I am the General Counsel of the Council of Institutional Investors. We are a nonprofit, nonpartisan association of U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments.
Together, our members manage approximately $5 trillion in assets. They are major long-term investors with a duty to protect the retirement savings of millions of workers and their families, including public pension funds with more than fifteen million participants – true “Main Street” investors through their pension funds.
Our members have long supported the Delaware franchise and its balanced approach to protecting the rights of shareholders while providing flexibility and certainty to corporate boards and executives. We are deeply concerned about Delaware Senate Bill 21, which upsets that balance.
As long-term shareholders with significant investments in Delaware corporations, the Council and its members share the view that corporate governance structures and practices should protect and enhance corporate executives’ accountability to shareowners. We believe that a hallmark of the Delaware General Corporation Law is the careful and deliberate nature in which it is adopted and enforced, including the ways in which Delaware law balances boards’ decision-making with accountability to shareholders overseen by the expert judges of the Delaware Court of Chancery and the Delaware Supreme Court
We share the concern expressed by some commentators that SB 21 is a direct rebuke to the Delaware courts and the body of case law developed by those courts. More specifically, some have estimated that the provisions of SB 21 would overturn over thirty Delaware Supreme Court decisions made by different judges over a period of more than forty years. We believe that SB 21 would also limit the Delaware courts’ discretion to provide equitable relief in future cases involving transactions between a company and its controller.
By overruling decades of Delaware precedent and limiting the Court’s ability to grant equitable relief going forward, SB 21 could make Delaware substantially less attractive to institutional investors when evaluating where the corporations that they own should be incorporated. As one commentator has noted, “from the perspective of Delaware’s interest in maintaining its leading position in the market for incorporations, in the long-run, this legislation could backfire and operate to undermine Delaware’s position.”
One of our particular concerns is that SB 21 creates a strong presumption that a director deemed independent under stock exchange rules would be presumed disinterested unless strong, particularized evidence proves otherwise. We believe the stock exchange rules for director independence are inadequate and do not contemplate the many potential situations where a director technically qualifies as “independent” yet may be subject to significant inherent bias.
As one example, we note the views of a commentator “about relying on stock exchange standards . . . [when] a board’s independence determinations are based on director questionnaires [that] [w]hile generally reliable, . . . can fail to account for undisclosed conflicts.” Given the importance of ensuring that decisions made at the board level are impartial and free from bias we believe consideration should be given to adopting a more exacting definition of what constituents an independent director consistent with the Council’s longstanding independent-director definition.
If Delaware is to remain a widely respected leader in corporate law, particularly from the perspective of long-term institutional investors, we believe it is imperative that SB 21 not be enacted in its current form.
Jeffrey P. Mahoney joined the Guest as general counsel in 2006. His responsibilities include advocating the Council’s membership-approved policies before standard setters, regulators, members of Congress, and other policymakers.
