Delaware, a perennial leader in the realm of corporate law, is once again at the forefront with its latest legislative proposal, Senate Bill 21. The bill, which has successfully cleared the state Senate, now awaits deliberation in the House of Representatives. Its proposed changes focus on the determination of when shareholders exert “effective control” over a corporation, a topic that has historically spurred extensive and costly litigation under existing standards.
This legislative initiative is rooted in the pursuit of legal clarity by setting a tangible threshold for determining control. Presently, Delaware courts apply the entire fairness doctrine—a rigorous standard of review—when transactions involve controlling shareholders. This standard necessitates the court to delve into fair dealing and fair price, evaluating both procedural and economic fairness. However, determining the status of a controlling shareholder has traditionally involved subjective assessments, often fueling protracted legal battles.
An illustrative case is the 2018 ruling on Elon Musk’s involvement with Tesla Motors Inc. Here, the Court of Chancery deemed Musk a controlling shareholder due to his influential status and personal connections, despite owning only 22% of Tesla’s stock. This led to an entire fairness review, underscoring the ambiguities inherent in the system that Senate Bill 21 seeks to address (read here).
The proposed bill establishes a clear line: shareholders owning less than 33% of the stock are presumed not to wield effective control, thus reducing the uncertainty and litigation risks linked to the current evaluative framework. While plaintiffs may still mount challenges by providing solid evidence of actual control, SB21 is designed to curtail the ambiguity that currently serves as fertile ground for litigation (see article).
Opponents of the bill argue that easing the oversight of controlling shareholders might disadvantage minority investors, ostensibly reducing their protective leverage in corporate governance. However, proponents maintain that ultimately, the increased stability and predictability engendered by SB21 will enhance overall corporate value, benefiting all stakeholders, minority shareholders included.
Historically, Delaware has demonstrated a consistent commitment to enhancing clarity in corporate governance. A parallel can be drawn with the state’s swift legislative response following the Delaware Supreme Court’s 1985 decision in Smith v. Van Gorkom, which led to the enactment of DGCL Section 102(b)(7). This move allowed corporations to curtail director liabilities, stabilizing the corporate governance landscape amid fears of extensive director culpability (details here).
While Senate Bill 21 promises to reinforce Delaware’s reputation as a hub of business-friendly corporate law, it also highlights ongoing tensions with powerful vested interests, including the plaintiffs’ bar, whose business thrives on litigation prepped by legal uncertainty. Nevertheless, the bill could serve as a model beyond Delaware, encouraging other states to consider similar legislative clarity.
In conclusion, Delaware’s corporate law reform aims not only at streamlined governance within its jurisdiction but also at setting a broader precedent in the national corporate landscape, emphasizing the importance of predictability in corporate law (further reading).