceived threat before it gains ground.

Together, they crafted a complex proposal to revamp Delaware corporate law by essentially making it tougher for shareholders to sue founders and top executives for perceived conflicts.

They did so, Meyer and others involved in the process say, to alleviate concerns they are hearing from the nation’s corporate community that Chancery Court has grown increasingly unfriendly to top execs like Musk in mega-dollar cases.

Meyer, a Democrat and lawyer who took office Jan. 21, echoed other supporters when the bill was introduced Feb. 17. “We will protect our reputation and continue Delaware’s tradition of a balanced and measured approach, and we will do so relentlessly,” Meyer said.

Meyer’s concern is magnified by the impact a DExit would have on balancing the $6.8 billion state budget and maintaining public services during his four-year term, especially at a time when President Donald Trump is trying to cut critical federal funding to states.

Delaware needs and wants those $2 billion in incorporation revenues every year, plus a related $420 million the state gets from abandoned financial accounts at banks and other companies registered in the state, Meyer said.

“When one-third of your state’s budget is on the line and you’re eyeing down untold federal budget cuts, you have to make a choice: protect your residents or not. And I choose Delawareans every day,” Meyer said in an interview last week. “Any bill that helps improve our financial stability needs to be considered fully.”

Lawrence Hamermesh, professor emeritus at Widener University’s Delaware Law School and one of the bill’s drafters, said it will restore eroding confidence in corporate circles and prevent “catastrophic” cuts to the state budget.

“Unlike as long as I’ve been practicing and teaching corporate law, there is no longer the inclination to tell clients and to conclude that Delaware is the place to set up your corporation,” Hamermesh said. “That is potentially the source of a tipping point that would be devastating for the state and its taxpayers and workers and everybody here.”

The bill, which has bipartisan support that includes the Senate and House leadership, could become law within a month, said Delaware Senate Majority Leader Bryan Townsend, the chief sponsor.

While the bill currently has no effective date — spurring speculation that it could be retroactive and change the result of cases involving Musk and other executives — state Sen. Townsend said it’s being modified so the effective date would be after it’s signed into law.

Critics say ‘Billionaires’ Bill’ could destroy state’s dominance

Some observers, however, deride the measure as the “Billionaires’ Bill.”

Detractors contend that instead of shoring up Delaware’s treasured franchise and its treasury, such a law could backfire and even destroy Delaware’s prestige and dominance of the incorporation industry. Many say no changes are needed.

Critics say the proposed changes were not only rushed by panicked politicos and lawyers, but were developed outside the normal channel for revisions to Delaware’s General Corporation Law.

More importantly, said Charles M. Elson, a retired University of Delaware professor who is considered one of the nation’s experts on corporate governance, the bill favors company founders and executives over major investors such as Vanguard and the Teachers Insurance and Annuity Association of America (TIAA).

The result, Elson said, would be to limit viable lawsuits like the case over Musk’s compensation. In that case, Chancellor Kathaleen St. J. McCormick concluded the process used by electric car maker Tesla’s board of directors to award Musk a $56 billion payday was “deeply flawed” by conflicts of interest. “Musk had extensive ties with the persons tasked with negotiating on Tesla’s behalf,” the judge wrote.

The net effect, Elson said, would be to discourage major investors from putting their money in Delaware-chartered companies. “If we lose the support of the investors of this world, then it’s curtains for our franchise,” Elson said.

Natalia Renta, a director at the nonprofit Americans for Financial Reform, said it’s a moment of truth for Delaware.

“Delaware lawmakers should ask themselves whose side they are on — working people like teachers saving for retirement or self-dealing billionaires like Elon Musk,” Renta said. “We urge them to side with working people by voting down the Billionaires’ Bill.”

U.S. Sen. Elizabeth Warren of Massachusetts, ranking Democrat on the Senate Committee on Banking, Housing and Urban Affairs, expressed that same sentiment.

The Delaware legislation was Musk’s “latest plan to rip off the American people to make himself and his fellow billionaires richer,” Warren said in a statement to WHYY News. “Corporate law protects minority shareholders’ rights so that greedy controlling shareholders like Musk can’t take away safeguards for Main Street investors.”

Data doesn’t show exodus, but officials aren’t waiting

So is DExit — a play on “Brexit,” as Great Britain’s withdrawal from the European Union is known  — really happening or about to happen?

And how did this bill come about, especially with such speed?

Sen. Townsend, himself a corporate lawyer, said the rumblings sparked by Musk’s departure and diatribes against Delaware, coupled with other judicial decisions that went against corporate executives, have been reverberating for more than a year.

“It came to a head and became very real and quite urgent with the flurry of announcements in late January and early February about people leaving Delaware or looking to leave Delaware,” Townsend said.

Sen. Townsend, a Newark-area Democrat, said some of the discontent was attributed to technology companies largely controlled by their founders, that “people are joining up forces with Elon Musk and they’re leaving. But what several of us did in the immediate moment is say, ‘Well, let’s check to make sure. Let’s see where this is coming from and see how people feel.’”

Townsend said he and others spent more than a week undertaking a “purposeful market canvas of trying to figure out the breadth and depth of the concerns, how far it reached throughout the economy in terms of types of different companies. And it turns out that there is widespread frustration for a variety of reasons that hadn’t necessarily been brought to our attention or appreciated fully about how serious it was.”

No formal report was prepared, Townsend said, but with Texas and Nevada trying to compete with Delaware as America’s incorporation capital, legislative leaders and the Meyer administration decided to take preemptive action.

Delaware Secretary of State Charuni Patibanda-Sanchez, who like her boss, Meyer, assumed the post last month, said data from the state Division of Corporations, which she oversees, doesn’t currently  show any exodus — massive, middling or minor.

“So this is not a simple thing where you can just take a snapshot of the data and say, ‘Oh, look, there are declining trends and we need to act,’” said Patibanda-Sanchez, also a lawyer. “Because in fact, if you are acting after the trends are happening, then we’re much too late to the game.”

That’s why Delaware has mobilized to head off any potential stampede, she said.

“Maintaining Delaware as the corporate capital of the world is always on top of mind for Delaware leadership,” she said. “And we always have to be on our toes because this is essentially a choice for businesses. And so it’s really important to always stay competitive. Being reactive is not where you want to be when it comes to being responsive and maintaining Delaware’s reputation. Being proactive is the key here.”

But state Rep. Sean Lynn, a Democrat and Dover attorney who specializes in family law, countered that without data showing declines in registrations or departures, seeking to revamp the law seems like a premature, misguided reaction to “rumors and conjecture.”

Lynn, a member and former chair of the state’s House Judiciary Committee, said Meyer, Townsend and others are overreacting to pressure from Musk and his “megaphone” as X owner and top adviser to President Trump.

“From this position of new authority and as a social media mogul, he’s out there blasting from the parapets [that] the Delaware Court of Chancery is somehow unbalanced,” Rep. Lynn said. “Does that translate, however, into people actually buying into that and moving their corporations from Delaware to Nevada or Texas? We’ve not seen anything that suggests there’s some mass exodus or DExit. The data just doesn’t exist.”

Lynn questions whether corporate execs “genuinely feel that Delaware is out of balance, or is it more that they are saber-rattling because they sense blood in the water and fear, and are just angling for a better deal.”

Bill drafted outside normal channel for corporate law changes

Gov. Meyer indicated during an interview with Business Insider, just two weeks after succeeding John Carney as governor, that Musk’s rhetoric motivated him to act.

“It’s really important we get it right for Elon Musk or whoever the litigants are in Delaware courts,” Meyer told the publication. “We’re cognizant that there may be some things that need to change. We’re going to work on them.”

By then, Meyer and Townsend had already put in motion an initiative to make swift changes to the law governing how corporate leaders must behave and how judges must evaluate their actions.

That spurred a distinct departure from the way such changes are usually made.

Traditionally, potential modifications are hammered out by the Corporate Law Council of the Delaware State Bar Association. The 26-member body of lawyers represents both corporations and the investors who sue them. It often takes the council months to reach compromises deemed fair to both sides.

This time, however, the matter was put in the hands of four Delaware legal powerhouses.

The four were Hamermesh, former Del. Supreme Court Chief Justice Leo E. Strine Jr., former Chancery Court Chancellor William B. Chandler III, and John Mark Zeberkiewicz, who represents corporations, boards and executives for the Richards, Layton & Finger law firm in Wilmington.

Richards, Layton & Finger was among several firms representing Tesla — but not Musk — in the compensation case and an appeal now before the state Supreme Court. Zeberkiewicz, however,  did not participate in the legal work for Tesla.

In a few short weeks, the men presented a draft to Townsend and legislative attorneys, who made some tweaks and introduced the bill in the Senate.

Rep. Lynn is crying foul over the exclusion of the Corporate Law Council in the drafting process.

“They are the preeminent barometer of what corporate law needs to be in this state,” Lynn said. “However, they have never mentioned in any of the previous years that they believe Delaware corporate law is unbalanced, and we’re hearing from our clients that unless this sweeping change goes into effect, all of our clients are going to pull out of Delaware.

“Either they’re not the omnipotent overlords of corporate law that we’ve been led to believe, or this isn’t true” that mass departures are looming.

Sen. Townend said he would have gone through the council if the drumbeat had grown louder six months ago, but with so-called “proxy season” — annual shareholder meetings for public companies — set to start within weeks, there wasn’t enough time.

Meyer said the council is now involved, albeit on the back end. The council added some recommendations Monday night that included more safeguards for investors by, for example, adding language that said any transaction must be fair not only to the corporation but to stockholders. Lawmakers will soon consider adding that language to the bill they will ultimately consider.

Strine, Chandler and Zeberkiewicz did not speak with WHYY News for this story.

Lisa Richards, president of Richards, Layton & Finger, said in a written statement that the firm has long “played critical roles in drafting and amending many of the state’s business statutes, including the original Delaware General Corporation Law” and was proud to participate.

“As many have recognized, statutory changes are necessary to restore the core principles that have been the hallmark of Delaware for over a century and ensure that Delaware remains the preeminent jurisdiction for incorporation,” she said.

Hamermesh said he was pleased to help craft a long overdue overhaul.

“I can’t tell you that without the legislation, there’s inevitably going to be a mass exodus of Delaware corporations,” he said. “But you don’t wait around for the boat to sink before you start plugging the hole.”

Clarity for judges or gift to corporate titans?

So what does Senate Bill 21, whose language is convoluted and dizzying for most people to follow, actually seek to do?

In a nutshell, authorities on both sides of the debate agree that it would limit lawsuits against corporate leaders.

The major provision defines steps corporate boards could take to insulate directors and so-called controlling shareholders from litigation over alleged conflicts, such as having financial transactions with the company.

One way the bill allows directors to avoid litigation or have it dismissed is having a majority of so-called “disinterested directors” approve the transaction that gave rise to a potential conflict. The bill defines a disinterested director as someone who has no “material interest” in the transaction “or a material relationship with a person that has a material interest” in the deal.

Hamermesh said the bill would clarify the law to give judges more precision in evaluating cases. Unlike lower-level civil courts, Chancery Court doesn’t have juries.

“If you can’t tell for sure who is an independent disinterested director because the independence standards are too amorphous, if you can’t tell who’s a controlling stockholder because the criteria are too amorphous, you can’t reliably plan to deal with even routine business,” Hamermesh said. “And that is the biggest problem that’s animated the legislation and the opposition or the concern about whether Delaware should continue to be the selected forum for incorporation.”

Hamermesh said he’s received positive feedback from firms that represent corporations.

“I’m already seeing law firm memos that say this legislation really will restore confidence in the ability to use Delaware incorporation,” he said.

Yet the professor also acknowledged he’s also heard the opposite argument from firms that represent investors. Some have offered revisions that could be incorporated into the bill, Hamermesh said, but others have told him “that if this passes, we’re going to turn Delaware into an apocalyptic hellscape.”

Elson said he thinks the bill, should it become law, would lead major investors, who provide the fuel of corporate finance, to avoid Delaware companies.

“You’re designing a bill that not only shifts the balance away from shareholders or out of equipoise, you’re creating one that is so weighted in favor of controlling shareholders that our neutrality to the world will dissipate,” Elson said. “And you will force the large institutional investors who have supported us to conclude we’re no longer neutral, and will support incorporation either in other places, or more importantly, seek federal regulation of the area, which is probably what will happen. So Delaware basically loses.”

Elson also argued that the bill undercuts the judgment of sophisticated judges, “suggesting they are biased or foolish.” The reality, Elson said, is that for decades, the state’s Chancery and Supreme courts have gained the trust of the nation’s corporate titans and big investors by issuing thoughtful, fair rulings.

A coalition of consumer and investor groups, including Public Citizen, Americans for Financial Reform and the Consumer Federation of America, agrees with Elson.

“The Billionaires’ Bill will eviscerate investor rights, dramatically limit judicial oversight, and make it virtually impossible to hold greedy corporate actors accountable for self-dealing,” the coalition said in a news release.

Corey Frayer, of the Consumer Federation of America, said the measure would hurt Delaware. “Gutting working families’ rights to hold corporations accountable and defend their pensions will harm Delaware’s economy far more than it helps,” Frayer said.

Sen. Townsend counters that the bill is a commonsense approach that restores balance to the law so judges can rule with more precision, and shores up the $2 billion-plus in annual revenues that Delaware counts on to run the state government.

“We’re not going to let decision-makers enter into transactions that are immune from court review,” Townsend said. “They’ve got to earn that deference by putting those decisions in the hands of independent decision-makers, either independent directors or disinterested stockholders.

“So bringing clarity to that point and enabling companies to enter into plans and transactions, where they know the way in which they can earn that important deference is, we believe, a critical aspect of this.”

Investors wouldn’t get emails, texts while mulling lawsuits

Another controversial aspect of the bill is that it would omit emails and text messages, which often provide evidence of alleged conflicts, from the type of company “books and records” that investors can obtain while they investigate whether to file a lawsuit.

“By limiting the ability of a plaintiff to see those emails, even in limited form, it means basically it’s going to be impossible to prove any sort of wrongdoing,” Elson said. “Or put it this way, it’s going to make it very difficult, which means that the plaintiff’s actions themselves will become much more difficult to bring. And probably you won’t see as many, which is problematic because the threat of those actions really creates accountability. You’re removing accountability to the controlling shareholder. And that’s dangerous.”

Hamermesh and Townsend said emails and texts would still be available to plaintiffs once a lawsuit is filed, but that letting potential litigants go on a fishing expedition within company records is too burdensome and expensive — not only to the company but to the investors whose money is at stake.

Books and records requests, Townsend said, were always “meant to be a preliminary quick process for stockholders to get access to core corporate documents to try and figure out what the value of their shares might be and whether there’s any wrongdoing occurring.”

“But the issue is that over the past several years out there in the world of practice, the quick look has gotten longer and longer,” he said. “It’s become in some instances more and more like typical litigation, which was never intended to be. It’s meant to be a balanced approach that works well for both sides.”

Hamermesh agreed.

“The cases become hugely expensive, even when they don’t result in any litigation later on. And that is unquestionably an irritant to Delaware’s corporate constituents,” he said. “So what the legislation does is really try to bring us back to a point where the inspection is targeted specifically and not a major treasure hunt.”

Hamermesh did agree that fewer lawsuits would result by preventing would-be plaintiffs from accessing emails and texts, but said that occurs already.

“You’d be crazy not to acknowledge that there are probably some good cases that will go undiscovered,” he said. “But that’s the way life is now.”