DOVER — Gov. Matt Meyer signed a bill that made controversial amendments to the corporate law Tuesday night, just hours after Delaware legislature approved the measure under the watchful eyes of corporate America.
The Delaware House of Representatives passed Senate Bill 21 without the multiple amendments proposed in the last week designed to offer more shareholder protections. The bill passed 32-7. Rep. Stell Parker Selby (D-Milton) was absent for the final vote as she continues to deal with apparent health concerns, and Rep. Madinah Wilson-Anton (D-Newark/Bear) did not vote.
Meyer reportedly arrived in Dover to sign the measure into law less than two hours after it passed. SB 21 was a top priority for his administration – it was announced last month as a way to ensure that Delaware continues to compete at the highest level for incorporating businesses while Texas and Nevada are shaping up as competitors.
“Delaware is the best place in the world to incorporate your business, and Senate Bill 21 will help keep it that way by ensuring clarity and predictability, balancing the interests of stockholders and corporate boards,” Meyer said in a prepared statement. The bill signing was closed to the press.
Delaware is the legal home to 2.2 million registered entities and 81% of all Initial Public Offerings (IPOs) were also incorporated in the First State last year. The corporate franchise tax and fees those companies and entities pay amounts to $2.2 billion of the state’s revenue. There are about 3,000 companies that pay the top of the franchise tax, collectively paying $670 million last year.
SB 21 offers revisions that would define “controlling shareholders” as those who own at least half of a company’s shares or a third of shares while also serving in a managerial role. It also limits the scope and time window for “books and records” requests and lowers the scrutiny to examine deals made with powerful shareholders, among other topics.
But many critics, including legal scholars and plaintiff attorneys, denounced the measure as a way to work around the Court of Chancery in light of major companies losing major disputes and being court-ordered to pay record legal fees as a result. In the last few weeks, there was a marketing campaign that decries SB 21 as a “giveaway for billionaires,” suggesting it weakens protections for retail shareholders and those who have pension plans and 401(K)s.
Rep. Krista Griffith (D-Fairfax) pushed back against this claim during her speech on the House Floor on Thursday night. She pointed out that there are thousands who work in legal services in the state, as well as a thriving small business industry, all of whom rely on the courts.
The residents who rely on the $2.2 billion in revenue from corporate franchise taxes and fees were the most important part of the equation to Griffith.
“[That] pays for our public education system, our roads, our health care for seniors, nonprofits…. We can’t afford to lose a single penny, because we need to make sure that we continue to protect them,” she said.
Griffith also reminded legislators of Delaware’s shifting economy in the last 30 years when there were car manufacturers and major banking and credit card companies hiring thousands of people in the state.
“Many of you remember MBNA was doing so well, they could afford to display an antique car right in their lobby. DuPont had scaled back by that point but still also employed thousands,” she said. “All of that is gone. It is never coming back. That shows how quickly economic opportunity can be lost.”
Amendments that failed
Several amendments were introduced in the last days of debate and all had failed, after being considered “unfriendly” by Griffith.
Rep. Sophie Phillips (D-East Newark) had proposed an “opt-in” measure, while Rep. Frank Burns (D-Pike Creek) proposed a provision that would change the effective date to when the bill was signed, instead of when it was proposed.
Burns told legislators that there was much confusion out there about when the “books and records” provisions would go into effect. Meta, which had first suggested reincorporating elsewhere in early February, reportedly is dealing with a “books and records” request right now.
This would be more “honorable and clean” and “takes us out of being accused of having done something that would intervene in some ongoing investigation,” Burns said.
Wilson-Anton proposed three amendments which included exceptions for the sale of a company or break up as well as “enhanced security” for such actions, as well as opening other options to dispute challenges from a conflicted board.
Wilson-Anton said she worried that the bill unamended would risk the corporate franchise, as it sends a message to the business world that Delaware was unable to trust an independent process from the courts.
“I think it risks federal intervention and regulation, and that would be, if we use the analogy that the corporate franchise is the golden goose, this would be in fact cooking that golden goose,” she said. “I sincerely hope that I am dead wrong.”
The path ahead
The impact of SB 21 will likely not be known for a while. The Delaware State Department has said that assessing the number of corporations here is an imperfect data point as it also includes the merging or dissolution of limited liability companies and other entities.
About 289,000 new entities were incorporated in the state last year, including 58,000 corporations, according to the Delaware Department of State.
However, supporters of SB 21 have pointed out that the “Dexit” is continuing – Simon Property Group was the latest company to make an announcement to leave the state through a proxy statement. The statement noted the “increasingly litigious environment” facing corporations incorporated in the state and that it “may distract from the Company’s core mission and redirect value from shareholders.”
Simon Property Group is one of the top payers of corporate franchise taxes, paying a quarter million each year to the state.
Opponents of the bill have since denounced it, including the Investor Protection for the Consumer Federation of America, a nonprofit coalition of consumer protector organizations.
“Delaware corporate law – which covers two-thirds of companies in the S&P 500 – has become one of the last mechanisms of corporate accountability, especially for shareholders. The Delaware Assembly clearly failed to protect investors with the passage of the Billionaire’s Bill,” Investor Protection for the Consumer Federation of America Director Corey Frayer said.
In the statehouse, Rep. Cyndie Romer (D-South Newark) summarized much of the contentious debate inside the state and at the broader world as confusing to determine the best course of action for the state. In particular, she took issue with the hyperbolic nature of both sides on this bill and how it “muddied the waters.”
“I went back and looked at last year’s corporate bill, and the sky was falling on both sides of that issue…. And now here we are, back to using the same exact verbiage to threaten, to have conversations,” she said. “It makes it really challenging for us to make the best decisions in regard to our constituents and all of Delaware.”
