Delaware’s corporate law, proposed amendments play fair

The best umpires in baseball are those you don’t notice. The same could be said of the game of business. In that arena, the state of Delaware has acted as the nation’s umpire for 125 years, providing a playing field of corporate laws so clearly marked, consistent, and fair that businesses can focus on performing for the benefit of their shareholders, their customers, and our country.

These very features have allowed Delaware to go unnoticed, while they led eight out of 10 newly public companies and more than two thirds of the Fortune 500 to choose to incorporate here.

But suddenly, Delaware is attracting attention. This week, lawmakers proposed changes to our General Corporation Law, placing the business world’s focus squarely on the umpires. In response, as predictably as fans aggrieved by a call, some commentators have questioned the motivation behind the bill.

They intimate that it wrongly serves the interests of specific political agendas, companies, or individuals. Most often they point fingers toward Elon Musk, whose pay package was famously invalidated in a Delaware court.

We can say this, as individuals who responded to the call from Delaware’s governor and legislative leadership for assistance drafting the proposed amendments that represent an attempt to reestablish long-accepted rules once familiar to the Delaware courts and are nothing less than a sincere effort by public officials to protect the interests of their constituents.

Two aspects of the legislative process have drawn particular attention: the participation of private citizens in drafting the bill, and the speed with which it was introduced. These are reasons for praise, not suspicion. Delaware Governor Matt Meyer and bi-partisan lawmakers sought our help crafting legislation to restore confidence in Delaware as a trusted venue for incorporation.

They turned primarily to us and Leo Strine, Jr.— a former chief justice of the Delaware Supreme Court—for our understanding of the nuances of Delaware law. They certainly did not seek us out for the cohesiveness of our political views (we include one Republican, two Democrats, and a former president of the ACLU in Delaware), nor our loyalty to Musk. Although we have different political perspectives on many things, we have a long, shared commitment to the integrity of Delaware corporate law.

The swiftness with which the Senate introduced the bill is also laudable. Governor Meyer, to his credit, responded within weeks of being in office to the growing crisis. Multiple companies, including Meta, had begun to consider alternatives to Delaware as their state of incorporation. We understand other companies are also considering whether to vote on the question at their upcoming annual meetings, with proxy season beginning next month for many public companies. The time to address concerns about Delaware’s continued value as a venue for incorporation is before play starts, not after the game has begun.

The proposed amendments answer those concerns, and their substance confirms that they were not drafted to serve any one company or individual. They respond to a trend in Delaware court decisions that has evolved rapidly in recent years, where changes to judge-made law have made it easier for shareholders to challenge company actions in court, often by expanding critical concepts beyond earlier boundaries. Take, for instance, the conflicts of interest among board members that trigger powerful shareholder derivative lawsuits.

Previously, courts found such conflicts only when board members had a financial stake in a disputed transaction or material entanglements with someone who did; now they perceive conflicts over mere social ties between individuals, using a standard so loose that it becomes relevant whether one director was a guest at another’s family wedding or in pictures on social media.

Similarly, courts had long given heightened scrutiny to transactions between companies and their “controlling shareholders.” But that term has expanded from its natural meaning—someone who owns half or nearly half of a company’s stock—to include “superstar CEOs” who supposedly control investors through sheer force of personality.

These decisions have created an unknowable strike zone when companies try to anticipate lawsuits. Worse, in using nebulous standards, they have made it impossible for corporations to know if they are complying with Delaware law. When an advantageous deal comes before them, corporations do not know if they should swing or not.

Close observers have watched and worried over this trend for years. In fact, two important articles, one of which goes back to the turn of the century and was co-authored by the late Chancellor William Allen, Strine, and then-Vice Chancellor Jack Jacobs, and another co-authored by Strine, Jacobs, and Hamermesh, identified the principles underlying the current legislation as reflecting Delaware’s traditional approach to corporate law.

The articles, which both predate Musk’s loss on his compensation package, addressed ways in which those traditions were under stress. The current bill reflects a good faith attempt to ensure that Delaware corporate law, as was understood and applied for many years, can be relied upon. It is designed to reaffirm what it was until recent years and to address departures from that tradition that have caused legitimate concern among companies in all industries and regions.

The amendments offer clearer, brighter-line definitions of key terms like “disinterested director” and “controlling shareholder.” They also establish procedures that offer safe harbors for companies to use in transacting with controlling shareholders or where members of the board have conflicts, so they can do the right thing and be confident that, if they do, they won’t be sued. Another provision places reasonable limits on a shareholder’s right to examine a company’s “books and records,” which has inflated over time to cover emails, text messages, and other material that goes beyond that term’s normal and intended meaning.

These details may not excite anyone not steeped in corporate law. Yet non-specialists who only see the rules being changed deserve an explanation, so that the quick answer—it’s all Elon Musk—can be seen for what it is. Assisting the legislature and the governor with statutory drafting has been an inspiring exercise in sound government—one joined by lawmakers and citizens with varied economic and political interests, united only in our desire to serve Delaware by ensuring that investor and manager interests are fairly balanced.

That exercise will serve its purpose if, after enactment, long-standing principles of Delaware law that maintain high levels of protection for shareholders, in a way that also gives corporations needed clarity, are restored.

As a result, the playing surface in Delaware’s business arena will be more definitively lined and fairly balanced than it has been in years. With the proposed amendments, Delaware as umpire has yelled “play ball!” After that, it can again recede from view, a comforting and reliable backdrop to the competition that is rightly at the heart of the game.

William Chandler III is a partner at Wilson Sonsini Goodrich & Rosati and a former chancellor on the Delaware Court of Chancery. Lawrence Hamermesh is a professor emeritus at the Widener University Delaware School of Law.