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 with contractual control over virtually all board functioning as long as they didn’t actually have power to vote for nominees, and so forth.

So, whether it’s good for shareholders depends on how valuable you believe more rigorous procedures – and the litigation that enforces them – to be.  Some believe procedural guardrails to be necessary to protect against agency costs, and shareholder litigation to be a necessary corrective to managerial excess; others believe shareholder litigation is a mere nuisance that has little substantive effect on corporate behavior. 

Separately, the bill would drastically limit shareholders’ ability to access internal corporate records.  These matter for more than just litigation – they’re used by shareholders to protect their rights and to facilitate activist intervention. More generally, books and records access, and the prospect that boardroom misconduct will be exposed, can act as a kind of soft discipline that curtails agency costs all by itself.

That said, in recent years, some Delaware decisions have suggested that, in an age of powerful, informed, institutional shareholders, these kinds of legal protections are less necessary.  Markets, including the market for corporate control, work; maybe in that world we don’t need as much litigation or even as much informational access.

At the same time, though, the SEC is starting on a project to limit investor power. The reforms to 13D have the potential to take the largest asset managers out of the oversight business; and we haven’t yet begun to see whatever’s going to happen with proxy advisor regulation. 

What does SB 21 look like in a world where institutional shareholders are suddenly defanged?

Is this good for Delaware?

Delaware, of course, relies on incorporations.  My little joke is that Delaware has exactly one industry – the production and export of corporate law – which is entirely controlled by the government, so functionally the beating heart of American capitalism is a socialist state.

Which means, if there is a real threat that corporations will exit en masse, Delaware must change its law, no question.

But there are other truths here as well.  Part of Delaware’s power also comes from an ecosystem, which Brian Quinn described in this blog post after the Great Battle of SB 313. Law professors study and write about Delaware law, they communicate their respect for it to their students, who go on to recommend Delaware to clients.  Federal regulators avoid treading too far on Delaware’s turf; other states stay pending corporate cases in favor of Delaware adjudication, look to Delaware precedent when interpreting their own law, and respect the internal affairs doctrine.  Delaware judges get invited to international conferences to offer up comparative assessments.  And that ecosystem rests, in part, on a belief that Delaware has a technocratic and balanced approach to lawmaking that is relatively insulated from political or industry capture.

That reputation is at risk if Delaware outsources its corporate governance standards to the exchanges, and is perceived as rewriting its corporate code every time a powerful litigant loses a case, particularly so if ordinary procedures are bypassed to do it.  And that’s especially true if the law gets rewritten in a manner that retroactively restores one particular litigant’s pay package and insulates a pending merger from shareholder challenge to boot.  That’s not even a story of reform; that’s a story of political pay-to-play.  To put it more bluntly, if that’s how Delaware is perceived, these articles don’t get written. Instead, articles get written about the need for a different system, one that is less politically vulnerable.

More generally, Delaware needs cases, not just incorporations alone.  Not simply for the actual business they provide (hotels! Meals! Employment for Delaware litigators!), but because the judicial opinions also contribute to an understanding of the law, which provides the foundation for the respect accorded to Delaware from other actors.  And that means plaintiffs have to be able to win, occasionally, and get their wins affirmed on appeal without legislative interference, and get paid fees that justify the risks involved. 

And then there’s the point that part of Delaware law’s mystique – and what makes it difficult for other states to copy – has been the fact that it’s largely based in caselaw.  If the DGCL just becomes a poor man’s MBCA, it’s, you know, portable. 

Last year, I warned that SB 313 could cause a loss of cases to other venues.  Now, the new SB 21 threatens to limit the ability of shareholder plaintiffs to litigate altogether.  I mean, the Delaware Court of Chancery can always become a court that exclusively hears earnout disputes, but that doesn’t get you a pride of place in the Business Organizations casebook. (And even the earnout disputes aren’t safe; disappointed litigants are now warning of a corporate exodus if those come out the wrong way, too.)

Which means, the question whether SB 21 is good for Delaware is complicated – there’s the short term and there’s the long term, and then there’s the question whether the full package of proposals appropriately balances the two.

Edit: I had further thoughts, here.

Is this good for society?

That’s also complicated, and that’s what I’m trying to work out in my Legitimation of Shareholder Primacy paper. On the one hand, it has often seemed like the guardrails imposed by Delaware law have been the only real constraints on the exercise of an enormous amount of power by a very small number of people.

On the other hand, those guardrails exist, ostensibly, to protect capital, and certainly there is an argument that greater protections for capital come at the expense of other constituencies. 

On the third hand, even before SB 21, those guardrails were pretty thin, and to the extent they fooled everyone, including corporate law professors, into believing they were stronger than they actually were, maybe it’s better that their fragility be revealed.

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 raging in academic circles for decades: is there value to the state-imposed rigidity of the corporate form, or should business forms be endlessly malleable according to the desires of corporate participants, so that really everything is reducible to an LLC?

Whatever the correct answer to that debate as a theoretical matter, with Section 122(18), Delaware came down firmly in favor of the argument that the corporate form has no inherent value; private ordering is everything, and we are, in fact, all LLCs now.

That said, one of the key distinctions between LLCs and corporations is fiduciary obligation: in LLCs they are waivable, in corporations they are not.  Fiduciary obligations are, like the rigidity of the corporate form itself, a type of state regulation: They are a judicially-imposed limit on exploitative conduct by managers.

But Delaware’s been eroding that form of regulation for quite some time, first with the adoption of 102(b)(7), then with 122(17), then with Corwin and MFW, and then with the expansion of 102(b)(7).

Still, fiduciary obligations seemed to make something of a comeback, when then-Vice Chancellor Strine set upon a multi-year project, culminating in Marchand v. Barnhill, to seriously examine the social and professional ties among directors as part of the independence inquiry. 

So I suppose it was inevitable that the Delaware legislature would seek to undo that last vestige of regulation, as well as all other remainders.

In sum, the proposed amendments to Delaware law would:

1) Impose single trigger (disinterested director approval, or disinterested shareholder approval) cleansing for conflicted controller transactions except for going private ones, which would continue to require both sets (overrule Match)

2) Eliminate the “ab initio” requirement for cleansing (meaning, a controller could negotiate substantively before the protections are put into place)

As I have said in various spaces, given the demand requirement for derivative claims, I believe controlling shareholder transactions already have a single trigger cleansing requirement in most scenarios (as VC Fioravanti just demonstrated in Trade Desk); the only transactions where double trigger requirements do much work are for the very largest kinds of deals. So, these first two changes, would, as far as I can tell, have the effect of insulating transactions like the Paramount merger with Skydance.

3) Overrule Match’s requirement that special committees be completely independent; majority independence suffices

4) Redefine independence/disinterest to incorporate federal stock exchange standards, so that if the board certifies a particular director as independent under exchange listing standards, that determination presumptively controls, unless a plaintiff shareholder offers “substantial and particularized facts that such director has a material interest in such act or transaction or has a material relationship with a person with a material interest in such act or transaction.”

5) Redefine the “entire fairness” inquiry to mean “the act or transaction at issue, as a whole, is beneficial to the corporation, or its stockholders in their capacity, as such given the consideration paid to or received by the corporation or its stockholders or other benefit conferred on the corporation or its stockholders and taking into appropriate account whether the act or transaction meets both of the following:

a. It is fair in terms of the fiduciary’s dealings with the corporation.

b. It is comparable to what might have been obtained in an arm’s length transaction available to the corporation”

6) Define controlling shareholder to mean someone with a majority of the voting power entitled to vote in director elections, or someone who has one-third of the voting power in a general director election, or power to elect directors who have a majority of board voting power, and has “power to exercise managerial authority over the business and affairs of the corporation.”

Which translated means, you must at least have 1/3 of the voting power in a general election of directors before you can even be considered a controller, so, presumably, someone with a 122(18) contract to control almost all corporate functioning other than director selection would not be a controlling shareholder, so that’s a roadmap for future 122(18) agreements;

7) Overrule Sears Hometown by providing that controlling shareholders can only be liable for loyalty violations

8) Limit Section 220 to cover only formal board materials, rather than emails and other documents where business may be conducted

9) Separately ask the Delaware Council of the Corporation Law Section to propose a bill to cap plaintiffs’ attorneys fees.

Collectively, the changes represent a wholesale repudiation of Delaware’s common law approach to lawmaking; instead, they most closely resemble the MBCA’s rule-bound approach. Moreover, the changes, if adopted, mean it will be laughably easy, with a few incantations of magic words, to create the appearance of procedural regularity, while shareholder plaintiffs will be denied access to the information necessary to establish any procedural irregularity.  At the same time, because fees will be capped for successful claims, plaintiffs’ attorneys will be deterred from taking on the enormous risks associated with stockholder litigation. 

What stands out for me is that Delaware could have proposed to eliminate shareholder litigation altogether.  It would have been simpler, and more honest: a straightforward declaration that litigation does little to substantively protect shareholder value.  That’s not even a crazy position; it’s certainly a vibrant debate among academics.

But rather than be so forthright, the proposal retains the veneer of governance, to create the appearance that conflicts are being policed – but, with no actual substance to back it up.  That is, of course, the thesis of my article. The law itself isn’t doing any work except to launder managerial power.

One final point, for now:  The proposed legislation says nothing about whether it applies to pending cases.  If it does apply to pending cases, it could conceivably upend the Tornetta appeal, regarding Musk’s compensation package.

Update: Reuters reports that Delaware state Senator Bryan Townsend says the bill is not retroactive, and so would not apply to Tornetta. I don’t see that in the text, but we may get clarification along those lines. The analysis below was written before I saw the Reuters report.

Under the new legislation, Musk could not be considered a controlling shareholder, because he never had 1/3 of the vote.  That alone wouldn’t be enough to overturn McCormick’s findings, though; she also concluded that the board was not independent, and shareholders were not fully informed, which meant a judicial determination of “fairness” was necessary.

The statute redefines independence, but again, I’m not sure that would matter to the Tornetta appeal: Under the new statute, listing standards presumptively control, but plaintiffs can rebut with specific facts demonstrating a lack of independence – and they may have those in Tornetta (I would say they surely do, but I can’t be sure whether a “material relationship” under the statute means something different than it does at common law).

The proposed statute also explicitly contemplates that transactions may be ratified by a fully informed shareholder vote, which would seem to validate the Tornetta revote.  But then again, the statute doesn’t say anything about the procedural stage at which such a vote must be taken; what sunk Musk’s “ratification” was, among other things, the fact that it occurred post trial.  (A point I discussed at length in a Shareholder Primacy podcast).

But what I think has the most bite for Tornetta is the redefinition of “fairness.”  If that applies to the appeal – coupled with the unmistakable rebuke the statute is offering to the entire Delaware judiciary (and no, not just “two judges,” but all of them, including Strine and his reinvigoration of the independence inquiry, and the Delaware Supreme Court’s Match opinion) – that could change the Tornetta outcome.

That said, as I warned in my article, “The more freedom Delaware accords corporate managers, and the less scrutiny it applies to their transactions, the less there is for Delaware to, well, actually do.” Delaware could wind up deregulating itself out of relevance entirely.

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 just a books and records action – alleging that these corporate boards transferred valuable assets out of their companies for a corrupt purpose, in violation of their obligations to shareholders.

Now, that might be a tough claim to make, and there wouldn’t be much in it for the shareholders because the dollar figures themselves, at least in the Disney and Meta cases, are relatively small.

But now we have reporting that Paramount executives are angsting over whether to settle another one of Trump’s suits, and this situation has a little more meat. The claims are, to put it mildly, weak (that CBS deceptively edited an interview with Kamala Harris, which somehow caused $20 billion of damages to Trump in Texas, in part because of a diversion of attention from Truth Social. In 2023, Truth Social reported $300 million in assets, with a $21 million loss, so man, that interview did a number on it).

(I will also point out that Trump is currently arguing that he cannot be named as a defendant in lawsuits involving Truth Social, because it would distract him from his duties as President. Being a plaintiff, apparently, poses no such threat).

Anyhoo, Trump brings these claims right as Paramount is seeking FCC permission to be bought out by Skydance, and, reportedly, Paramount has been mulling a settlement just to get the deal done. But this settlement might be a large one, and the merger itself contemplates leaving a number of public shareholders in place. Several such shareholders have already expressed dissatisfaction with the merger, and at least two are suing for books and records. For these shareholders, it would certainly be a sweetener if they could demonstrate that executives violated the law in connection with the transaction, and, in so doing, transferred money out the door that might otherwise have increased the company’s valuation.

That possibility is, according to WSJ, weighing heavily on the minds of Paramount executives, who fear insurance might not cover their liability.

But may I venture an alternative interpretation? Many, both inside and outside of Paramount, have warned that settling this type of claim erodes press freedom. The prospect of Caremark liability – however dim – may actually function as an excuse for executives to reject a settlement they don’t want anyway. That’s a point that was made when Trump announced he’d be pulling back on FCPA enforcement: executives doing business abroad may like being able to say that American law prohibits bribery because it gives them an excuse not to bend to extortion. Right now, Caremark could serve a similar function for Delaware-incorporated firms.

(Trump could, I suppose, pardon everyone, which does raise the question whether Caremark liability attaches for pardoned criminal acts.)

And another thing: New Shareholder Primacy podcast is up!  This week, Mike Levin and I talk about companies staying private longer, and about rational shareholder apathy.  Available here at Spotify, here at Apple, and here at YouTube.

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.

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 and/or procedures better), alleging that Daktronics’s proposal represents a breach of fiduciary duty and shareholder oppression.

So, quick point: Shareholder oppression is a remedy unavailable in Delaware, but available in most other states in one form or another, and typically protects shareholders in close corporations from the unreasonable frustration of expectations by a majority shareholder or controlling group.  Usually, the issue is that the majority group is refusing to pay dividends or otherwise cutting the minority shareholder off from the economic benefits of the investment, leaving the minority shareholder trapped with illiquid holdings that are not generating any income.  So, employing the doctrine in the context of a public company would be unusual, but I’m not an expert in South Dakota corporate law (is anyone?) and we’ll have to see how that unfolds.

That said, the more interesting question is how to think about the legal issue of using reincorporation as a defensive tactic.

As Ben Edwards posted, earlier this week, the Delaware Supreme Court decided Maffei v. Palkon, where it held that reincorporation out of Delaware into Nevada – even if forced through by a controlling shareholder – will not be treated as a conflicted transaction subject to entire fairness review.  But there’s an important caveat: the Delaware Supreme Court made clear that if there is an actual transaction under consideration, such that the plaintiffs can show reincorporation would rob them of specific rights, then entire fairness might be the appropriate standard of review.  As the court held:

[T]he hypothetical and contingent impact of Nevada law on unspecified corporate actions that may or may not occur in the future is too speculative to constitute a material, non-ratable benefit triggering entire fairness review…. Given the absence of any allegations that the Conversion decisions were made to avoid any existing or threatened litigation or that they were made in contemplation of any particular transaction, we hold that Plaintiffs have failed to adequately allege facts showing Defendants’ receipt of a material, non-ratable benefit….

We note that Plaintiffs have not alleged that Defendants have taken any articulable, material steps in connection with any post-conversion transactions.  If directors or controllers were to take such steps in furtherance of breaching their fiduciary duties prior to redomesticating, even though such transactions or conduct would not be consummated or take place until after the change of corporate domicile, then our standard of review could be different.  Although we do not reach that issue today, under such a scenario the conduct of those alleged to have engaged in it could still be subject to Delaware law.  But, as we have stated above, the record here suggests the existence of a “clear day” and the absence of any material, non-ratable benefits flowing to the controller or directors as a result of the Conversions.

So, back to Daktronics.  Here, the reincorporation is not intended to effectuate a specific transaction, but it is intended to thwart shareholder voting rights in the context of a particular, threatened proxy contest.  And – I have no idea what South Dakota law is, I doubt anyone knows – but under Delaware law, such actions would usually be evaluated under the heightened scrutiny of Unocal/Coster.  Specifically, as the Delaware Supreme Court put it in Kellner v. AIM:

the court should review whether the board faced a threat “to an important corporate interest or to the achievement of a significant corporate benefit.” The threat must be real and not pretextual, and the board’s motivations must be proper and not selfish or disloyal. As Chancellor Allen stated long ago, the threat cannot be justified on the grounds that the board knows what is in the best interests of the stockholders.

In other words, as Kellner put it, takeover defenses are prohibited when they interfere with voting rights and are adopted by a board “for the primary purpose of precluding a challenge to its control.”

Now, relocating to Delaware does not preclude Alta Fox’s challenge, but it does seem like reincorporation is intended to change the rules of the game to Alta Fox’s detriment mid-stream, so I venture to guess that a Delaware court, confronted with the problem, would in fact employ the heightened test rather than business judgment review.

Anyhoo.  I don’t know how the case comes out, I don’t even know if a South Dakota court will look to Delaware precedent.  But it’s interesting that even after Maffei, we immediately see an example of reincorporation as potentially subject to a heightened standard of review.

And another thing.  New Shareholder Primacy podcast is up!  This week, Mike Levin talks to Lauren Thomas of the Wall Street Journal.  Available here at Spotify, here at Apple, and here at YouTube.