Corporate capital Delaware is changing its law in fight pitting corporate insiders vs. investors
Delaware lawmakers are putting aside protests from big investors and approving fast-tracked legislation that backers say will protect its status as the world's corporate capital
Delaware lawmakers put aside protests from major investors and approved fast-tracked legislation Tuesday night that backers say will protect its status as the corporate capital of the world after criticism by billionaire Elon Musk and other influential business titans rattled public officials.
The bill is headed to Gov. Matt Meyer, a Democrat who met with corporate leaders about their concerns about precedent-setting court decisions governing corporate conflicts of interest and urged lawmakers to quickly pass changes to the law.
They did, sending the bill through both chambers within two weeks of its introduction, despite shareholders’ lawyers, consumer groups and pension funds slamming it as a giveaway to billionaires and corporate insiders. The House approved it Tuesday night, 32-7, after a unanimous Senate earlier in March.
Delaware’s experienced corporate law courts and their well-developed body of corporate case law have become the go-to destination to settle all sorts of business disputes as the legal home of more than 2 million corporate entities, including two-thirds of Fortune 500 companies.
The state also reaps billions of dollars from the activity, making lawmakers nervous that corporations could flee Delaware and undercut a major source of revenue that funds one-third of Delaware's operating budget.
After two hours of debate Tuesday, Rep. Krista Griffith told colleagues that the bill was complex, but the reasons for voting for it were simple: “Protect Delaware’s economy, protect future opportunities for the people in our state. We have the best business court in the nation.”
However, an opponent, Rep. Madinah Wilson-Anton — referring to the business courts as Delaware's “golden goose” — warned that the changes being passed could end up "cooking that golden goose.”
A legal challenge is widely expected after Meyer signs the bill.
In hearings, lawmakers were warned by corporate lawyers and state officials that businesses were contemplating moving their legal home — a “Dexit,” as it has been dubbed — and that startups are being advised to incorporate elsewhere, such as competitors Nevada or Texas.
Corporate leaders complained about a lack of predictability, clarity and fairness, lawmakers were told.
Last year, Musk slammed Delaware, saying “Never incorporate your company in the state of Delaware” and instead recommended Nevada or Texas as destinations after a Delaware judge invalidated his landmark compensation package from Tesla worth potentially more than $55 billion.
Musk and Tesla are appealing in the state Supreme Court, and Musk’s companies — Tesla, SpaceX and Neuralink — all departed Delaware for Nevada or Texas.
The fallout seemed to accelerate in recent weeks when the Wall Street Journal reported that Meta Platforms — the parent company of social media platforms Facebook, Instagram and WhatsApp — was considering moving its incorporation to Texas. Meta — run by billionaire chairman and CEO Mark Zuckerberg — didn’t confirm the report.
The bill has come under withering criticism that it will tilt the playing field decisively against investors, including pensioners and middle-class savers, and make it harder for them to hold billionaires and corporate insiders accountable for violating their fiduciary duty.
In a statement, the Consumer Federation of America said Delaware's lawmakers “clearly failed to protect investors with the passage of the Billionaire’s Bill.”
Opponents argue that the bill overturns decades of court precedents. But its backers say it is only affecting newer precedents, modernizing the law, clarifying gray areas and maintaining balance between corporate officers and shareholders.
The bill changes several provisions.
One, it gives corporate officers and controlling stockholders more protections in certain conflict-of-interest cases in state courts when fighting shareholder lawsuits.
Two, it limits the kind of documents that a company must produce in court cases and makes it harder for stockholders to get access to internal documents or communication that could prove time-consuming and expensive for a company to produce — not to mention, damaging to its case.
Institutional investors warn that such a law may prompt them to push corporations that they own to incorporate elsewhere.
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Follow Marc Levy on X at: https://x.com/timelywriter.
