DOVER — After an hour of discussion and arguments from the founder of Delaware’s center of corporate governance and a former chancellor of the Court of Chancery, Senate Bill 313 passed the House.
The final vote was 34-7 on Thursday night. SB 313 now heads to Gov. John Carney for his decision, and officials in his office told the Delaware Business Times last week that he will sign the bill.
Rep. Krista Griffith (D-Fairfax) who led the bill’s efforts through the House after it easily passed the Senate last week, said after the bill passed that SB 313 was a key part in addressing the evolving needs of the business community while protecting the interests of consumers, investors and the economy as a whole.
“The companies that incorporate in Delaware and bring businesses and employers to the state are integral to the economy,” she told legislators on Thursday night. “The franchise [fees] represent the largest combined source of state revenue with $2 billion in taxes and feeds and more than $600 million in abandoned property. Delaware has such a prominence on a national stage in the business community because of its reputation for being consistent, intelligent and responsive when needed.”
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.
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.
But what complicates matters is the Delaware Court of Chancery’s recent decision in 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. This case is still under post-trial proceedings but it is likely to be appealed.
Delaware’s Court of Chancery, made of seven judges, are asked to deliberate on corporate matters using a foundation of more than a century of law and decisions in a decisive manner. Its decision on that case prompted the Delaware State Bar Association to propose a new section that would expand the rights of what contracts corporations can enter, though it exempts any litigation pending on or before Aug. 1.
Rep. Madinah Wilson-Anton (D-Newark/Bear) who led much of the outcry against the bill, argued Thursday night that the passage of SB 313 would step in on an issue that has yet to be fully settled by the courts. She also said that the bill would continue to allow the thousands of attorneys that work in Delaware to work with companies that incorporate here to write contracts that could not be enforced.
“I think what we’re being asked to do here is to bail out lawyers who wrote illegal agreements instead of having them deal with the consequences of their actions,” she said. “As legislators, we should never be passing laws to legalize behavior after the fact.”
Charles Elson, who founded the University of Delaware’s Weinberg Center for Corporate Governance and has served on several board of directors and advised many others, testified a third time before legislators that he thought SB 313 would threaten Delaware’s dominance in corporate litigation matters.
“This kind of revision hasn’t taken place since the 1980s, and that took two years of back and forth and compromise. This has taken two months, and I don’t believe there’s significant enough debate or attempts to compromise,” he said. “Decisions on corporate law should not be a ballgame, because it’s our bread and butter … It constitutes 67% of our revenues, and it’s the reason we don’t have a sales tax.”
He again argued that Delaware corporate law has focused on investor protection, as people would be reluctant to invest if they were wary over the board of directors charged with managing their money —especially those who were not financially sophisticated to do so. About 30 years ago, Elson said, shareholders started to spread into large institutions and mutual funds and Delaware’s courts have served as an equalizer to keep the companies in check.
“I always thought that saved Delaware from federalization many years ago: that we were very balanced between shareholder prerogative and managerial director prerogative. It’s a delicate balance,” Elson said. “… any time you shift one way or another, that veneer of neutrality disappears. You basically lose the basis and the trust of the system itself.”
Meanwhile, former Chancery Court Chancellor William Chandler, testified that he had faith in the Delaware Corporate Law Council, the body that drafted this amendment, and thought it was continuing to work to keep the First State ahead of the rest in corporate law matters. Chandler has served as a partner at Wilson Sonsini Goodrich & Rosati since 2011.
“I believe deeply in the process. These are experts who have one mission: to keep Delaware up-to-date and to keep our laws predictable, certain, reasonable and fair … right now, the corporate market is not feeling good about Delaware because of the uncertainty and unpredictability of a few decisions by just two judges.”
In recent weeks, Two Chancery Court judges, including Vice Chancellor J. Travis Laster and Chancellor Kathaleen McCormick, have written publicly and to the state bar regarding their concerns about the new amendment. Many other lawyers have written detailed memos and briefs on their concerns, as well as testifying for hours before both the House and Senate Judiciary committees.
“As chancellor, I was taught that judges need to stay in their lane and need to be applying the law [legislators] give them,” Chandler said. “Judges don’t need to intrude upon the process of law, because if they do they become the makers as well as the appliers.”
If SB 313 did not pass, Chandler predicted that it would send a message through the corporate law world that the House of Representatives had the final word over how stable the corporate structure in Delaware was.
“The headlines will read that two judges and a lot of law professors succeeded in convincing [legislators] to vote down changes to corporate law that would have preserved the continuity and stability that we have known,” he said.
SB 313 passed with seven dissenters: Wilson-Anton, Rep. Sherry Dorsey Walker (D-Wilmington), Rep. Larry Lambert (D-Claymont), Rep. Sean Lynn (D-West Dover), Rep. Eric Morrison (D-Glasgow/Middletown), Rep. Sophie Phillips (D-East Newark/Christiana) and Rep. Cyndie Romer (D-South Newark).
