Musk Appeasement Gambles Delaware’s Corporate Golden Goose

A proposed shift in legal power from smaller investors toward moguls like Elon Musk is dividing Delaware’s business community over the state’s future as America’s corporate capital.

State Senate Bill 21, unveiled in February, would limit judges’ discretion to scrutinize insider deals, shrink the category of documents available to shareholders, and make it harder to prove boards are beholden to a dominant force like Musk. The proposal follows Musk’s year-long crusade against the court system that cost him $56 billion.

A split has emerged over whether those measures would save or kill Delaware’s golden goose—corporate franchise taxes generate about 25% of the state budget—after news of departure plans by Meta Platforms Inc. and Dropbox Inc. Backers including Gov. Matt Meyer (D) say the bill will slow the “DExit” momentum, but opponents describe it as a coup by powerful controlling stockholders against the elite Delaware Chancery Court.

The statute “will blow up everything that makes Delaware special,” Tulane University law professor Ann Lipton said. “Corporate managers are essentially declaring, ‘No gods, no masters.’ It reflects an attitude that laws simply cannot contain the people at the top of the corporate hierarchy, so it’s useless to try.”

Bernstein Litowitz Berger & Grossmann LLP partner Jeroen van Kwawegen, who helped overturn Musk’s compensation, referred to SB21 as a “major rewrite of corporate law designed to transfer value from public shareholders to corporate insiders.”

“I’ve called it a license to steal,” he said. “That’s exactly what it is.”

Controlling Stockholders

Widener University law professor Lawrence Hamermesh, a drafter of the legislation, said it will restore the balance between dealmaker flexibility and fairness for investors, leaving corporate law “where it was 10 years ago.”

SB21 targets the swing toward shareholders, particularly the Musk decision—saying his influence over Tesla Inc. made him its controlling stockholder with only a 22% stake—and a ruling involving Match Group Inc. that upheld heightened scrutiny of even routine transactions involving controllers.

Delaware’s defense bar reacted to the decisions with alarm, saying they made insider deals onerous while leaving no way to predict who’s an insider. The bill shields most transactions—excluding go-privates—from review if they get board or shareholder approval at virtually any time, rather than requiring deals to be conditioned on both in advance.

It also restricts when a minority stockholder can be considered a controller—requiring either a one-third stake or a board majority—and strengthens the presumption of director independence. At the same time, the law could handcuff shareholders by significantly raising the bar for accessing emails and texts they need to overcome that presumption.

There were ways to reverse Match with less collateral damage, said Columbia University law professor Dorothy Lund. “I think Match was wrong,” she said. “I would’ve decided the Musk case differently. But this is overkill.”

DExit

The repudiation of landmark precedents targeted by Musk’s anti-judge campaign is contributing to an atmosphere of recrimination. SB21’s rollout bypassed the usual vetting process by the influential Corporation Law Council.

The fast track is about DExit, said Hamermesh, who downplayed data suggesting the trend is overstated. He cited “the sheer extent of discontent in boardrooms,” saying the upcoming proxy season will start revealing the iceberg.

“People in Delaware don’t want to wait until we’re past the tipping point,” Hamermesh said.

But lawyers for billionaires are drumming up false urgency through “a whisper campaign” that defies reality, said Labaton Keller Sucharow LLP partner Mark Richardson.

Van Kwawegen called the process an ambush by “sore losers.” The mass exodus narrative is “fake news,” he said.

The council, which ultimately got the chance to fine-tune the bill, delivered tweaks Monday. But the initial end run squandered an opportunity to get broader buy-in, Lund said.

‘Extraordinary Rebuke’

Even more striking than the pivot toward insiders would be Delaware’s overnight turn toward inflexible statutes, away from “textured and interesting and responsive” reasoning by a specialized judiciary, Lipton said.

“It’s an extraordinary rebuke to the judges,” she said. “They’re gutting the common law method of corporate governance in favor of an off-the-rack approach. You can argue about whether that’s good or bad, but one thing it’s not is Delaware.”

Lawmakers seem to be saying, “We can’t trust our judges, so we need bright-line rules,” said Lund. That would undermine Delaware’s “secret sauce"—its bench—making it easier for states like Nevada and Texas to compete, she said.

Hamermesh acknowledged the downsides of “greater prescriptiveness,” though he said the courts will still play a major role.

“Legislation is inherently sloppy,” he said. “But the basic substance is sound.”

Legislative Battle

The proposal is expected to sail through the state Senate, which reconvenes March 11. A rapidly mobilizing opposition makes its chances less certain in the General Assembly.

In the meantime, the bill’s opponents are highlighting its ties to Richards, Layton & Finger PA, a firm handling Tesla’s compensation appeal.

“A couple of people sit in a room, they have RLF write the law they like, and they push it through,” van Kwawegen said.

Hamermesh said the “scrivener,” RLF partner John Mark Zeberkiewicz, is a skilled drafter not involved in the compensation case. The firm stressed in a statement that it represents Tesla, not Musk, and emphasized its “responsibility to provide our deep institutional knowledge” to ensure “Delaware remains the preeminent jurisdiction for incorporation.”

“Our assistance was not on behalf of or influenced by any client,” the statement said.

The potential authorization of post-deal shareholder “ratification” has amplified suspicions it’s about Musk, who tried to revive his pay on those grounds. But applying the law to Musk retroactively would happen “over my dead body,” Hamermesh said.

Monday’s version of the bill specifies that the amendments won’t automatically cover ongoing cases, but it explicitly gives judges permission “to reach an outcome consistent with one that would be dictated by this act.”

“To suggest this isn’t related to Elon Musk is just gaslighting,” Richardson said. “The governor said so himself.”