As I listened to the debate on Senate Bill 21 after tending to my daughter Tuesday night, I couldn’t help but remember a similar debate the General Assembly had last year.
That debate was another corporate law amendment: Senate Bill 313, and it was controversial for its time, as it dealt with granting companies’ power to enter into contracts with one or more stockholders. At the time, national media and several legal experts and lawyers turned their attention to Delaware to see the bill eventually become law.
I’m not a lawyer, but I have now spent a very good chunk of my time listening to lawyers and legal experts and reading on the matter. What strikes me today is that Charles Elson has testified on both SB 313 and SB 21, and as of last week, he warned legislators that “if we change the rules for companies, they will keep asking for more changes.”
Now, two years may make a trend, and it may not. But here’s a trend: in my five years of reporting in Delaware, not until last year had I started to report on the routine changes in the corporate law.
This year, the process this bill has gone through since it was proposed on Feb. 17, is quite remarkable. It was proposed, then sent to the Delaware State Bar Association for review, then it passed easily with no debate in the Senate and with more debate in the House.
All within the span of six weeks. The governor, who had been on national media talking about the issue, had signed it two hours after the House passed it.
For reference: SB 313 was introduced in May 2024, after the state bar association had voted on the proposal. It passed through both chambers by the end of June, and the governor at the time signed it in July.
When people ask me about this bill and what it means, it’s hard to say what it does. All indicators tell me we will likely not know the response until at least a year from now when publicly-traded companies hold annual shareholders. At worst, we may not see whether large investor institutions like California Public Employees’ Retirement System (CalPERs) will move out of the state, years down the road.
Digging back in history, there may be only one other case that was considered as seismic. That was when the state amended the corporate law to introduce 102(b)(7) – a section that was established in 1986 that limits director liability during litigation when companies are seeking damages.
That provision came from Smith v. Van Gorkom, a case where shareholders brought a class action lawsuit against Trans Union Corporation CEO Jerome Van Gorkom for apparently leveraging the value of the company for merger and buyout negotiations, with no evidence in how he came up with the company valuation, with the support of the board of directors. The state courts found that the directors were “grossly negligent” because they approved the deal without looking closely at it or seeking expert advice. The directors agreed to pay out $23.5 million in damages.
Apparently, the decision triggered an outcry from board of directors from public companies as it made them personally liable for company decisions. It also caused a sharp increase in insurance premiums. And much like we have seen in the last two years, the state bar association and the legislators had created a law that granted companies incorporated in Delaware to adopt charter amendments that relieve directors from being personally liable for breaches of “duty of care.” This provision in the charter must be approved by the shareholders.
I have heard that instance – shaping what eventually would become section 102(b)(7)- was the biggest overhaul of the state’s corporate law at the time, and the time between first discussions and the bill passing took a year in all. Of course, I was not there, so like usual, I take that with a grain of salt.
Interestingly, there’s an oral history project by University of Pennsylvania Carey Law School about this process with interviews with former Chief Justice E. Norman Veasey of the Delaware Supreme Court as well as Steven Lamb, a former Chancery Court Chancellor.
Those recollections of this subsection suggest that Veasey saw the trend of hostile takeovers and that the Van Gorkom case was the tip of the advisor. The justice alerted the then-chairman of the corporate law chairman of the state bar about the rising insurance costs that were causing directors to be worried for their livelihoods.
Veasey, who was a partner at Richards, Layton & Finger at the time this case was decided, wrote a memo on the indemnification’s statute in February and then to the state bar association in May. He told his interviewer that crafting the legislation was a collaborative process among many academics and lawyers, but it was critical that it had no effect on the court of chancery’s ability to block transactions that were in violation of the duty of care.
“It was a selling point. And it was an important point in corporate governance. If you have–if there is a deal being made where the directors of the target company, for example, were negligent in how they considered something, the court could step in upon the application of the plaintiff, and adjoin that transaction,” Veasey said.
There’s more but I think you can see a lot of the parallels in our recent conversation about the ability of the Chancery Court and drafting these laws. In Lamb’s oral history, there were still issues in determining what constituted good faith – and there were court cases on the issue between 1997 to about 2006.
Again, I’m not a lawyer. I do however believe that taking the time for more thoughtful debate on issues instead of moving at the speed of light on a matter that would have unknown impacts for years to come.
It’s hard to say how this process differed from the explosive case in 1985, because what I have immediately available shows that much of it was the same, except two key matters: SB 21 came from the legislative branch before the bar association, and it was done within the matter of weeks versus months.
Both of those facts should give us pause by the time we assess the next corporate law bill next year.
