Delaware’s House has approved a contentious bill set to alter governance rules for some of the nation’s most influential companies. The legislation, now awaiting Governor John Carney’s signature, has sparked significant debate among legal experts both within the state and nationwide, including strong opposition from the top judge of Delaware’s powerful Chancery Court.
The bill, which passed the House with a 34-7 vote, allows Delaware companies to make side agreements with individual shareholders without requiring a full board vote. These agreements could potentially transfer control of the company to a single shareholder, thereby permanently limiting the board’s decision-making powers.
Despite facing substantial opposition in the House Judiciary Committee, the Senate approved the bill earlier this month without dissent. House sponsor Krista Griffith (D-Fairfax) argued that the amendments are crucial to maintaining Delaware’s status as a premier incorporation destination for businesses.
“The franchise represents the largest combined source of state revenue, contributing $2 billion in corporate franchise taxes and fees, and over $600 million in abandoned property,” Griffith stated. “The incorporation status of our state is critical for these funds and the income tax from thousands of jobs across various industries.”
The Delaware State Bar Association (DSBA) drafted the bill earlier this year. Srinivas Raju, chairman of DSBA’s Corporation Law Council, assured House committee members that such agreements are already common practice and do not constitute a significant departure from existing law.
However, the bill follows recent Chancery Court decisions, notably the Moelis case, where Vice Chancellor Travis Laster invalidated a side deal that allowed investment bank Moelis & Co. to grant its founder the ability to override the board’s duties. Laster, who described the legislation as “major surgery,” emphasized in his ruling that companies must adhere to Delaware law.
“Market participants must conform their conduct to legal requirements, not the other way around,” Laster’s decision stated.
Representatives Madinah Wilson-Anton (D-Newark) and Michael Smith (R) invited experts to present arguments on both sides of the issue. Wilson-Anton highlighted past memos warning that such stockholder agreements might be unenforceable.
Charles Elson, founding director emeritus of the Weinberg Center for Corporate Governance at the University of Delaware, expressed concerns about the lack of transparency in these agreements.
“If you buy into a company and there’s already a side agreement that determines management and function without your knowledge, it poses a risk,” Elson explained. “The secrecy of these agreements can lead to a minority shareholder discovering that the company’s direction has already been predetermined.”
In contrast, former Chancellor William Chandler defended the Corporation Law Council’s drafting process, asserting that the DSBA and bill sponsors have consistently maintained high standards.
“I trust the Corporate Law Council to do the right thing,” Chandler affirmed. “The corporate market isn’t feeling positive about Delaware, and I question the objectivity of McCormick and Laster regarding the bill’s amendments.”
Chandler also emphasized that judges should refrain from influencing the legislative process. “Judges need to stay in their own lane,” he remarked. “They should focus on adjudicating cases in the courtroom and applying the law as provided, not intruding upon the law-making process.”
As the bill advances to Governor Carney’s desk, its implications for Delaware’s corporate governance and the broader legal landscape remain hotly debated.