Delaware lawmakers are gearing up to vote on a significant change to the state’s corporate law next week. This move aims to maintain Delaware’s reputation as a business-friendly state, but critics argue that it mainly benefits wealthy shareholders.
The proposed legislation makes it tougher for investors to sue over specific transactions involving controlling shareholders. For example, if a controlling shareholder sells their business to the company, it could be harder for investors to challenge that deal if certain steps are followed. The bill also affects transactions involving board members and executives but does not change the current rules for company takeovers by controlling shareholders.
This bill, referred to as SB 21, has stirred up considerable debate, turning what is usually a routine update of corporate laws into a heated political issue. Lawyers representing shareholders have dubbed it the "billionaire’s bill" and are actively campaigning against it.
Originally, a vote was expected on Thursday, but now it seems likely to happen on Tuesday. The Delaware House of Representatives, which is controlled by Democrats, needs two-thirds of its members to approve the bill for it to pass. The Senate already approved it, and Governor Matt Meyer has indicated he will sign it into law.
The urgency around this legislation comes as some companies, including Dropbox and Meta Platforms, have hinted they might leave Delaware. They are concerned about the state’s corporate laws and are considering relocating to states that are more accommodating. Delaware relies heavily on corporate fees, which make up about 20% of its budget, so keeping these companies is crucial for the state.
Corporate lawyer Amy Simmerman testified before the House Judiciary Committee, stating that she represents 15 significant clients who are contemplating leaving Delaware. She emphasized the seriousness of the situation, suggesting that these companies are not just making empty threats.
Under the new bill, if a deal is approved by a board committee with a majority of independent directors or through a vote by public shareholders, investors would have little recourse to challenge it in court. Currently, litigation can only be avoided if both conditions are met, and the committee must consist entirely of independent directors. The bill also makes it more difficult to question a director’s independence and limits the information available to shareholders investigating potential conflicts of interest.
At a recent committee hearing, most of the testimony supported the bill, with many witnesses expressing concern about companies leaving the state. However, shareholder attorneys criticized the bill as rushed and lacking transparency, claiming they were excluded from the drafting process. Joel Fleming, a lawyer for shareholders, argued that the bill was influenced by lobbying from Meta Platforms and would shield its CEO, Mark Zuckerberg, from potential legal issues.
Governor Meyer’s spokesperson stated that while he met with Meta to discuss corporate law, the company did not lobby for the bill. The governor aims to engage with various stakeholders to ensure Delaware remains a leader in corporate governance.
The debate over this bill reflects broader frustrations among corporate leaders regarding recent court rulings that have challenged expectations surrounding Delaware’s corporate laws. The situation has intensified since high-profile figures like Elon Musk suggested companies consider leaving Delaware due to unfavorable legal decisions.
As Delaware prepares for this critical vote, the outcome could have lasting implications for the state’s corporate landscape and its ability to attract and retain major companies.