Why Are Delaware Democrats Trying to Give Elon Musk $55 Billion?
For over a century now, Delaware has been the home of most large American corporations. The state government has set up an incredibly corporate-friendly regulatory, tax, and legal regime, and so big companies locate their official headquarters there. Many trusts and on-paper shell corporations are Delaware-based as well, for the same reasons. It’s a classic race-to-the-bottom dynamic where, because the federal government does not set a consistent baseline, states competed as to who could pander the hardest to big business, and Delaware hit bottom first. Most Fortune 500 companies locate there, and in return the state gets about a third of its budget from corporate franchise fees and taxes.
But Delaware’s incorporation laws also provide some rights to shareholders. While shareholders have extremely limited ability to sue over the business judgment of corporate managers, corporations must prioritize them and treat them fairly.
Good thing or bad thing?
So on Monday I threw up a rather inflammatory post about SB 21, which would dramatically rewrite Delaware law. (Here’s a post by Eric Talley, Sarath Sanga and Gabriel V. Rauterberg, which takes a more measured tone).
As I’ve talked to people about the law, the first question I get asked is, “Is this a good thing or a bad thing?” And that’s a really difficult question to answer, because “good” can have many meanings in this context.
Is this good for shareholders?
Well, I find it very difficult to take seriously the notion that the procedures written into the law will have any protective effect for shareholders. The independence standards of the exchanges are notoriously weak; that’s why ISS and Glass Lewis frequently adopt their own definitions of independence, so much so that the Business Roundtable accused them of proxy fraud. The cleansing standards would insulate transactions by a board that is entirely captured by a counterparty, so long as a single member of that board is independent and votes with the others (a standard that one can easily see being transferred to the demand excusal context). The definition of controlling shareholder would exclude people
Delaware Decides Delaware Law Has No Value
I suppose it’s gratifying that the proposed changes to Delaware law support the thesis of my new paper, The Legitimation of Shareholder Primacy. There, I argue, among other things, that Delaware imposes procedural limitations on managerial behavior that function more as a performance to the general public, to grant corporations a social license to operate, than as real constraints. So, of course, as soon as those limitations started to have even the tiniest bit of actual bite – and in an environment where the prospect of federal preemption is largely nil, and corporate power has reached the point where a social license to operate may no longer be necessary – managers threaten to depart the state, and Delaware proposes of package of statutory changes that undo certainly the last 10 years of Delaware jurisprudence, if not the last 50, in favor of a model of corporate self-policing.
The story actually begins last year, when, in response to the Moelis decision, Delaware rushed to amend its corporate code to add Section 122(18), permitting corporate-governance-by-contract. At the time, I asked – quite seriously – what is the value of the corporate form?
This is very much a debate that’s been
Caremark, maybe I misjudged you
Lately, several media and news organizations have “settled” somewhat frivolous lawsuits filed by President Trump, raising suspicions in at least some minds that the settlements were a rather unsubtle form of bribery, intended to win Trump’s favor with respect to other aspects of their businesses.
I am not particularly knowledgeable about bribery laws but let us assume, for the moment, that if these settlements were, in fact, shams to funnel money to Trump in exchange for regulatory favors, that would be illegal under some law somewhere. And, given that Trump is, you know, president, I also assume that, to the extent those laws are federal, charges are unlikely to be pursued by federal authorities.
But Disney/ABC, and Meta – not X – are incorporated in Delaware. And Delaware makes it a breach of fiduciary duty for corporate managers to intentionally break the law. I’ve blogged about the doctrinal difficulties that Caremark creates for Delaware (and they’re discussed extensively in my new paper, The Legitimation of Shareholder Primacy, now forthcoming in the Journal of Corporation Law), but whatever the doctrine’s flaws, there remains the intriguing possibility that an enterprising shareholder might bring a lawsuit – or even
Petition – A Call To Urgency
Maxine Eichner of UNC has organized a petition, available at this link, for law professors to communicate the urgency of the constitutional crisis that is facing the country. More than 400 law professors have signed as of this posting. If you would like to add your name, you can do so by emailing maxine.eichner@gmail.com. You are invited to share the link with others who may be interested in signing.
DEntrance
Lotta news lately about companies seeking to leave Delaware, so it’s amusing to see a company fighting to get in.
Daktronics is incorporated in South Dakota of all places (is it lonely there?). South Dakota mandates cumulative voting, which makes it much, much easier for a minority blockholder to gain board representation, as Matt Levine explains here.
And such a blockholder has emerged, in the form of Alta Fox. Alta Fox is both a shareholder and a holder of Daktronics notes, but the notes are convertible into shares, so on a fully diluted basis, Alta Fox owns over 11% of Daktronics’ voting power. Given that, at least some of Alta Fox’s director nominees would likely have been seated in a proxy contest but – plot twist! – Daktronics called a special meeting of its shareholders to vote on reincorporation to Delaware, where cumulative voting is not the default.
And, as I understand it, Daktronics is calling for that vote before Alta Fox’s shares convert, so that Alta Fox will be heading into the meeting with less than its full voting power. In response, Alta Fox filed a lawsuit (in federal court, presumably because it just likes the judges
New Paper: The Legitimation of Shareholder Primacy
This Article argues that, in some ways, the critics are correct: Delaware law is on a path toward politicization. But it is not because of any particular bias of its judges or its law; to the contrary, the pressures
Proxy Exempt Solicitations, again
They find that a variety of institutional investors make these filings, including public pension funds (38%), union funds (26%), and other institutions, including hedge funds (22%).
Some cases have a certain aesthetic perfection
Sometimes you come across a case so clean, so pure, with respect to first principles, it’s actually quite charming. So it is with Caribbean Sun Airlines v. Halevi International, decided this week by the Delaware Supreme Court.
Alan Boyer was hired as a financial advisor to Caribbean Sun Airlines and a related entity, and in that capacity, was given a significant amount of access to the premises. At some point, he offered to buy the whole company, and as part of the transaction, sought a loan from Halevi, to be taken out in Caribbean’s name. Except when he approached Halevi, he represented that he was president of the company and a significant shareholder. He forged some documents to that effect, though the paperwork he provided to Halevi contained significant inconsistencies. As part of the due diligence process, one of Halevi’s representatives accompanied Boyer for a site visit, where Boyer was treated respectfully by the employees and permitted to access the computers, but he refused to take the representative to see the airplanes.
Boyer then signed a loan agreement on behalf of Caribbean Sun, including a confession-of-judgment affidavit. Halevi wired the company about $4 million.
Meanwhile, the principals of
Bump up
This Bloomberg article about insurance disputes over “bump ups” caught my attention, so it’s another moment for me to step outside my (corporate) lane and pretend I know something about contracts (or insurance).
The issue is, lots of corporate managers have D&O coverage, and that coverage includes standard exclusions. Like, D&O insurance won’t cover willful acts of misconduct, that kind of thing, but it will cover settlement of such claims.
And it also includes an exclusion for “bump up” claims. That kind of claim is when the company sells itself to an acquirer, and the former shareholders sue alleging the consideration was inadequate. If there’s a settlement – or I guess an adjudication that doesn’t fall into the willful category – for bumping up the consideration paid to shareholders in an acquisition, the insurer is not obligated to cover it.
That’s led to a lot of litigation over what kinds of settlements/claims are excluded, and what are not, and insurers come out on the short end of the stick. For example, in Harman Int’l Indus. Inc. v. Ill. Nat’l Ins. Co., a Delaware Superior court held that Section 14 claims for a false proxy statement issued in connection