Musk-Linked Corporate Law Overhaul Criticized by Delaware Judge

A Delaware judge sharply criticized a major overhaul of corporate law—shifting legal power toward business leaders like Elon Musk—saying the legislation drew arbitrary bright lines that will undermine the predictability it’s meant to foster.

Vice Chancellor J. Travis Laster spoke about the changes at Fordham University School of Law on Wednesday evening, less than 24 hours after Gov. Matt Meyer (D) signed a bill designed to lower the guardrails around insider deals, reduce shareholder access to texts and emails of board members, and strengthen a presumption that they’re legally independent.

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Meyer proposed state Senate Bill 21 in mid-February in response to fears that a recent court crackdown on corporate self-dealing might drive an exodus from Delaware, which funds more than a quarter of its budget with billions in corporate fees. Musk responded to a decision voiding his $56 billion pay package last year by assailing the state’s elite business court, moving Tesla Inc. to Texas, and urging others to follow, a phenomenon dubbed “DExit.”

Laster, one of seven specialist jurists serving on Delaware’s Chancery Court, referred obliquely to Musk at several points, though never by name. It’s fair game for politicians to act with an eye toward the state’s role in the corporate ecosystem, but judges need to rule on the merits without fear or favor, he said.

“I want judges to be applying the rule of law, not the rule of whom,” Laster said to applause. “The suggestion that a court should approach decision-making that way, to me, is far closer to corruption than any sense of judicial decision-making.”

Missed Opportunity

The judge saved his direct commentary on SB21 for the end of a wide-ranging lecture on controlling stockholders, whose conflicts of interest face special scrutiny. The talk drew implicit contrasts with the new law, which defines the category narrowly, in a significant break from precedent—requiring, among other things, at least a one-third ownership stake.

The changes are “generally inconsistent with the weight of authority on control,” Laster said. “It’s not clear to me where the one-third figure came from. There isn’t anything in the legislative history.”

The bill’s backers have downplayed any link to Musk—or to Mark Zuckerberg’s Meta Platforms Inc., which had executives in the backroom meetings that led to the legislation—saying dealmakers and corporate planners have legitimate concerns about a swing toward shareholders that has made even routine transactions onerous and unpredictable.

Read More: Musk’s War on Delaware Spurs Law Pushed by Private Equity

But Laster suggested the legislation will backfire, pushing judges into unfamiliar territory where they’ll be forced to make it up as they go along. “We have a test with a lot of language that is left for courts to interpret,” he said. “That means a lot of litigation to try to find out what we have.”

He called the changes a significant departure “from the way other areas of the law define control,” including state and federal securities laws, banking statutes, US Treasury Department regulations, insurance codes, and many other contexts.

Those adjacent bodies of law generally recognize that corporate control is “a fact issue for a trial judge,” not something that can be made to fit hard-and-fast rules, according to Laster. They tend to create presumptions about ownership levels that can be bolstered or overcome—usually at around 20%—rather than the sort of hard 33% floor the new law adopted, he said.

“Delaware sacrificed a real opportunity to provide clear statutory standards,” the judge said. “Perhaps if the process had not moved so fast, perhaps if the process had been more open, perhaps if there had been more input from more voices, we could have ended up with a test that was more like the consensus.”

Legislative Supremacy

He appeared to be referring to the bill’s blitzkrieg rollout, which initially bypassed a months-long process that ordinarily begins with the state bar association’s influential Corporation Law Council. Prominent court watchers have expressed shock and outrage over the way the state’s House Speaker shouted down and ejected a former Securities and Exchange Commission member who tried to testify against the measure shortly before it passed.

Laster echoed the view that the law could permanently alter norms surrounding Delaware’s constitutional separation of powers. Though he stopped short of calling the changes a rebuke of the judiciary, as many critics have, he said the state had “entered the legislative era of Delaware corporate law, where codification prevails over court decisions.”

The judge said he’d avoided weighing in on SB21 until it was done and dusted after drawing fire last year for commenting publicly on a previous round of corporate law amendments. He also urged both sides of the state’s tight-knit legal community to repair the ruptures caused by the bill’s unusually aggressive process.

“I have policy disagreements with where things ended up, but I think it’s important to remember that no one is doing this out of bad faith,” Laster said. “Everyone involved in this process believes that whatever action they’re taking is in the best interest of Delaware.”