Delaware Legal Tweaks Threaten Business Court’s Famed Speed (1)

Legal reforms floated this week by Delaware’s governor to fend off Elon Musk and stop the flow of corporate departures could undermine speed and certainty at the state’s elite business court.

Gov. Matt Meyer (D) set up a working group that will produce specific recommendations in “weeks not months,” likely including process changes for appeals of significant rulings and the way lawsuits are assigned to judges, he said in a Feb. 3 interview. The governor took office Jan. 21, amid a wave of political changes in the US that have elevated Musk’s influence to new heights.

The world’s richest person called the suggestions “encouraging” in a post on X this week. The billionaire and his online legions have trained much of their ire on the business court’s chief judge, who has handled the recent cases against him.

Although Meyer avoided directly addressing Musk’s yearlong barrage against the state’s judiciary, he said many corporate leaders think repeatedly facing the same judge makes every dispute “a foregone conclusion.” But forcing a new judge to get up to speed from scratch on the complex mechanics of a sprawling enterprise like Tesla Inc. would sacrifice efficiency at a court that’s managed to remain famously fast despite significant resource constraints, according to Tulane University law professor Ann Lipton.

“There’s a lot of speed to be gained from having one judge who’s very familiar with this company and this governance structure and these documents and these investor rights,” Lipton said. “What these companies really want is to get away from judges they don’t like.”

Chancellor Kathaleen St. J. McCormick, who leads Delaware’s Chancery Court, declined to comment. Delaware Chief Justice Collins J. Seitz Jr. declined to comment through a spokesperson.

Steps by the Meyer administration are intended for Delaware to remain the preeminent location for global corporate law, Delaware Secretary of State Charuni Patibanda-Sanchez said in a statement on Friday.

“As Secretary, I’m working tirelessly to improve our processes, listening to CEOs, shareholders, and my fellow corporate attorneys about how we can better meet the needs of our evolving economy,” she said.

Trial Uncertainty

Meyer’s tentative proposals came days after Meta Platforms Inc., Dropbox Inc., and Bill Ackman’s Pershing Square revealed plans to potentially leave Delaware, home to nearly 70% of Fortune 500 companies. Musk has been urging other businesses to follow him out the door since he moved Tesla to Texas in response to a $56 billion court loss, but the campaign made little headway until he stepped into a powerful role in President Donald Trump‘s new administration.

Delaware’s corporate defense bar and companies eyeing other states have also cited substantive legal reasons for seeking a friendlier venue, complaining about a series of novel rulings that cracked down on self-dealing, scrutinized agreements handing governance rights to insiders, and clarified the standards for controlling stockholders, who face special scrutiny.

The new governor pointed to the uncertainty businesses have to contend with while they wait to learn the ultimate fate of a consequential trial court ruling. Loosening the standards for mid-case or “interlocutory” appeals, however, would likely have the paradoxical effect of worsening that legal limbo, according to University of Pennsylvania law professor Jill Fisch.

“The flip side of making Supreme Court review quicker and easier is that it would create uncertainty about every trial court decision,” Fisch said.

Sweet Spot

Delaware’s top court added a wrinkle to the charged reincorporation debate on Feb. 4, when it overturned a decision involving TripAdvisor Inc. that had threatened damages if companies leave for states seen as friendlier to insiders, particularly Nevada and Texas.

The ruling came on interlocutory appeal—after Vice Chancellor J. Travis Laster said damages were potentially available, but before he could decide if they were actually warranted. “The case is a nice example of why the system isn’t particularly broken,” Fisch said.

Of the two ideas, “fine-tuning” interlocutory appeals looks less like an overcorrection, according to Columbia University law professor Eric Talley. Delaware’s courts are already considering the right factors, but there may be value in recalibrating how judges find the “sweet spot” when weighing those criteria, he said.

“When you put those things into a bowl and mix them up, how long do you leave the cake in the oven?” Talley said. “The application of the identical test, filtered through judicial policy, can evolve over time. This conversation gives the Delaware Supreme Court an invitation to revisit that. But totally rejiggering the test could cause the whole process to seize up into complete dysfunction.”

‘Good Leadership’

Critics have argued the spate of novel decisions in 2024 blindsided businesses by overturning common practices or imposing stricter standards that make Delaware more hostile to corporate controlling stockholders. The backlash culminated last summer in a swift push by lawmakers to overturn several rulings by McCormick and Laster.

That context makes it a bit unexpected for the governor to start with modest process changes rather than another push to directly confront the judiciary, said Lawrence Cunningham, director of the University of Delaware’s Weinberg Center for Corporate Governance. But it’s a welcome surprise, according to Cunningham, who said the proposals “sound like judicial branch kind of activities.”

Meyer made a similar point Feb. 3, saying he hopes the courts will take the initiative and run with the ideas he’s proposing. “If not, we have a decision to make about whether we’re going to make legislative change or go through some other avenue, but it’s premature to speculate,” he said.

A carefully conceived proposal might draw support from McCormick and Seitz on its own merits, according to Cunningham. But the changes would further tax an already overworked court system, so there would need to be give and take, probably including an infusion of additional resources, he said.

“These are perfectly valid topics for the executive branch to begin a conversation on,” Cunningham said. “That sounds like good leadership.”