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Controversial corporate law bill moves to final vote

Katie Tabeling
Delaware Legislative Hall. | DBT PHOTO BY JACOB OWENS

The Delaware House of Representatives is set to make a decision on SB 313, a controversial change to the state’s corporate law that may impact how millions of companies incorporated in the state do business. | DBT FILE PHOTO BY JACOB OWENS

DOVER — Senate Bill 313, which corporate legal scholars argue will shift how the board of directors oversee millions of companies that do business as Delaware corporations, is set for a floor vote in the House of Representatives today. 

The potential vote is set at the end of a long agenda in the House after a contentious House Judiciary committee hearing on Tuesday raised questions about the late timing of the bill on a complicated issue. Rep. Franklin Cooke (D-Newport/New Castle) made his displeasure known at the committee hearing, but voted to release the bill so his other colleagues would be able to hear the complex issues.

“I know how complicated this is, because it’s very complicated to me, and I don’t appreciate it on June 18. I need my other colleagues to hear this completely,” Cooke said during the hearing. 

SB 313 passed out of committee with a vote of 6-4, with one member absent. It proved to be a more contested matter than hearings in the Senate where it passed unanimously last week.

There are five legislative days to go and legislators are now looking at a race to the finish line. The Joint Finance Committee has also released the operating budget bill, which includes $6.1 billion in operating expenses, on the same day SB 313 was released from committee.

SB 313 creates a new subsection of the state corporation law 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. Critics say it could grant veto rights to one or more stockholders or even prospective stockholders.

Traditionally, the corporate law is amended each year with little fanfare. But this time, the proposed legislation alters the balance of corporate governance, allowing corporations to enter into these types of stockholder contracts without being required to disclose such provisions in the certificate of incorporation.

At the heart of the matter is the Delaware Court of Chancery’s recent decision in West Palm Beach Firefighter’s Pension Fund v. Moelis & Co. In February, that decision nullified provisions of a contract between global investment bank Moelis & Co and its chief executive officer and required the CEO to sign off on any major corporate decisions. It also granted the CEO veto power, potentially setting up a situation where a single shareholder can override a board of directors.

The decision issued by the Chancery Court rendered parts of the contract invalid because these veto powers should have been outlined in the company’s charter, according to an opinion written by Vice Chancellor Travis Laster. The Moelis case is currently in post-trial proceedings, but it will likely be appealed to the Delaware Supreme Court. 

According to Srinivas Raju, the chair of the Delaware Bar Association’s Corporation Law Council, SB 313 would have no impact on Moelis  since the bill exempts any litigation pending on or before Aug. 1.

Around 2 million companies have incorporated in Delaware, in part because of its robust legal foundation that it has built since 1899 and built on through case laws and legal opinions. While companies can choose to have corporate and fiduciary disputes handled in their home state or Delaware, many choose to do so in the First State to have it heard by the top corporate legal experts in the country.

That, Raju told the House Judiciary Committee, would still be an open door for shareholders even if SB 313 passes.

“With respect to the stockholder agreements, it’s a fundamental aspect of contract law that a contract only binds those who are parties to the contract. If I want to bring a breach of fiduciary duty action against the board, I can still sue in Delaware,” he said. “It does not restrict my ability to bring my claims.” 

Some representatives were skeptical of the bill, specifically with the timing of the proposal coming to a vote weeks after the Moelis decision. Rep. Madinah Wilson-Anton (D-Newark/Bear), who is not a voting member of the committee, still questioned that point, noting that she has seen several memos pointing out that thousands of these contracts now challenged under Moelis  had issues.

“I can personally say to the committee that I’ve seen several memos from years back with the precise warning that these agreements are unenforceable and the central case on this issue is almost 70 years old. Why didn’t these drafting attorneys know the law,” she asked.

Rep. Cyndie Romer (D-South Newark) also posited that not enough time had passed between Moelis  to move forward to address a perceived issue.

“If I didn’t know something was illegal, I might not know to file a complaint or what my rights are. I am concerned there hasn’t been enough time to see how this plays out. Maybe there’s stakeholders that feel they’ve been wronged and don’t see a path,” Romer said.

The House Judiciary Committee Heating brought many legal experts once again, most notable among them Charles Elson, the so-called “Godfather” of corporate law. Elson founded the University of Delaware’s Weinberg Center for Corporate Governance and has served on several board of directors like Circon Corporation, Sunbeam Corporation, AutoZone and more.

He told the Delaware Business Times in a later interview that while he never testified before the state legislature, he thought SB 313 was too important to sit out, as the bill was more dangerous than just changing the rules on how these matters are settled, it would put the state’s reputation of a fair day in Chancery Court at risk.

“There is no industry in the state, no local business, that would influence the court one way or another, and it’s not true in other states. You have great expertise in this area, as well as a long line of decisions that ensure that,” Elson told DBT. “We’ve been viewed as a neutral court that’s quick to resolve disputes, and more important disputes. And recently, the court has been viewed as balanced between shareholder prerogatives and managerial control.”

Elson also said that the bill could open doors to have the federal government make new regulations to settle issues. A little more than a decade ago, shareholders gained more of a say on the company’s board via proxy access. That stemmed from the federal government passing more regulation on areas of corporate law, including in Delaware’s jurisdiction.

Elson expressed concern that SB 313 could lead to broader federalization of areas traditionally regulated by Delaware corporate law, like seen in the past.

“If issues like that go to the federal courts, it goes to judges who have very little corporate law experience and they’re susceptible to local pressures,” Elson said. “Those judges are products of their localities. If you’re in front of the [Chancery Court], you knew it would be handled in a neutral and fair fashion. I’ve had decisions I disagreed with, but I couldn’t disagree with the integrity of the judge that’s a product of our system.”

The debate scheduled on SB 313 is set for Thursday afternoon. 

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