Delaware has initiated a comprehensive revision of its business law in an effort to discourage corporations from following the footsteps of high-profile figures like Elon Musk, who have moved their business entities to other jurisdictions. Signed into law by Governor Matt Meyer, the bipartisan bill (S.B. 21), is designed to address significant concerns about litigation involving controlling stockholders and the Chancery Court’s approach to corporate disputes.
The overhaul addresses several key concerns by redefining what constitutes a “controlling stockholder” and streamlining the process for assessing potentially conflicted transactions. It strengthens the assumption that board directors function independently of management and controlling stockholders, potentially making it more challenging for shareholders to contest acquisitions or pay packages believed to have conflicts. The law also restricts access to internal company records often used by smaller shareholders as a basis to challenge such transactions.
This legislative change responds in part to recent criticism, notably from Musk, targeting Chancellor Kathaleen St. Jude McCormick’s rulings that invalidated a $56 billion compensation package offered to Musk by Tesla’s board, which is still under appeal before the Delaware Supreme Court. Notably, companies like Dropbox, TripAdvisor, and billionaires such as Bill Ackman have considered or have moved their incorporations elsewhere, threatening Delaware’s substantial fiscal reserves, with incorporation fees comprising over one-third of its state budget.
Support for the bill came from various stakeholders, including corporate defense attorneys and lobbyists from the American Investment Council, representing private equity giants like Blackstone and KKR. Despite this, the bill has not been universally welcomed. Opposition came from public pension funds, academic figures, and consumer advocacy groups, dubbing it the “billionaires’ bill,” arguing that it impinges on the rights of smaller shareholders.
The question remains whether these business law changes will influence corporations to remain within Delaware. Opinions vary, with some experts suggesting mature companies will take a cautious approach before considering relocation. Certain industry insiders, such as Michael Navarro, have described S.B. 21 as a last-ditch effort to retain businesses not valuing Delaware’s legal framework, while others foresee potential for additional amendments given the rapid development of this legislation.
The fast-tracked nature of this bill indicates there may be further adjustments required to address any unintended consequences, particularly as Delaware’s role as a primary venue for incorporations and bankruptcy filings may face challenges.