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Lawmakers in Delaware have proposed new rules to help shield companies controlled by founders from shareholder lawsuits as the US state seeks to halt a string of high-profile defections.
The bill comes as the state, long considered a haven for incorporations, has faced losses of companies, including Tesla, TripAdvisor and Dropbox, to jurisdictions such as Nevada and Texas. Facebook owner Meta has also said it is considering a departure.
Two-thirds of S&P 500 companies are incorporated in Delaware, whose corporate law system has become the model for many other US states. Delaware judges rarely intervene in companies with widely dispersed shareholders. However, so-called controlled companies have faced more scrutiny, prompting some groups to consider relocating their legal bases to states seen as friendlier.
The proposed bill, which was posted on the Delaware General Assembly’s website on Monday, would make it more difficult for shareholders to show that a corporate director is “conflicted” in a deal, a legal status which makes it easier to prove the transaction was unfair to ordinary shareholders.
The legislation also provides an easier legal path for deemed conflicted transactions, which arise when a controlling shareholder seeks a deal where they may personally benefit, to repel shareholder litigation.
The law would also restrict access to the emails and text messages among directors, executives and bankers that often comprise the evidence upon which shareholder lawyers rely to bring lawsuits.
A separate bill asks the state’s bar association, which typically advises on changes to the Delaware General Corporation Law, to study potential reforms to fees paid to shareholder plaintiff’s law firms which can total in the tens of millions of dollars in winning cases.
The bill comes after several large technology companies, with founders serving as chief executive, had judges rebuke deals after shareholder lawsuits claimed the board had breached its fiduciary duties by siding with the controlling shareholder.
Elon Musk has strongly criticised the Delaware Court of Chancery, which hears corporate disputes, after his $56bn pay package was twice nullified by chancellor Kathaleen McCormick, each after successful shareholder approvals. The law firms which successfully brought the Musk pay lawsuit have been awarded a fee of more than $300mn, after they had initially requested $5bn. The case is now on appeal to the Delaware Supreme Court.
“Uncertain standards or barriers to responsible options that cause widespread frustration among Delaware companies are not helpful to anyone, especially to the stockholders who would not enjoy the value of Delaware’s legal protections at all if companies feel forced to relocate to less balanced jurisdictions,” said Delaware lawmakers who sponsored the new bill, in a statement.
The legislation has been accelerated in recent weeks after large New York law firms told their Delaware counterparts that corporate proxies to be sent in coming weeks in advance of annual shareholder meetings could contain additional company proposals to reincorporate outside of Delaware, according to several people familiar with the matter.
Earlier this month, the Delaware Supreme Court ruled that controlled companies had the freedom to move their corporate domicile without facing penalties sought by aggrieved shareholders.
Charles Elson, a veteran Delaware-based corporate governance expert, said he expected a tussle over the proposed changes to the corporate law, which he described as a dramatic upheaval in norms in Delaware where typically courts develop transaction standards through opinions.
“The legislation destroys our reputation for neutrality and balance,” said Elson.
