Delaware bill would limit investor lawsuits as companies threaten to leave the state

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18/02/2025 24:47

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      Bill limits shareholder lawsuits, access to internal
records
    

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      Companies consider leaving Delaware due to legal concerns
    

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      State's corporate court has come under attack by Musk
    

  
    By Tom Hals
       WILMINGTON, Delaware, Feb 17 (Reuters) - Delaware
lawmakers on Monday proposed changes to the U.S. state's widely
used corporate law that would limit shareholder lawsuits after
several high-profile companies said they might move their legal
home to another state.
    The bill sets out steps that corporate boards could take to
insulate directors and controlling shareholders from litigation
over alleged conflicts. The bill would also limit the kinds of
internal records that shareholders can access, which they need
to build their cases. The bill is sponsored by leaders of both
parties in both houses of Delaware's state assembly.
    Delaware's corporate law governs relations between company
boards and their investors for around two-thirds of the S&P500
index. Companies tend to charter their businesses in the state
for its stable law and well-respected courts and the fees those
companies pay to the state generate around a third of Delaware's
general budget revenue. 
        But several companies, including Meta Platforms
 META.O , Dropbox  DBX.O  and Bill Ackman's management company,
recently have said they were moving or considering moving their
incorporation out of Delaware, which prompted the bill,
according to the sponsor, Delaware state Senator Bryan Townsend,
a Democrat and senate majority leader.
    "And it also comes at a time when you have a couple other
jurisdictions in particular that are seeming to gain some
traction with being viewed as legitimate alternatives to
Delaware," Townsend told Reuters.
    Texas has established a business court that is meant to
rival Delaware's Court of Chancery for specializing in business
and investor disputes. Elon Musk's Tesla  TSLA.O  and SpaceX
moved their state of incorporation to Texas from Delaware after
a Chancery judge last year ordered Musk's $56 billion pay
package from Tesla to be rescinded.
    Townsend said he'd like to move quickly on the bill, which
he said was drafted with input from the state's recently elected
Governor Matt Meyer, a Democrat. The bill was not drafted by the
state's bar association, which typically oversees changes to the
state's corporate law.
    Townsend said the bill would not change the case challenging
Musk's pay, which is on appeal before the Delaware Supreme
Court. "This has nothing to do with Elon Musk. And I'll note
that this legislation is not retroactive," Townsend said.
        Townsend also introduced a bill that asked the state bar
association to prepare a report on awarding attorneys fees.
Delaware judges have awarded several fees that were among the
largest ever in the past two years.
    In recent years, several corporate leaders who lost costly
cases in the Court of Chancery have attacked the state's
judiciary, most notably Musk. Another outspoken critic was Phil
Shawe, who was embroiled in a long-running case over control of
TransPerfect, a translation provider. Shawe has run ad campaigns
in local media criticizing Chancery judges and was a leading
proponent of Meyer's campaign for governor.
    Several rulings in recent years have held controlling
shareholders liable over deals that corporate lawyers thought
were properly structured, fueling criticism that the state was
becoming too favorable to shareholder lawyers.
State lawmakers took the unusual step last year of amending the
corporate law in response to three rulings before those cases
had even been appealed, which was widely criticized by
academics.  
    Ann Lipton, a professor of corporate law at Tulane Law
School, said Monday's bill would make shareholder litigation in
Delaware "dramatically less successful."
    The exact impact of that is unclear. Some experts argue
shareholder lawsuits prevent the worst board room abuses and
self-dealing. But others say litigation acts as kind of tax on
companies that rarely results in much benefit for shareholders
and that the real policing of corporate boards comes from
institutional investors such as large pension funds.
    However, the administration of Republican President Donald
Trump may loosen federal securities regulations and place
constraints on the ability of institutional investors to apply
pressure to corporate boards. "That mechanism is failing at
exactly the same time," Lipton said.

 (Reporting by Tom Hals in Wilmington, Delaware, Editing by
Alexia Garamfalvi and Nick Zieminski)
 ((thomas.hals@thomsonreuters.com; 610-544-2712))