Summary
Delaware, which depends on incorporation fees to support its budget, changed its corporate legislation in an effort to prevent businesses from leaving the state.
Bloomberg Law
"Delaware enacted a corporate law overhaul that aims to keep companies from following
Gov. Matt Meyer (D) signed the bipartisan bill (S.B. 21) Tuesday, the final step in a fast-tracked legislative response to a series of rulings out of Delaware’s Court of Chancery.
While the bill comfortably passed both chambers of the state legislature, the corporate law community is divided over whether it’s the right approach to address corporate giants’ concerns that Delaware judges had given too much ground to smaller investors.
1. What does the new law do?
The law’s target: judge-created guardrails around insider deals involving some of the world’s largest companies and richest people.
It narrows the definition for a “controlling stockholder” and lowers the hurdles one must clear to avoid court scrutiny of a potentially conflicted transaction. It also strengthens the presumption that board directors are independent of management and controlling stockholders, which will make it harder for shareholders seeking to challenge an acquisition or pay package as rife with conflicts.
The law also will limit access to internal company records commonly used by smaller shareholders to investigate those deals.
The amendments apply to litigation and books-and-records demands filed after Feb. 17.
2. What motivated the overhaul?
The law follows criticism that recent Chancery rulings involving controllers were inconsistent and made even routine transactions onerous and vulnerable to shareholder litigation.
Musk led many of those attacks himself after Chancellor Kathaleen St. Jude McCormick invalidated a $56 billion CEO pay package that Tesla’s board offered him; a ruling that is under appeal at the Delaware Supreme Court. He responded by reincorporating his companies in Texas and Nevada, and encouraging other executives to follow his lead.
Dropbox Inc. and TripAdvisor Inc. have left for Nevada, and billionaire hedge fund manager Bill Ackman has pledged to take Pershing Square Capital Management LP elsewhere. Meta Platforms Inc. also has begun discussing reincorporating outside Delaware.
The state has a lot to lose: It’s the corporate home to 2.2 million registered entities—over twice its population—and incorporated 81% of US IPOs last year, according to a statement from Meyer’s office. The corporate franchise represents more than one-third of the state budget at roughly $2.2 billion a year..."
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This article was originally published in Bloomberg Law.
