DOVER — The controversial Senate Bill 21 which could forever change corporate law in the First State was released from committee this afternoon after rigorous testimony from Delawareans and attorneys alike. The bill will be heard by the Senate on March 13.
While some urged lawmakers to pass the bill in hopes of protecting the state’s corporate franchise tax, corporate lawyers argued that it would weaken protections for ordinary shareholders.
Governor Matt Meyer swiftly reiterated his support of the bill in a public statement released within minutes after the Senate Judiciary Committee released it for a full Senate vote. Retaining corporations in the state was a fight Meyer took on within hours of being sworn into his new role and he has reportedly heard from many C-suite level executives with concerns about whether the Court of Chancery remains a fair venue for companies.
In the statement, Meyer said that Delaware had been the most desired state for businesses to incorporate because of the state’s nimbleness to meet the market demands.
“Today, we are in one of those moments. We must once again demonstrate why we retain an unparalleled reputation for clarity, predictability and fairness in global markets,” Meyer said. “That is why I am urging both chambers in the state’s legislature to move with the urgency this issue deserves and to pass Senate Bill 21 as quickly as possible.”
SB 21 offers significant reforms to corporate law, such as defining “controlling shareholders” as those who own at least half a company’s shares or a third of shares while also serving in a managerial role.
The bill lowers the bar for corporate action by those controlling shareholders, requiring them to receive approval from the shareholders by a vote or by independent board members. It also limits “books and records” requests, which relate to how plaintiffs suing companies can obtain files and communications to build their case. The window would be reduced to three years, as well as increasing rules on what documents can be obtained.
If passed, SB 21 would not impact any court proceedings on or before Feb. 17.
In the last weeks, there was debate on how the bill was proposed. Typically, the corporate law council of the Delaware State Bar Association (DSBA) votes on amendments and then brings it forward for a full vote.
SB 21, however, was drafted by lawmakers with input from Widener University Delaware School of Law Professor Lawrence Hamermesh and former Chancellors Leo Strine and William Chandler III. Strine and Chandler both work at high-profile law firms that represent major corporations.
On Tuesday, Bloomberg reported that the DSBA voted to take no position on SB 21. But the state bar association later took to social media to announce that it has unanimously approved the request of the Corporate Law Section, citing a bylaw that deals with circumstances where the committee makes a recommendation on a matter of policy but the executive committee has determined to take no position.
The debate
Senate Majority Whip Bryan Townsend (D-Glasgow/Newark) framed the bill as a way to offer clarity on matters that have been left for lawyers to litigate and for the Chancery Court to decide. But in the weeks since, a major grassroots campaign from plaintiff lawyers have argued that this will weaken protections for pensioners, ordinary shareholders and institutional investors.
Those opponents point out that SB 21 comes after Tesla founder Elon Musk had been harshly criticizing the court since the Chancery Court threw out a $56 billion pay package. Musk is appealing the case, but Tesla has already reincorporated to Texas. Reportedly, Meta and Dropbox are also considering leaving Delaware.
Jim An, a former judicial clerk of the Delaware Supreme Court and lecturer at Stanford Law School, bluntly called SB 21 “a shakedown” that was preying on the state’s fear.
“That’s why each of you have been told that Delaware is on the precipice of disaster if Delaware doesn’t pass this bill. You’ve been told that this will keep a few more corporations and a few more franchise dollars,” An told the Judicial Committee. “In the Bible, Judas bought a farm with his 30 pieces of silver. Was that farm worth it?”
“What I think if you vote on this bill, you will enable billionaires like Elon Musk and other controlling shareholders to take advantage of retirees and ordinary investors,” he added.
Much of the debate over the past month has been on what proof state officials have that a “Dexit” was underway, with law professors conducting their own research in the last year that shows that the company’s board of directors are dismissing the idea. Chief Justice Collins J. Seitz, Jr. told legislators in February that both the Chancery and Supreme Courts have never been busier—and that it was impossible to make all parties in a legal dispute happy.
But legal experts like Amy Simmerman who were invited to testify, told the senate judiciary council that by the time there is hard data to prove companies will leave unless something is done, it will be too late.
“In the past five years, I’ve seen a growing frustration with the direction of Delaware law among clients, and conversations have gotten much more serious in the last 18 years,” said Simmerman, a Delaware native and a partner at Wilson Sonsini Goodrich & Rosati. “Before the proposed legislation was announced, I had 15 significant companies talking about reincorporating. If those companies went, we can be assured that others and our client base would follow.”
Simmerman added that many clients were trying for years to plan around the intricate case law that made the bedrock of Delaware’s corporate laws, but it’s not working.
“The judicial process isn’t best situated to fix this, with no disrespect. We need a statutory reset,” she said.
Joel Friedlander of Friedlander & Gorris, which represented institutional investors from Fox Corp. in a lawsuit against current and former Fox executives over election defamation suits, pushed back against that claim that SB 21 was a course correction.
Friedlander said that a decade ago there were a lot more avenues to challenge self-dealing transitions and law firms did not need “compelling need” to get access to internal documents to challenge self-dealing transactions.
“What clients of big firms like Wilson Sonsini have figured out is that if their clients don’t like the Delaware Supreme Court rulings when they make their views present and get rejected, they can just come to the legislature to overturn the Delaware Supreme Court,” he said. “That is bad business for Delaware to be in.”
The franchise tax
Much of the debate that supported Meyer and the bill came from Delawareans that represent key trade organizations like the Delaware Healthcare Association, Home Builders Association of Delaware, Delaware Volunteer Firefighters Association, Central Delaware Chamber of Commerce, New Castle County Chamber of Commerce and Kent-Sussex Leadership Alliance.
All referenced the corporate franchise, which brought in $2 billion in revenue last year and 250,000 more entities had incorporated in the state. In the past, the Delaware Department of State told the Delaware Business Times that judging how many companies are incorporated in the state was a flawed measure of the current climate on the Chancery Court.
Entities can merge or become void by failing to pay taxes on time, converting from limited liability companies to corporations, as well as dissolve, they explained. Franchise fees are paid quarterly, so it would take years of measuring trends to see whether companies still believe in Delaware’s court system.
Without the billions of dollars from the franchise, Delaware would likely struggle to find a quick solution for the potential shortfall. Delaware Volunteer Firefighters Association President Tom Di Cristofaro testified for SB 21 to bring that issue to light.
“We are gravely concerned by reports of major corporations leaving Delaware, recognizing the significant impact on state revenue. As front-line responders and a grant-in-aid nonprofit, we cannot absorb any further budget restrictions,” Di Cristofaro told the senators. “We fear without [the bill] unavoidable service cuts will be necessary if future funding is not secured.”
Senate Bill 21 is set to be heard in the senate on Thursday afternoon.
