HARRISBURG, Pa. Delaware is taking measures to maintain its reputation as the "corporate capital of the world" following a judge's rejection of Elon Musk's controversial Tesla compensation package. Critics, however, argue that the hastened legislation may undermine investor rights, particularly impacting pensioners and middle-class savers.
The Delaware House committee anticipated a vote on the proposed bill on Wednesday. Backed by Democratic Governor Matt Meyer, the legislation is designed to ensure that Delaware remains a "premier home for U.S. and global businesses" seeking incorporation. Proponents argue that the bill aims to modernize state law and restore equilibrium between corporate officers and shareholders in a state renowned for adjudicating business disputes for over a century. Currently, Delaware hosts more than 2 million corporate entities, including two-thirds of Fortune 500 companies.
Detractors of the bill, including institutional investors, pension funds, and asset managers, express concerns that it will diminish corporate governance standards and restrict shareholder rights, consequently limiting the capacity to hold corporate officers accountable for breaches of fiduciary duties.
In a significant case, a Delaware judge invalidated Musk's substantial compensation package from Tesla, potentially worth over $55 billion. Shareholders had sued, arguing that the package was awarded by a board lacking independence and supported by shareholders misled by biased disclosures in a proxy statement. Chancellor Kathaleen St. Jude McCormick's ruling led to Musk losing his position atop Forbes' wealthiest list, although he has since regained a high ranking.
Musk and Tesla are appealing the decision to the state Supreme Court, with Musk publicly urging companies to avoid Delaware for incorporation, instead favoring states like Nevada and Texas. This prompted multiple corporate lawyers to warn Delaware lawmakers about potential exodus, with some considering a "Dexit," as the trend has been named, suggesting startups may seek incorporation outside of Delaware.
Companies seem to be following Musk's lead. Tesla relocated its corporate listing to Texas post-shareholder vote, while both SpaceX and Neuralink followed suit to Texas and Nevada, respectively. Additionally, there have been reports of Meta Platforms, the parent company of Facebook and Instagram, contemplating a move to Texas, which it has not officially confirmed. Dropbox has already shifted its corporate listing to Nevada, and hedge fund founder Bill Ackman has indicated he would also exit Delaware.
On February 1, Musk announced on social media that "companies are flooding out of Delaware" due to the perceived anti-shareholder stance of the current Delaware judiciary. Nevertheless, critics assert that there is no substantial evidence to indicate that companies are departing Delaware en masse.
The proposed legislation introduces several changes. Firstly, it enhances corporate protections in conflict-of-interest cases, such as executive pay packages or intercompany agreements, when faced with shareholder lawsuits. Secondly, it limits the types of documents companies must present during court cases, making it more challenging for shareholders to access internal documents and correspondence, which could be burdensome for companies to provide and potentially detrimental to their legal positions.
Legal scholars like Eric Talley have compiled extensive lists of Delaware Supreme Court precedents that the new legislation could alter, while Lawrence Hamermesh, who assisted in drafting the bill, contends that only a few doctrines will be significantly affected.
An anticipated legal challenge is expected if Governor Meyer signs the bill into law. Meanwhile, institutional investors might leverage the new law to encourage the companies they invest in to incorporate elsewhere.
The implications of these legislative developments are important for Delaware’s economy, as corporate license fees and associated taxes constitute around one-third of the state’s revenue, approximately $2.2 billion. This revenue stream helps maintain Delaware's 0% sales tax and contribute to lower property taxes, which benefit industries such as vacation homes along its coast. Furthermore, Wilmington supports a network of corporate lawyers who thrive in the legal environment created by Delaware's Chancery Court and state Supreme Court.
