Delaware’s Shareholder Move Could Reshape Startup Regulation (1)

In a landmark decision for the startup ecosystem, Delaware Gov. John Carney enacted a law that redefines shareholder rights in venture-backed startups. This move comes at a critical time when the dynamics of corporate governance are rapidly evolving, necessitating a fresh perspective on shareholder protections.

In Tornetta v. Musk, a significant legal decision in the Delaware Court of Chancery, Chancellor Kathaleen McCormick invalidated Elon Musk’s $55.8 billion compensation package awarded by Tesla, Inc. Musk swiftly advised businesses to avoid incorporating in Delaware, suggesting Nevada or Texas as alternatives. In June, Tesla shareholders approved reinstating Elon Musk’s compensation package and decided to reincorporate in Texas.

Musk isn’t alone in challenging Delaware’s dominance. The Moelis decision in February, which invalidated a stockholder agreement at Moelis & Co., sparked significant criticism and led to amendments to the Delaware General Corporation Law. Adopted last month, these changes reverse the Moelis decision and authorize broad provisions in stockholder agreements.

The new law mandates thinking about transparency and accountability going forward and might even bring lawyers to think about requiring startups to provide more detailed disclosures to shareholders. This move wouldn’t foster a culture of openness and trust unless lawyers take action to mandate more disclosure. The shift is particularly crucial in the fast-paced, high-risk environment of venture-backed startups, where swift decisions often have long-term ramifications.

The passing of this bill re-examines Delaware’s commitment to its preeminence in corporate law while adapting to the needs of modern business. As other states watch closely, Delaware’s proactive stance sets a new benchmark for corporate governance, one that could shape the future of startup regulation across the nation.

Yet rushed legislative changes can disrupt Delaware’s stability and competitive advantage. Proponents claim fiduciary duties will always trump contracts, but this overlooks potential pitfalls. If shareholders don’t enjoy transparency and can’t challenge breaches of fiduciary duties under secret agreements, their strength is meaningless.

Opponents, including myself and many corporate law professors, argue the bill was a hasty response and that the state’s supreme court should address these legal issues. They worry it allows companies to alter governance and board authority without shareholder approval or scrutiny, and that it creates a separate set of internal corporate claims that can be litigated under non-Delaware law.

In an era where the balance of power in corporations is constantly recalibrated, Delaware’s latest legislation is a bold step for the startup ecosystem. As legal professionals, it’s our responsibility to understand and navigate these changes, ensuring that we continue to support the growth and success of innovative enterprises.

I don’t think any other state can compete with Delaware—yet.

The cases are Tornetta v. Musk, Del. Ch., No. 2018-0408, decided 6/7/24, and West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, Del. Ch., No. 2023-0309, hearing 7/18/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anat Alon-Beck is associate professor of law at Case Western Reserve University School of Law.

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