Delaware lawmakers recently passed significant changes to corporate laws in an effort to retain businesses following the high-profile departure of Elon Musk.
Governor Matthew Meyer signed the SB 21 legislation into law on Tuesday, emphasizing that the new law would uphold Delaware’s reputation as the premier location for business incorporation.
The law is designed to provide clarity and predictability while balancing the interests of stockholders and corporate boards.
This legislation was introduced in response to concerns raised by several prominent CEOs, including Musk, whose companies, Tesla and SpaceX, moved their incorporations to Texas. Musk’s other ventures, Neuralink, The Boring Company, and X, also relocated to Nevada. These corporate exits have led to the term “Dexits” being coined to describe the trend.
Other companies, including Meta, Dropbox, and Trade Desk, have signaled similar intentions to move their incorporations out of Delaware. This shift is unsettling a state that has long been a corporate hub due to its favorable laws, specialized business courts, and ease of paperwork filing.
Delaware boasts that over two-thirds of Fortune 500 companies are incorporated there. However, the percentage of these companies registered in the state decreased slightly in 2023, from 68.2% in 2022 to 67.6%.
Governor Meyer, a newly elected Democrat, formed a working group to address growing complaints and pushed for legislation that would limit investor lawsuits.
The bill gives corporate boards more protection from liability, particularly in cases where there are conflicts of interest involving board members, officers, or major shareholders.
The controversy surrounding Musk’s decision to leave Delaware stems from a ruling by a Delaware judge, which invalidated his $56 billion performance-based compensation plan. Musk is currently appealing this decision.
The new law grants corporate boards more flexibility in transactions where conflicts of interest arise. It also makes it more difficult for investors to inspect company records, raising the bar for plaintiffs trying to gather evidence for lawsuits.
Corporate lawyers warned that if Delaware did not act, other major companies like Walmart could follow Musk’s lead and relocate. Critics, however, argue that the amendments provide undue advantages to billionaires by expanding protections for corporate directors. They also criticize the swift passage of the bill without sufficient debate.
Some legal experts, including professors from Columbia Law School, have expressed concerns over the speed at which the legislation was passed.
They noted that significant reforms usually go through a more thorough review process within Delaware’s legal community, but this time the process was expedited.
Eric Talley, one of the professors who co-authored a critique of the law, suggested that parts of the new legislation could face challenges based on Delaware’s state constitution.
He also pointed out that the law may reduce protections for investors, particularly in cases where insiders, such as officers or large stockholders, divert assets away from other investors for personal gain.
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