Delaware, a state known for its favorable corporate laws, has proposed a significant change that could reshape the relationship between corporate boards and shareholders.
This new bill aims to limit shareholder lawsuits, especially after several prominent companies, including Meta Platforms and Dropbox, have hinted at moving their legal incorporation out of Delaware.
Here’s a breakdown of the bill and its potential implications.
Why is the bill being proposed?
Delaware’s corporate law governs the relationship between company boards and shareholders for two-thirds of S&P 500 companies.
This makes the state a hub for corporate incorporations, with businesses attracted to its well-established courts and stable laws.
However, recent high-profile cases involving companies like Meta and Dropbox, as well as tensions with the Delaware judiciary, have prompted some businesses to consider relocating their incorporation to states like Texas, which has created its business court.
According to Delaware state Senator Bryan Townsend, a Democrat, the bill is being introduced in response to growing concerns about shareholder litigation and competition from other states, Reuters reported.
Townsend notes that some jurisdictions are gaining traction as legitimate alternatives to Delaware’s corporate law.
Key provisions of the new bill
- Limiting shareholder lawsuits: The bill would take steps to protect directors and controlling shareholders from legal action related to alleged conflicts of interest. This would include reducing the scope of internal records shareholders can access, which are often used to build cases against corporate boards.
- Reducing shareholder access to records: Shareholders would face more restrictions when trying to access internal company records, potentially making it more difficult to gather evidence for litigation.
- Protection for directors: The proposed law would help shield company directors and controlling shareholders from liability in certain situations, particularly those related to conflict-of-interest claims.
Delaware bill: a response to recent legal challenges
The bill comes on the heels of several controversial rulings in Delaware’s Court of Chancery, which have held controlling shareholders liable for deals that were previously thought to be properly structured.
This has led to criticism that the state is becoming too favorable to shareholder lawyers, particularly in cases where corporate leaders lose costly lawsuits.
Notably, Elon Musk has been an outspoken critic of Delaware’s judiciary, particularly after a Chancery judge ordered the rescinding of his $56 billion pay package from Tesla.
Musk’s companies, Tesla and SpaceX, have since moved their incorporation from Delaware to Texas.
Texas has created a business court aimed at competing with Delaware’s renowned Court of Chancery, attracting business moguls like Musk to its jurisdiction.
What impact will the bill have?
The bill could drastically change shareholder litigation in Delaware.
Experts are divided on its potential impact. Some argue that shareholder lawsuits are essential in preventing corporate abuses and holding boards accountable.
Others contend that these lawsuits are often ineffective, serving as a “tax” on companies without delivering meaningful benefits to shareholders.
Experts note that the bill would make shareholder litigation “dramatically less successful,” which could lead to fewer legal challenges for companies operating in Delaware.
However, she also points out that federal securities regulations, under the administration of Republican President Donald Trump, could further restrict institutional investors’ ability to influence corporate boards, reducing the effectiveness of the litigation mechanism altogether.
The bill is still under review, and Delaware lawmakers are moving quickly to push it forward.
Delaware Governor Matt Meyer, a Democrat, has voiced his support for the bill, but it remains to be seen how this will play out in the coming months.
As corporate leaders continue to weigh the benefits of incorporating in Delaware versus other states, this legislation could mark a shift in how the state governs corporate law.
Delaware’s reputation as a corporate haven may be tested, and businesses may find new opportunities to structure their operations in more favorable legal environments.
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