Delaware Judge Weighs Sending Corporate Overhaul to Justices (2)

A major overhaul of Delaware’s best-in-class corporate laws that bitterly divided the state’s legal community earlier this year may be on a fast track to its top court.

The chief judge of Delaware’s elite business court, Chancellor Kathaleen St. J. McCormick, said Thursday that she’d like the Delaware Supreme Court to weigh in on a constitutional challenge to the law, state Senate Bill 21. The legislation, which took effect in late March, replaced several longstanding legal guardrails around insider transactions with a safe harbor for dealmakers.

The safe harbor and another section making the bill retroactive have been targeted by multiple shareholder lawsuits that say they violate several provisions of the state constitution, including a clause prescribing the jurisdiction of Delaware’s Chancery Court. McCormick, who’s overseeing the first challenge—a case taking aim at Dropbox Inc.'s departure from Delaware—said the state’s justices should get the first crack at those legal theories.

But because the company and leaders including founder Andrew Houston have asked McCormick to throw out the case without ruling on the validity of SB21, she invited them Thursday to make their views known. Their responses are due May 29.

The Dropbox case, parallel suits involving Korean sportswear giant Misto Holdings Corp. and a BlackRock Inc. joint venture, and others likely to follow will force Delaware’s judges to grapple with the limits on their power in the shadow of an unusually direct legislative push to rein in their know-it-when-I-see-it discretion. Moving the case to the high court would shift that fraught responsibility from a trial judge to a tribunal with the power to deliver binding precedent.

Dealmakers have blamed recent rulings by McCormick and one of her colleagues, Vice Chancellor J. Travis Laster, for uncertainty about what counts as a board conflict of interest and when a minority investor may be a controlling stockholder subject to elevated scrutiny. Many scholars and members of the plaintiffs’ bar have called those criticisms unfair.

Senate Bill 21

The bill’s aggressive rollout in mid-February sought to reverse the perceived legal swing toward public investors who can gum up the corporate works by bringing shareholder cases. It followed a panicked response to news two weeks earlier that Dropbox, Bill Ackman’s Pershing Square Capital Management, and Meta Platforms Inc. were eyeing other states—a phenomenon dubbed “DExit.”

Gov. Matt Meyer (D) enlisted a panel—including ex-judges now practicing law at firms linked to Elon Musk and Mark Zuckerberg—to draft the law, which also reduced shareholder access to director communications and strengthened a presumption they’re capable of independent corporate oversight.

Nevada, known for lax liability rules, and Texas, which recently set up its own business court, are the alternatives getting the most buzz. Musk moved Tesla Inc. to Texas in June 2024 and spent a year slamming Delaware’s judiciary after a $56 billion court loss.

Backing the legislation was a coalition of white-shoe firms, private equity lobbyists, and the state’s political establishment, all sounding the alarm that a judicial crackdown on self-dealing has made even routine transactions onerous. Shareholder attorneys and institutional investors argued unsuccessfully that the “billionaire’s bill” would backfire by tying judges’ hands and giving oligarchs a blueprint for end-running court rulings.

The pension fund leading the Dropbox litigation, the Plumbers & Fitters Local 295 Pension Fund, is represented by Prickett, Jones & Elliott PA and Kessler Topaz Meltzer & Check LLP. Houston, Dropbox, and other members of its board are represented by Wilson Sonsini Goodrich & Rosati PC.

The case is Plumbers & Fitters Local 295 Pension Fund v. Dropbox Inc., Del. Ch., No. 2025-0354, 5/22/25.