OPINION
Dear Friends,
Big news in Delaware folks. Legislators have introduced potential corporate law changes to help keep companies incorporated in America’s First State to stay here, and not flee to other states, as many have.
Senate Bill 21 has been proposed to stem the tide of companies like TripAdvisor and TransPerfect, which have left our state due to unfair treatment from our once-esteemed Chancery Court.
“We understand there are threats to Delaware (incorporation) supremacy,” newly-elected Delaware Governor Matthew Meyer told CNBC-TV in an interview last week. “If companies have already left, we’re gonna work to win them back.”
The bill would “bring ‘clarity and balance’ back to Delaware corporate laws after a flurry of high-profile companies have either exited the First State or are threatening to do so,” the Delaware Public Media story below says. Indeed, folks. I couldn’t have said that better myself. I have said it in this space over and over and over in recent years.
In my view it doesn’t go far enough. Indeed, folks, if this law was truly written by Richards, Layton & Finger, that’s most ironic because they are among the insiders who are the reason reform is needed.
Senate Majority Leader Bryan Townsend — a Democrat from Newark and a career attorney who handles Delaware corporate litigation — told Sarah Petrowich of Delaware Public Media that “recent court decisions have effectively muddied some key aspects of Delaware’s legal franchise.”
Townsend aims to bring back “predictability” to our Chancery Court.
I’ve been pleading with our legislators to do something about this for years. While I’m not thrilled it’s being done by a Democrat Governor and Senator, I’ll take it, folks. The Chancery Court corruption, as I see it, has been begging for changes.
Please send your feedback on this BIG story, folks. It is always welcome and appreciated.
Respectfully Yours,
JUDSON Bennett–Coastal Network
Delaware lawmakers propose corporate law changes amid ongoing departure threats and Musk litigation
Delaware Public Media | By Sarah Petrowich
Published February 18, 2025 at 6:42 PM EST
Delaware legislators introduce bipartisan corporate law changes in an effort to persuade companies to remain incorporated in the First State.
The proposed Senate Bill 21 is not Delaware’s routine annual corporate law update, which includes recommendations compiled by the Delaware State Bar Association’s Council of the Corporation Law — that legislation is still expected in the coming weeks.
Instead, the bill is a timely attempt to bring ‘clarity and balance’ back to Delaware corporate laws after a flurry of high-profile companies have either exited the First State or are threatening to do so.
The bill’s prime sponsor, Senate Majority Leader Bryan Townsend (D-Newark) — a career attorney focused on Delaware corporate litigation — explains that recent court decisions have effectively muddied some key aspects of Delaware’s legal franchise, and he hopes the proposed legislative changes will bring a sense of predictability back to the corporate law system.
How did Delaware get here and what are the changes
Delaware has a nationally recognized corporate law structure that has long held the reputation of being efficient and stable.
Businesses often opt to incorporate in Delaware, including close to 68% of Fortune 500 companies, not only because of its ideal legal structure, but because of its specialized judicial system.
The Delaware Court of Chancery utilizes expert and impartial judges to decide corporate cases, rather than juries.
Additionally, franchise revenue, which includes the taxes businesses pay to incorporate in Delaware, amounts to close to $2 billion annually — the state’s second highest revenue source behind personal income tax.
But in recent years, there have been a series of court decisions that have left some companies uneasy about the predictability of Delaware’s corporate law, which Sen. Townsend says has led to a “growing drum beat of problems.”
Sen. Townsend explains one of the main drivers behind the need for legislative clarification was a 2024 Delaware Supreme Court decision in a case involving Match Group, Inc.
The high court held that a two part framework applies to all transactions in which a controlling stockholder stands on both sides of the deal. Meaning that a transaction must 1) be negotiated by an independent committee and 2) be approved by a fully informed vote of the majority of minority stockholders.
But Delaware corporations have long been under the impression both guardrails only need to be met under a “squeeze-out” merger, where a parent company forces minority shareholders to sell their shares for cash.
“What happened after that decision came out — that decision said that you have to have both procedural protections for any kind of transaction where there is a conflict. And that just caused companies all across the country and all across the world to say, ‘Wait a minute, how can we undertake all kinds of transactions that we do every single week, every single month. How can we plan for this, when you don’t know the outcome of those guardrails?’ It’s just not workable,” he explained. “They basically were like, ‘Look, we can do one of the two guardrails. We can figure that out, but doing them both for every single kind of transaction just isn’t workable. And if Delaware is now going to say that that’s the law, which we didn’t really ever understand that to be the law before, that’s not really workable for all the kinds of things we have to do.'”
The bill also comes following over six years of corporate law turmoil involving Tesla CEO Elon Musk.
The fallout came after Chancellor Kathaleen St. J. McCormick blocked what would be the largest CEO compensation deal in U.S. history — a pay package worth $56 billion.
In 2018, it’s reported that over 70% of shareholders voted to approve the pay package, but several stockholders brought a lawsuit forward against Musk, arguing the deal breached fiduciary duties owed by Musk and the defendant directors to Tesla and its stockholders.
In 2024, Chancellor McCormick ultimately sided with the plaintiffs and reaffirmed her decision after shareholders voted to approve the pay package for a second time last year.
Musk has since appealed that decision to the Delaware Supreme Court and has reincorporated Tesla in Texas.
Following McCormick’s decision, he has publicly bashed McCormick on social media platforms and ridiculed Delaware’s corporate law system as a whole, encouraging other companies to leave the First State.
Meta — the parent company of Facebook, Instagram and WhatsApp — has been in talks of moving its corporation to Texas, and file hosting service company Dropbox is considering a move to Nevada.
And most recently, Bill Ackman, the billionaire CEO of Pershing Square Capital Management, announced on X — formerly Twitter — that he will move his management company out of Delaware to reincorporate in Nevada.
Sen. Townsend insists the legislation is not a response to Musk and is in no way an attempt to reincentivize the billionaire to come back to Delaware, feeling the relationship between Musk and Delaware is largely irreparable.
He does believe the changes will effectively keep the companies who have threatened to depart from Delaware from leaving, but still feels as though the changes uphold necessary protections for minority shareholders.
“We don’t want conflicted people to be going around making decisions that could come at the expense of minority stockholders. We don’t want there to be no guardrails — that’s what other states might be offering. We want important guardrails, but they’ve got to be predictable and consistent and workable out there in terms of all the kinds of transactions that companies enter into,” Townsend said.
On the other hand, Boston College Law School professor Brian Quinn, who specializes in corporate law and merger acquisitions, believes the legislative changes will dissolve crucial protections for those minority stockholders.
“I’m very worried that [the changes] lower the guardrails — almost takes them away. It doesn’t quite take them away, but it really lowers the guardrails and makes it really unclear for public stockholders whether they have anyone on their side when it comes to these kinds of transactions. I don’t think that this maintains any sort of balance,” Quinn said.
Quinn also says his read on the legislation is that someone like Elon Musk would no longer be considered a “controlling stockholder,” which he finds concerning.
Musk is reported to have 21% voting control of Tesla. The new legislation defines a “controlling stockholder” as someone who owns or controls at least 50% of the shares, or owns at least one-third of the shares with the ability to dictate governance.
“I think what’s happening here is that the state is reacting to very very high profile individuals who are upset and they think it’s going to lead to a stampede — I don’t believe it it will. I think it’s very shortsighted,” Quinn said.
The legislation also sets forth certain conditions that a stockholder must satisfy in order to make an inspection of books and records.
Sen. Townsend explains the ability for stockholders to obtain important documents was always meant to be a pre litigation tool to be able to try and figure out if any wrongdoings have occurred or figure out what the value of their shares are.
“If you couldn’t get those documents from the company, you could then sue to get those documents. But even that was meant to be a very quick lawsuit — 60 to 90 days. And what’s happened in recent years is that sort of initial lawsuit was supposed to be pretty quick and has turned into a big fight over all kinds of other documents, and it just leaves people feeling that this is no longer like the quick tool that it was supposed to be to try and resolve issues,” he said.
Legislators have also filed Senate Concurrent Resolution 17, where if passed, would request the Council of the Corporation Law to present a report to the governor and General Assembly by March 31 with recommendations for legislative action on how to ensure that awards of attorney’s fees provide incentives for litigation appropriately protective of stockholders but are not so excessive as to act as a counterproductive toll on Delaware companies and their stockholders.
Sen. Townsend says this request does relate to the ongoing Tesla litigation, in which Chancellor McCormick awarded $345 million in attorney fees.
“Part of where we’re coming from now is in the Tesla litigation, where, understandably, the chancellor awarded attorneys fees. Again, when you’re talking about a mega, mega amount of calculated damages, it obviously it stands to be the case that a even a small percentage of that becomes a mega, mega attorney fee award. And I just think that Delaware law perhaps needs more clarity or kind of modernization of what do we do in these mega cases,” Townsend said.
Would the changes affect Musk’s pay package litigation
Despite the new legislative changes clarifying the legal protections a controlling stockholder may earn for a transaction if they first secure the approval of unconflicted directors or stockholders, the bill would not seemingly affect Musk’s pay package appeal.
Sen. Townsend explains the bill is not retroactive and would become effective upon the governor’s signature — unless lawmakers decided to include a provision that would make the new changes take effect even later.
In fact, if the Delaware Supreme Court were to affirm Chancellor McCormick’s decision that the pay package is invalid, Townsend speculates Musk’s involvement in the Court of Chancery system would be a moot point regardless with Tesla’s incorporation now residing in Texas, meaning he likely would not be able to refile the case in Delaware.
The bill’s prime House sponsor State Rep. Krista Griffith (D-Fairfax), an attorney with a focus in criminal prosecution and civil litigation involving state agencies, wants to move away from the narrative around Musk and work to support the rest of the companies who have chosen to incorporate in Delaware.
“I’m concerned about the other corporations and companies that don’t want to be here in Delaware. I’m concerned about them. I know that proxy votes are coming up in the spring — the annual meetings are coming up for corporations. And, as I understand it, some of those questions that might be asked of shareholders is, ‘Do you want to move out of Delaware?’ The fact that that question even may be asked is troublesome,” she said.
“We are responding to an urgency here, an urgency to protect the state of Delaware and not have these other states swoop in and take our companies that love practicing here in Delaware or lure them away based on feedback that we’ve received. And so the changes that are set out in SB 21 seek to provide some clear structure and guidelines.”
The Delaware Department of Finance is predicting a .5% growth in franchise tax revenue for Fiscal Year 2026 — the same as the current fiscal year — but it is projecting a decline of 10% in corporate income tax revenue. The prediction is just one of the factors causing concern for state leaders as Delaware braces for financial uncertainty in the coming years,
Wilmington-based law firm Richards, Layton & Finger is a known legal representative of Musk in the Tesla litigation and confirmed in a statement they were involved in the drafting of the legislation.
“We are proud to have been part of a group, including highly respected lawyers, professors, and former jurists, assembled by elected officials to recommend language included in the proposed legislation. 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.” Lisa Schmidt, President of Richards, Layton & Finger said.
But Griffith explains it’s common practice for Delaware law firms to be involved in several corporate cases due to the nature of the law, regardless of how close their ties are to the parties of the case.
“I believe Mr. Musk has lots of attorneys in Delaware, just as those who sue Mr. Musk and Delaware have lots of attorneys in Delaware. And I would say a lot of those lawyers on either side are probably members of the Corporation Law Council. So I don’t know how many lawyers he has in Delaware. I would imagine a company of his size or others probably have several different firms,” she explained.
There are at least eight other Delaware law firms listed on behalf of Musk, Tesla and other defendants in the case.
What comes next
Senate Bill 21 procedurally still has a ways to go before becoming law. It will have to be voted out of the Senate Judiciary Committee, receive a 2/3 vote of approval in the Senate, follow the same procedure in the House and then receive Gov. Matt Meyer’s signature for final approval.
Sen. Townsend says legislators worked collaboratively with Gov. Meyer on the bill, and he has expressed “full support” in moving the legislation forward.
“Clarity, predictability and fairness remain the hallmark of our franchise. I thank the Legislature for moving swiftly to respond to the evolving needs of the global market. Delaware’s ability to respond quickly again highlights why stockholders across the world repeatedly choose Delaware. As with all proposed updates to our corporate legal code, I respectfully request the Delaware State Bar Association, through its Corporate Law Council, to immediately take up SB21 for review, comment, and recommendation,” Gov. Meyer said in a statement.
Delaware Secretary of State Charuni Patibanda-Sanchez expressed a similar sentiment on behalf of Gov. Meyer, emphasizing the administration would like an opinion from the Corporate Law Council on the proposed changes: “This legislation came to fruition through a collaborative process that included corporate law practitioners that represent several different perspectives, former members of the judiciary, academics and elected officials. Delaware owes it to our customers and our residents to strengthen the corporate franchise and respond to market demands. The Governor has already requested review from the Delaware State Bar’s Corporate Council and looks forward to viewing a final product that meets the evolving needs of all our stakeholders.”
The Delaware legislature is currently on break while the Joint Finance Committee holds state budget hearings, but the bill could be heard as early as March.