Why Should Delaware Care?
The rules that govern how 2 million Delaware companies structure themselves can impact how money flows across the globe and how it flows into Delaware’s state coffers. A controversial bill could dramatically change corporation law in the state.
A controversial bill that could change the rules around who can control many of the most powerful companies in the world is close to becoming law after Delaware legislators advanced it out of committee following a contentious Tuesday hearing.
The hearing featured references to the popular HBO satire “Succession,” testy exchanges among representatives, and pronouncements from each side that Delaware’s dominant role in global capitalism could be put into peril.
“This really damages our reputation as being a neutral player,” Charles Elson, the founding director emeritus of the Weinberg Center on Corporate Governance at the University of Delaware and a leading academic in the space, said in opposition to the bill during a hearing of the House Judiciary Committee.
On the other side of the debate was Srinivas Raju, chairman of a group of private lawyers – called the Delaware State Bar Association Corporation Law Council – that regularly writes the laws that govern how the 2 million companies legally registered in Delaware operate.
During his testimony, Raju said his group’s latest legislation, called Senate Bill 313, comes in response to state judges’ recent rulings, including one known as Moelis that declared that shareholder agreements that turn over power of a company to a signal individual are illegal.
Raju said those kinds of agreements are common, and therefore must be preserved.
“I think for decades companies have thought these types of rights could be memorialized in contracts,” he said.
But Raju’s assertion has been challenged by a wave of critics of Senate Bill 313, including dozens of law professors across the country who also argue that the bill will hurt small investors and only help the biggest money movers in the economy, such private equity firms.
Though written by the Corporation Law Council, the bill’s technical sponsor – Senate Majority Leader Bryan Townsend, a Newark Democrat – said the legislation helps the state’s corporate law stay “responsive and flexible, which is what attracts so many companies to incorporate in Delaware.”
But the leading opponent within the Delaware legislature, Rep. Madinah Wilson-Anton (D-Bear) has called the bill “historic overreach,” and said it responds to a court decision that has yet to be addressed by the Delaware Supreme Court.
On Tuesday, Wilson-Anton questioned Raju over two of his statements that the bill would not be the first to overturn a live Delaware court case, and that businesses and attorneys in the industry believed that the stockholders agreements at issue were legal under Delaware law.
“I can personally say to the committee that I have seen several memos from years back with the precise warning that these agreements are unenforceable,” Wilson-Anton asserted about communications among lawyers and businesses.
Wilson-Anton then asked Raju why attorneys who have written such shareholder agreements for their corporate clients didn’t “know the law?”
“I testified, representative, to what I think the prevailing belief among corporate practitioners and the marketplace was,” Raju said in response. “And, I think I stand by what I said.”
Wilson-Anton ended her questioning of Raju by asking, “Who lobbies you?”
The query brought to the surface of the public debate a long simmering question of how bills that go on to become part Delaware’s legal framework, known as the General Corporation Law, originate.
“Can you share some examples of folks that are unhappy with this (bill) because they think it does not go far enough?” Wilson-Anton added.
“We hear from everyone around the country, from corporations, from investors, from various practitioners, lawyers around the country,” said Raju in response.
The Bear Democrat then pushed Raju to be “more specific,” before the chairwoman of the House Judiciary Committee intervened.
“He needs to be allowed to answer his question. And, that will be done,” said the chairwoman, Krista Griffith (D-Fairfax), who supported Raju’s bill.
“I really want to do the right thing. And, it feels as if both sides have very compelling arguments.”
rep. cyndie romer
A tension then lingered in the air – one that has become common in recent years as Wilson-Anton, a political progressive, has highlighted a growing division between Democrats who are friendly with and those who are critical of the industry of businesses and lawyers that survives off of Delaware’s role as the leading legal domicile of global business.
It’s a role that also brings to the state roughly a third of its government revenues each year in the form of taxes and fees related to the incorporation industry.
Following Wilson-Anton’s exchange, Rep. Cyndie Romer (D-Newark) began her comments by noting that she was sweating and nauseous over the gravity of the debate, and what she said was her concern over living “in a country where corporate power (is) very out of control.”
“I really want to do the right thing. And, it feels as if both sides have very compelling arguments,” Romer said.
She also noted that certain themes of the bill in question reminds her of “Succession,”
the popular HBO series about control of a fictional media empire, that she watches “a little too much of.”
Romer then called Elson, the retired UD professor, who shared his concern that the bill could damage what he said was Delaware’s historic balancing of shareholder rights. That, in turn, could cause the federal government to attempt to take over Delaware’s role as the primary creator of corporate law, he argued.
In later testimony to the committee, Usha Rodrigues, the chair of corporate finance and securities law at the University of Georgia School of Law, also referenced the TV series, saying that the bill could allow a board of directors to strike a deal with a favored shareholder, such as the series’ character Logan.
“The board as a whole makes the side deal, but then it’s stuck,” she said. “And that deal lets Logan Roy keep on telling the board what to do.”
Griffith, the committee chair, then cut into Rodriques comments, urging her to move away from talking about a fictional series.
“Can we please stick to SB 313 and the issues at hand, because I care about the people listening out here that we’re talking about a real statute that impacts real people, real companies, and frankly it’s disturbing me that we’re talking about Logan,” Griffith said.
By the end of the hearing, members of the House Judiciary Committee voted to advance the bill to the full House of Representatives – its last step in the legislative process before heading to the desk of Gov. John Carney.
Have a question about or feedback on this story? Reach Karl Baker at kbaker@spotlightdelaware.org.
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