Newark Democrat introduces ‘compromise’ to controversial corporate law bill  

Why Should Delaware Care?
A major piece of state legislation could change the rules of its influential business court, making it more difficult to sue powerful 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.

A controversial bill in Delaware that would change the rules that govern how deals get done by powerful people within many of the biggest companies in the world now has a competing piece of legislation.

Opponents have derided the original proposal, Senate Bill 21, as a “billionaires’ bill,” saying it allows powerful investors to strike self-serving deals with companies. But backers, including Gov. Matt Meyer and the Senate’s Democratic leadership, have called the bill a “course correction” for Delaware’s business courts that they say have given smaller shareholders too much deference in recent years to challenge corporate actions. 

Backers have also contended that the bill is needed to pacify disgruntled executives who have threatened to cancel their companies’ Delaware registrations and set up legal homes in other states.

In recent weeks, the debate has spilled out of Legislative Hall, and out of corporate boardrooms and into Delaware homes, with opponents of the bill sending mailers out across the state that claim that under the proposed rules “corporate insiders and CEOs are immune from liability.”

On Tuesday, Rep. Sophie Phillips (D-Newark) introduced an amendment that would  make Senate Bill 21 only apply to companies if a majority of their shareholders vote to “opt in” to its provisions. 

It’s a change that several opponents of the bill have increasingly called for in recent days, including the California Public Employees’ Retirement System, the largest public pension fund in the United States.

In a letter sent to leading Delaware lawmakers on Friday, an attorney for the pension fund, called CalPERS, said allowing shareholders to opt into the bill’s provisions – which he characterized as an “extreme lack of accountability” for companies – was a fairer approach.  

Phillips told Spotlight Delaware that her legislation is not a new idea, noting that Delaware lawmakers passed a law three years ago that prevented corporate executives from being sued in many cases, but only if shareholders first voted to approve the indemnification measure. 

Phillips also called her current amendment a compromise to the original bill.

“I do want to make it clear that this amendment is nothing against the sponsors or the supporters of the legislation. I truly just think it is the fair thing to do,” she said. 

Phillips said she will bring up her amendment during a hearing of the House Judiciary Committee on Wednesday. The committee is scheduled to consider Senate Bill 21 in its current form during that hearing at 10:30 a.m.

It’s unclear whether Phillips will be able to find enough votes in the House to amend the fast-tracked bill that has been endorsed by all of the chamber’s leadership teams.

‘People aren’t saying they don’t want rules’

After reports of new potential corporate defections like Meta and DropBox in early February, Meyer told the business world that Delaware’s substantial corporate law needed some changes to allow the state to remain the pre-eminent legal domicile for millions of U.S. companies. 

Days later, he and lawmakers jointly introduced those changes in Senate Bill 21, a surprise piece of legislation at the time. 

The original bill would make dozens of changes to Delaware’s substantial corporate law. But, in sum, they would make it harder for relatively small investors to challenge deals in court that companies had struck with powerful shareholders, such as their founders. 

One particularly prominent such deal was Tesla’s $56 billion pay package awarded to Elon Musk in 2018. Last year, a top Delaware judge, Chancellor Kathaleen McCormick, nullified that massive payout on grounds that Musk 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 Delaware Supreme Court is scheduled to hear Musk’s appeal this summer.  

The bill’s sponsor, Senate Majority Leader Bryan Townsend, has said his bill is not about Musk, noting that the legislation cannot be applied retroactively to pending cases, and that Tesla moved its legal home out of Delaware in response to McCormick’s ruling. 

Still, Townsend’s bill ultimately sparked what has become a national debate that has centered around two main questions: How much power should mom-and-pop investors have to challenge the authority of founders and other big shareholders within companies? And should Delaware hold onto its position as the favored legal home for many of the biggest companies in the world?   

After the bill passed the state Senate last week, Townsend spoke about Delaware’s current position as a favored legal domicile, saying it is facing threat in the form of competition from states, such as Texas and Nevada, that want to take the state’s incorporation business.

That business, which supports Delaware’s broader corporate franchise industry of attorneys and registered agents, brought to the state government through taxes and fees more than $2.2 billion last year – or about a third of its budget. 

Townsend asserts that Senate Bill 21 will shore up Delaware corporate franchise business from outside threats, because he said it clarifies and codifies past legal precedents. 

“People aren’t saying they don’t want rules, they’re saying that they want rules to be clear,” he said. 

Townsend did not respond on Tuesday to requests to comment on Phillips’ amendment to his bill.

The post Newark Democrat introduces ‘compromise’ to controversial corporate law bill   appeared first on Spotlight Delaware.