Corporate law amendments propose major shift in shareholder rights

DOVER — A new bill that may settle who could control the top companies in the nation has been filed by a bipartisan coalition of lawmakers and endorsed by Gov. Matt Meyer as part of his accelerated campaign to keep Delaware’s incorporation status — and the state’s millions in franchise fees.

Senate Bill 21, filed Monday with Senate Majority Whip Brian Townsend (D-South Newark) as the primary sponsor, includes sweeping changes to Delaware’s corporation law that would ensure that controlling stockholders and control groups cannot be liable for monetary damages for “breach of the duty of care.”

The bill would also give safe harbor protections for select business moves to a controlling shareholder, or a person or a group which owns most of the voting stock of a corporation, if approved by a committee of minority shareholders or by vote. Taking a public company private may also be entitled to those same protections.

In essence, it would make it more difficult for shareholders to prove that corporate directors are “conflicted” in a deal, a status which makes it easier to prove that the transaction was unfair to minority shareholders.

Delaware’s Court of Chancery has a rich history of corporate law and is noted for quick decisions that also value the rights of minority shareholders. That is one of the prime reasons why lawsuits are filed in Delaware on various corporation actions.

SB 21 is co-sponsored by Rep. Krista Griffith (D-Fairfax), Senate Minority Whip Brian Pettyjohn (R-Georgetown/Bridgeville) and House Minority Leader Tim Dukes (R-Laurel).  The trio and Townsend issued a statement that said this bill would “restore” Delaware law, ensuring it is balanced and maintain stockholder rights and workable for corporate leaders and directors.

“Uncertain standards or barriers to responsible options that cause widespread frustration among Delaware companies are not helpful to anyone, especially to the stockholders who would not enjoy the value of Delaware’s legal protections at all if companies feel forced to relocate to less balanced jurisdictions,” the statement reads.

“For the last century, Delaware law and all relevant stakeholders have benefited from our law having balanced protections and being shepherded by expert corporate law practitioners and thoughtful elected officials,” the statement reads. “That is what this legislation reflects.”

With literal billions at stake, Delaware’s new governor and the legislators have been vocal in the media regarding their intentions to protect the franchise fees. Bill co-sponsor House Speaker Melissa Minor Brown wrote an opinion piece with Sen. Nicole Poore on their goal to protect the franchise fees, pointing out that the next few weeks in Washington D.C. would be critical for the state’s future.

Meyer has also gone on a press tour, speaking with local media like the Delaware Business Times as well as national outlets like Bloomberg, Business Insider and more. During this tour, he told CNBC that he has heard from companies and attorneys they “feel like they may not get a fair hearing” in the Chancery Court.

“Delaware is the world’s preeminent center of corporate jurisprudence. We will protect our reputation and continue Delaware’s tradition of a balanced and measured approach, and we will do so relentlessly,” Meyer said in a prepared statement. “Clarity, predictability and fairness remain the hallmark of our franchise. I thank the Legislature for moving swiftly to respond to the evolving needs of the global market.”

To pass the bill at hand, the state constitution requires a two-third majority to amend the general corporation law.

How we got here

The amendments proposed in SB 21 would speak to the heart of the contentious debate that engulfed Delaware’s legal community last spring and continues to rage on at a national scale. Last year, the Delaware Court of Chancery ruled to nullify provisions of a contract between global investment bank Moelis & Co and its chief executive officer and required the CEO to sign off on any major corporate decisions. It also granted the CEO veto power, potentially setting up a situation where a single shareholder can override a board of directors.

It was the latest decision from the highest profile corporate court that resulted in tossing out a contract between CEOs and their boards. But now, that case is dwarfed by activism spurred by Tesla CEO Elon Musk who lost his Delaware-based case for a $55 billion pay package at the beginning of 2024 and eventually also lost the appeal toward the end.

In response, Musk warned his followers on social media to “never incorporate your business in Delaware.” He moved Tesla’s incorporation status to Texas which had just set up a new business court. Nevada and Wyoming are also contending for more of the incorporation business by setting up more business courts and adjusting their legal systems in the same vein.

Since December, Musk used social media to blast the decision, the Chancellors and the state’s corporate laws which have been the bedrock of the legal community and billions in revenue to support the state’s spending plan. He spent days attacking the Chancellor who wrote the ruling decision against him, eventually accusing her of being a “a radical far left activist cosplaying as a judge.”

The criticism has gotten louder in the weeks since President Donald Trump returned to the White House and named Musk the head of the Department of Government Efficiency, granting him unprecedented power to review and cut federal programs.

Now with the news that Meta and Dropbox are considering incorporating in other states, prompting speculation on a “Dexit,” state officials and Delaware’s new governor are working quickly to keep the roughly 2.2 million entities incorporated in the First State.

With Delaware’s small size, the franchise fees and taxes are the major source of state revenue, along with personal income tax. Of the two million entities that are currently incorporated in the state, two-thirds are Fortune 500 companies. Around 80% of initial public offerings (IPO) are also established here as a way to signal stability.

In fiscal year 2023, franchise tax — which is a flat fee, no matter the size of the company —brought $2 billion to Delaware’s revenue.

The process for sweeping changes

Unlike previous amendments to the corporation law, SB 21 has not been reviewed or voted on by the Delaware State Bar Association’s (DSBA) Corporation Law Council. That entity within the state bar association is responsible for reviewing and recommending best practice changes to the law so that the First State stays up to date.

In 2024, the council proposed the controversial changes that would grant companies the power to enter into contracts with one or more stockholders, greatly expanding what corporations can do without the full approval of the board of directors. While the bill was seriously debated and questioned in terms of how it would impact cases that were pending for appeal, it was signed into law that summer.

But this time, SB 21 was not initially recommended by the DSBA or its corporation council. In fact, members of the bar first started hearing of the bill Feb. 12, just six days before it was filed in the general assembly, according to four people familiar with the matter.

The Delaware Business Times’ request to the DSBA for comment was not returned as of press time.

Meanwhile, Meyer has been talking to plaintiff attorneys, CEOs and legal experts on what the next best market practices would be starting from day one when he put his hand on his parents’ Bible to take the oath of office, launching what would become an aggressive campaign to update the corporation law. He later told DBT that proposed solutions would come either within the judiciary or through legislation to strike a balance for shareholders and management.

Meyer said in a press statement that, like all proposed corporate legal code changes, “we respectfully ask the Delaware State Bar Association, through its Corporate Law Council, to immediately take up SB 21 for review, comment, and recommendation.”

At the same time, a Senate Concurrent Resolution is also proposed, seeking the state bar association to present a report by March 31 on recommendations for legal action. That report should include a fee cap for attorneys that would not be counterproductive to companies and stockholders.

Delaware’s corporation experts weigh in

SB 21 is expected to be highly controversial and will likely face pushback from attorneys who represent defendants and shareholders. Lawrence Cunningham, the director of the University of Delaware’s Weinberg Center for Corporate Governance, said much of the debate will focus on independence of directors and fairness in how a corporation is governed.

“The goal is clear: increase certainty for dealmakers while maintaining Delaware’s balance between shareholder protections and director discretion. But legislative line-drawing in corporate law is always contested. Critics will debate who should set the rules [and] how much procedural protection is enough,” Cunningham said in a statement to DBT.

He noted that the amendments provide a framework for transitions outside typical procedural safeguards if they were fair for the corporation, but that may not be the best test for fairness.

“Fairness in an interested director setting often involves both substantive terms and process, ” Cunningham added. “Controlling shareholder transactions, however, may turn more on price than process—suggesting that ‘fairness from a financial point of view’ might be the more relevant test.”

Charles Elson, the founder of the UD Weinberg center, had more pointed words for SB 21. He warned that it would “destroy the typical traditional balance” between shareholder prerogatives and managers and controlling shareholders – and it would invite complete federalization of regulating corporations.

“[This bill] doesn’t just tip the balance; it completely tilts it. It’s a terrible signal to send to the business world,” Elson told DBT. have always been known for our neutrality. That’s not the way business has been done here.”

Elson, who has sat on many company boards and now serves as the executive editor-at-large for Directors & Boards magazine, said that it serves as a loud signal that Delaware legislators want to keep companies with controlling shareholders that could act badly to other investors at the table.

“If the goal is to attract a controlling shareholder like that, you absolutely destroy the whole point of the law,” he said. “The whole reason institutions came to Delaware is that it was an exclusive forum for resolving disputes, and with that, it gained a great gift in the neutrality of the system. This would shift the balance to majority shareholders and it would end our reputation.”