WILMINGTON — Earlier this week, Gov. John Carney quietly signed a bill into law that makes adjustments to Delaware’s corporate code, including how boards of directors oversee companies as fiduciaries.
Senate Bill 313 was sponsored by Sen. Bryan Townsend (D-Newark). The governor’s signature marks the end of a tumultuous time where legal experts and national media outlets turned their eyes to Delaware to see what changes would come to the law that impacts close to two million businesses incorporated in the First State.
“The real heart of what this was about was transactional and legal certainty in the world,” Townsend told the Delaware Business Times. “Moving forward, in terms of the rest of the world, I would hope that this is just a momentary blip on the radar. It was a surprise with an unexpected, but not incorrect, court decision that required a simple statutory change.”
Each year, the Delaware State Bar Association (DSBA)’s Corporation Law Council proposes amendments to the state’s corporate law which impacts 1.9 million businesses that chose to incorporate in Delaware and the lawyers that work for them. Experts also note the practice works to keep Delaware at the top of the corporate world as the state’s laws have been in place for more than a century.
In April, the DSBA’s Corporation Law Council proposed an amendment 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.
It was drafted in response to the Delaware Court of Chancery’s decision in February on a case that nullified provisions of a contract between a top executive and beneficiaries of a pension fund. It also grants the CEO veto power, potentially setting up a situation where a single shareholder can override a board of directors.
When Townsend filed the bill on May 23, it drew the attention of dozens of legal experts who traveled to Delaware to testify against SB 313 in the last weeks of the legislative session. But the Newark senator told DBT that the proposed amendment had been viewed by “more experts in the field than any legislation we receive ” when it was considered by the DSBA’s Corporate Law Council.
He added that the council had added more weeks to its timeline to host more discussion with law professors which is what delayed the bill’s filing. The DSBA’s Corporation Law Council proposed the amendment to address this on March 28. It was later approved by the association on May 16.
“In reality, the Delaware corporate law process is weeks and months prior to a bill being filed. I understand that many of my legislative colleagues would like to see bills early in the session and I agree with that,” Towsend said. “But there might be times where it’s important to respond quickly, and this was one of those times.”
Delaware heavily relies on its income and corporate taxes for revenues, with 68% of the Fortune 500 companies estimated to be incorporated in the state. Part of that reason, experts noted, has to do with the Chancery Court’s balanced approach while handling issues between shareholders and managers. Franchise taxes brought in $1.8 billion in Fiscal Year 2023 alone and lawmakers and state officials previously noted that it is critical to ensure that revenue stream remains strong.
But the question raised repeatedly throughout the hearings on SB 313 was whether this bill would strengthen that reputation or weaken it, especially as companies like Tripadvisor and Tesla were relocating to Nevada or Texas to reduce annual costs on incorporation.
Townsend said that SB 313 had nothing to do with Tesla’s decision to relocate out of the First State. He added that the bill was more about bringing the law to market practices as the chancellor who made the ruling on the case in February had to follow the statute.
“I think we, the General Assembly and the broader Delaware legal landscape, have to ask ourselves what weight we should grant to law professors around the country who might take interest and weigh in with theoreticals,” the senator said.
“If Delaware law becomes too pro-board management, stockholders won’t want to invest in Delaware companies. If Delaware law becomes too pro-stockholder, then people won’t want to serve as directors and officers of Delaware companies,” Townsend added. “You have to have a balanced approach to that so both want to be part of the Delaware corporate journey. And the legal industry of Delaware have to be spiritually in tune with the importance of that balance.”
