Why Should Delaware Care?
A major piece of state legislation will change the rules of its influential business court, making it more difficult to sue powerful, rich owners of companies. Proponents of the bill say it is necessary to ensure that Delaware remains the incorporation capital of America, which contributes about a third of the state budget independent of taxpayers.
Last week, political signs were posted across Wilmington that called out in bold letters, “NO to Elon Musk! NO to SB 21.”
The signs likely elicited strong feelings from sharply divided Americans over Musk’s actions in the Trump administration. But, instead they related to a separate controversy brewing within Delaware over legislation that proposes to change the rules that govern the control that powerful shareholders can have over some of the biggest companies in the world.
And as the debate has grown to a budding national controversy in recent weeks, one question has repeatedly emerged.
Will the bill allow Musk, the world’s richest person, to reclaim a $56 billion pay package from Tesla that last year was nullified by a Delaware judge? In January, Musk appealed the ruling to the Delaware Supreme Court.
Senate Bill 21, in its current form, defines what a controlling shareholder is within a Delaware registered company – and codifies various levels of scrutiny that constrains those controllers’ actions within the company. Under those rules, Musk does not appear to be a controller of Tesla.
Many believe the proposed rules, if applied to Tesla, would allow Musk to win his upcoming appeal to the Supreme Court – a belief that has sparked outcry from critics, including from an alliance of consumer advocacy groups that appear to have placed the political signs in Wilmington.
Still, the bill only could impact Musk, if its rules can be applied retroactively. The current legislation does not indicate when the rules would go into effect, if passed.
Then, last week, a new draft rewritten from the original version by a group of private Delaware attorneys was released publicly. In part, it appeared to be an attempt to answer Musk’s billion-dollar question.
But, instead of calming the controversy, critics contended that the new language muddies what they say is an already hasty piece of legislation that tilts the balance of power in companies toward big stockholders and away from mom-and-pop investors.
“SB 21 will … take rights away from stockholders to eliminate accountability for billionaire executives,” said a group of five attorneys, who bring shareholder cases against companies, in an open letter to Delaware lawmakers.
The bill’s sponsor – Senate Majority Leader Bryan Townsend – said the legislation responds to controversial court decisions in recent years that he said had disrupted a careful balance previously struck by Delaware judges between protecting the rights of big controlling shareholders and those of much smaller investors.
He also said he intends to get “final language” into his bill before a hearing of the Senate Judiciary Committee on Wednesday, where it is scheduled for roughly 90 minutes of debate. Public comment is available in person at Legislative Hall or remotely via Zoom.
Townsend did not say whether his final version would be materially different from the rewritten draft of his bill.
The answer to the question could impact the health of a Delaware economy that has increasingly depended on the jobs and taxes provided by the state’s corporate franchise, an industry that caters to the more than 2 million companies that maintain their legal home in Delaware.
A nudge to judges?
Within the proposed rewrite of Senate Bill 21, two sentences speak to the question of its retroactivity to past cases, including to Musk’s fight over the $56 billion.
The first sentence says the bill cannot be applied retroactively to past or pending cases – an indication that Musk’s pay dispute is not in its crosshairs. But the next sentence says that judges hearing pending cases still can make a decision that is in line with the new rules, if they can support it with pre-existing case law.
Townsend said the language is an effort “to make clear to the world” that judges have discretion, and that the bill should not be applied retroactively to past or pending legal disputes.
Others don’t see the language the same way, and some critics have claimed it amounts to a legislative nudge to Delaware Supreme Court judges to rule in favor of Musk.
Brian Quinn, a professor at the Boston College of Law, wrote in a prominent corporate law blog that the new language signals “to the court how it should decide on a pending case,” reminding readers that Musk’s case is up on appeal. He further concluded that the entire bill “appears to be about dictating an outcome” for Musk’s appeal to the Delaware Supreme Court.
In recent days, Spotlight Delaware asked two additional law professors about their interpretation of the new language. They both indicated that overall the draft bill is not written clearly, with University of Pennsylvania law professor Jill Fisch calling it “not a model of good craftsmanship.”
But, the professors disagreed on the question of whether the draft bill would apply new rules to Musk’s case. Columbia University law professor Dorothy Lund said the language appears to be a message to the court to rule in favor of Musk in his pay dispute appeal.
Fisch said she doesn’t believe the draft bill directs judges to apply its rules retroactively.
Is there a DExit?
According to data from Carta, an online platform that matches private equity funders to startup companies, there has been no significant move away from Delaware, nor has any single other state gained significant market share at Delaware’s expense, despite efforts by Nevada and Texas.
But the controversy began in January when Gov. Matt Meyer first told the business world that Delaware needed to change some laws to respond to announcements from several high-profile companies that they would leave, or were considering leaving, Delaware and legally incorporating elsewhere.
Those companies included DropBox, Meta, and Pershing Square Capital Management.
The departure of companies from Delaware was coined “DExit,” and conversations about the phenomenon spread in recent weeks on social media, particularly on the Musk-owned X.
“It’s really important we get it right for Elon Musk or whoever the litigants are in Delaware courts,” Meyer said in an interview with Business Insider in early February.
Weeks later, Townsend, the Senate Majority Leader, introduced Senate Bill 21, and presented it as a joint proposal with Meyer and Republican lawmakers.
Since then, backers of the bill have repeatedly stated that the changes within it are necessary to maintain a Delaware economy that has increasingly depended on the jobs and taxes provided by the state’s corporate franchise – an industry that caters to the more than 2 million companies that maintain their legal home in Delaware.
But, almost from the start, the bill was also ridiculed as a “billionaires’ bill,” by critics, including law professors and attorneys who bring lawsuits on behalf of small shareholders.
At least one of the prominent critics has also argued that Delaware’s corporate franchise is at stake, but he said it is Senate Bill 21 that threatens it. Charles Elson, the founding director of University of Delaware’s Weinberg Center for Corporate Governance, told Spotlight Delaware that the U.S. government could step in and mandate that corporate law is dictated by federal law.
Such a move could eradicate Delaware’s legal industry that propels much of downtown Wilmington’s economy.
Elson is also among the critics who see Senate Bill 21 as a way from the Delaware legislation to acquiesce to the demands of Musk.
“Elon Musk, is he really worth throwing away your reputation for him? He will blow himself up the next couple of months anyway,” Elson said.
Boosting that claim that Senate Bill 21 was about Musk was reporting last month that an attorney from Richards Layton & Finger, a firm that has represented Tesla, was among the drafters of the bill.
While Townsend and other backers of the bill have sought to distance it from Musk, he acknowledged that the Tesla case is the elephant in the room in the current debate.
Controversial decisions lead debate
Townsend’s introduction of the bill came more than a year after a top Delaware judge, Chancellor Kathaleen McCormick, first nullified Tesla’s massive $55.8 billion payout to Musk on grounds that he had effective control over the company’s board of directors, whose job it is to negotiate his pay.
The company’s shareholders later voted to uphold the payout, but in December McCormick again overruled it, calling Tesla’s board “a perpetrator of fiduciary misconduct” that is not allowed to “hit reset through stockholder vote.”
The Supreme Court is scheduled to hear Musk’s appeal this summer.
Beyond Musk’s dispute, Delaware judges have also recently ruled on other cases involving small shareholders challenging powerful individuals within companies.
Last month, a New York City workers retirement fund argued in a Delaware court that an $8 billion merger between Paramount Global and Skydance Media must be stopped, claiming it would unfairly enrich Paramount’s chairwoman Shari Redstone.
Last week, McCormick, the chief judge in Delaware’s Court of Chancery, issued a ruling in which she said she may pause the deal as it gets closer to finalizing.
The decision comes about a month after another Delaware judge ruled that former Meta executive Sheryl Sandberg had destroyed evidence that would have been useful in a case filed in 2018, in which a trade union pension fund demanded that her company turn over reams of documents related to a controversy involving the British data mining company Cambridge Analytica.
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