Dealmaking Scrutiny Overhaul Draws 11th Hour Compromise Bids

Opponents of a legal overhaul advancing in America’s corporate capital are scrambling to float compromise versions before Delaware lawmakers begin voting on the changes as soon as this week.

State Senate Bill 21 in its current form would lower judge-made guardrails around insider deals, restrict shareholder access to the texts and emails of company leaders, and strengthen a presumption that board members are independent of one another. The changes are aimed at mollifying controlling stockholders such as Elon Musk—who has lambasted the court system that cost him his $56 billion pay package—after news of several corporate departures to other states raised concerns about a “DExit” wave.

The legislation is expected to sail through the state Senate, where it’s set for a hearing Wednesday after clearing its first hurdle March 10. It also has the support of Gov. Matt Meyer (D). But a coalition of opponents is gearing up for a fight in the General Assembly. SB21 hit a snag Tuesday, when the state bar association’s executive committee—in an unusual step—took no position on it.

Shareholder attorneys, institutional investors, and scholars have opposed the bill and its aggressive rollout, which initially bypassed the ordinary legislative drafting channels.

“There hasn’t been a lot of reaching out,” said Columbia University law professor Eric Talley. “There seems to be a lot of digging in.”

The alternative backed by shareholder attorneys may not get a serious look unless the opposition succeeds in slowing SB21’s progress, according to University of Pennsylvania law professor Jill Fisch.

The proposal by the plaintiffs’ bar “doesn’t appear to me to be a basis for compromise,” said Widener University law professor Lawrence Hamermesh, a drafter of the version that’s now advancing. “In my view it’s time for the General Assembly to vote.”

More than 20 law firms representing “corporations, their directors and officers, and a wide range of investors” signed an open letter Tuesday supporting the bill in its current form.

‘Go Bananas’

The competing proposal began circulating within hours of SB21’s approval March 10 by a state bar committee that voted nearly 75% for the current version. The alternative measure would lower the bar for shareholders to get insider texts and emails, make rebutting the presumption of director independence more straightforward, clarify that certain landmark precedents remain good law, and ensure Delaware’s Chancery Court retains the full scope of its jurisdiction under the state constitution.

But making texts and emails more available looks less like a compromise than an outright reversal of proposed reforms to the state’s records access law—known as Section 220—that would lead “back to the same staggeringly expensive and time-consuming mess it’s in today,” Hamermesh said.

The version released by members of the plaintiffs’ bar would also partly rewrite a section restricting heightened legal scrutiny to take-private deals that forcibly cash out minority investors. The change—outlining “extraordinary transactions” functionally similar to take-privates—would close a loophole that could have swallowed the general rule, said Talley, who has offered his own alternative to SB21.

“If it’s one side of this arbitrary line, you get all kinds of scrutiny, and if you’re on the other you get a complete hall pass,” he said. “It’s a succulent temptation to go bananas on transactional design.”

Controlling Stockholder Definition

One thing the newest proposal leaves intact is the bill’s definition of a controlling stockholder: a person or entity with at least a one-third stake or the ability to designate a majority of directors. The bill’s supporters say the definition is about bringing predictability to an issue judges have tended to resolve on case-by-case basis, such as in the ruling last year that said Musk’s wide-ranging influence over Tesla Inc. made him its controller despite only a 22% stake.

Keeping those provisions in the bill reflects a good-faith effort to get to yes by addressing “the actual concerns expressed by the defense bar,” according to Friedlander & Gorris PA partner Chris Foulds.

But the category’s rigidity is a problem, said Fisch, who has come out against recent court decisions that require heightened scrutiny of even routine transactions involving controlling stockholders, such as CEO pay decisions. Rather than limit who’s a controller, the bill should have restricted that type of elevated scrutiny to meaningful conflicts of interest, she said.

It makes little sense for the definition to exclude preferred investors who sign agreements giving them authority over matters traditionally left to the board, according to Fisch. “There’s value in greater clarity, but greater clarity makes it harder to be fact-specific,” she said. “Instead of streamlining the analysis, the legislation tries to put in bright-line rules to take these decisions away from the courts.”

Talley said SB21 could backfire by undercutting the elite judiciary that has made Delaware home to nearly 70% of Fortune 500 businesses.

“That seems like, in an act of desperation, shooting yourself in the foot,” he said. “It might actually accelerate the rate at which companies leave.”

Delaware’s Brand

Proposals introduced by Talley and his Columbia colleague Jeffrey Gordon, meanwhile, would make the whole legislation opt-in. The approach is consistent with the broader brand in Delaware, which has “patented” a system of “enabling rather than mandatory” legal principles, according to Talley.

“Elon Musk doesn’t want any judge second-guessing him, and his stockholders believe he can do no wrong,” he said. “They want the version that gives him the most wiggle room. But what about the folks who think their founders are just humans? We can let the market decide which model works better, rather than having backroom scriveners cram the same rule down everyone’s throats.”

Hamermesh rejected the premise that corporate law should offer a separate system for iconic founders.

“I don’t accept the distinction about visionaries like Musk, if he’s even a visionary,” Hamermesh said. “This legislation is not simply about concern on the part of billionaires.”