Delaware's status as corporate capital might be on the line in a fight over shareholder lawsuits

HARRISBURG, Pa. (AP) — Delaware is trying to protect its status as the corporate capital of the world with fast-tracked legislation amid fallout from a judge's rejection of billionaire Elon Musk ’s landmark Tesla compensation package, although critics say the bill will tilt the playing field against investors, including pensioners and middle-class savers.

After three-plus hours of hearing testimony Wednesday, a Delaware House committee voted to advance the bill, which Democratic Gov. Matt Meyer says will ensure the state remains the "premier home for U.S. and global businesses” to incorporate.

Backers say it'll modernize the law, clear up gray areas and maintain balance between corporate officers and shareholders in a state where the courts, for a century, have settled all sorts of business disputes as the legal home of more than 2 million corporate entities, including two-thirds of Fortune 500 companies.

Critics — including institutional investors, pension funds and asset managers — say it’ll lower corporate governance standards, curb shareholder rights and, as a result, make it harder to hold corporate officers accountable for decisions that violate their fiduciary duty.

The bill passed the state Senate unanimously last week and could get a full House vote this month.

What happened in Elon Musk’s case?

A Delaware judge last year invalidated Musk's compensation package from Tesla that was potentially worth more than $55 billion after shareholders' lawyers had sued over the package that Tesla’s board of directors awarded Musk in 2018.

Chancellor Kathaleen St. Jude McCormick ruled that it had been developed by directors who weren’t independent of Musk and approved by shareholders who had been given misleading and incomplete disclosures in a proxy statement.

The ruling bumped Musk out of the top spot on Forbes' list of wealthiest people, although he has since climbed back up.

Musk and Tesla are appealing in the state Supreme Court. But Musk unloaded on Delaware, saying “Never incorporate your company in the state of Delaware” and instead recommended competitors Nevada or Texas as destinations.

Now, lawmakers are being warned by corporate lawyers that their clients are considering heading to the exits — making a “Dexit,” as it's been dubbed — and that startups are being advised to incorporate elsewhere.

What did Musk and others do?

Must took his own advice, moving Tesla’s corporate listing to Texas after a shareholder vote and his companies SpaceX to Texas and Neuralink to Nevada.

Backers of the bill say corporate unrest had been simmering the past couple years over various Delaware Supreme Court decisions in corporate conflict-of-interest cases and that Musk inflamed the discontent.

The fallout seemed to accelerate in recent weeks when the Wall Street Journal reported that Meta Platforms — the parent company of social media platforms Facebook, Instagram and WhatsApp — was considering moving its incorporation to Texas. Meta didn't confirm the report.

DropBox, the online file-sharing platform, moved its corporate listing to Nevada, and Bill Ackman, founder of Pershing Square Capital Management, a major hedge fund, said he’d leave Delaware, too.

On Feb. 1, Musk took to his social media platform X to crow about it, saying, “Companies are flooding out of Delaware, because the activist chief judge of the Delaware court has no respect for shareholder rights.”

That said, critics of the bill say there's no evidence that corporations are fleeing Delaware in any numbers and that Delaware lawmakers are simply bending to pressure from billionaires.

Opponents include The California Public Employees' Retirement System, or CalPERS, and New York City's comptroller’s office, which is a trustee of city pension funds.

What does the bill do?

It changes several things.

One, it gives corporations more protections in conflict-of-interest cases — such as a pay package for a CEO or intercompany agreements — in state courts when fighting shareholder lawsuits.

Two, it limits the kind of documents that a company must produce in court cases and makes it harder for stockholders to get access to internal documents or communication that could prove time-consuming and expensive for a company to produce — not to mention, damaging to its case.

Eric Talley, a Columbia University law professor, has compiled a running list of three dozen Delaware Supreme Court precedents that he said the legislation stands to overturn.

Lawrence Hamermesh, a former professor at Widener University’s Delaware Law School, disagreed. Hamermesh, who helped draft the legislation after Meyer asked him last month, said perhaps only a couple doctrines would be wiped out.

A legal challenge is widely expected should Meyer get and sign the bill. Meanwhile, institutional investors say such a law may prompt them to push corporations that they own to incorporate elsewhere.

Why is this a big deal for Delaware?

Money.

Approximately one-third of Delaware’s state government revenue — about $2.2 billion — comes from corporate license fees and associated tax revenues, according to the governor's office. That helps the state to maintain a 0% sales tax and keep property taxes relatively low, a nice perk for the beach vacation home industry along its Atlantic coast.

Beyond that, Wilmington is home to a cottage industry that caters to the corporate lawyers who live, stay, dine and shop around the state Supreme Court and the Chancery Court of Delaware buildings where they argue their cases.

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Follow Marc Levy on X at: https://x.com/timelywriter.