UPDATED: On June 13, 2024, SB 313 was passed by the Delaware Senate with 20 votes in favor, zero against, and one absent (Sarah McBride). The bill has been assigned to the Judiciary Committee in House.
The most extraordinary amendments to the Delaware corporate code in decades came one step closer to becoming law yesterday as the Senate Judiciary Committee voted in favor of moving the legislation forward. Senate Bill 313 is now all but certain to pass the state Senate and will likely go to the House next week for further consideration.
However, in a last-ditch effort to stop the controversial bill from becoming law, legal scholars from across Delaware and the country converged on Dover to voice their objections to amendments they view as misguided and a legislative process that, when compared to previous years, has been fast-tracked to ensure passage before the end of the current legislative session on June 30.
At issue is a Court of Chancery decision earlier this year that invalidated certain kinds of contracts that corporations may enter into with powerful investors, or even potential investors. In short, Vice Chancellor Travis Laster ruled in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company that “stockholder agreements,” as he refers to them, that transfer almost all governing authority from boards of directors to one or more investors are in violation of Section 141(a) of the Delaware General Corporation Law.
That sounds complicated, but it’s really quite simple: Directors are chosen by shareholders and entrusted with the legal obligation to do what is best for the company, and they shall not, under current Delaware law, designate that authority to a third party.
What are stockholder agreements? Listen to the Highlands Bunker podcast to learn more.
The Court’s decision in the Moelis case proved something of an unwelcome surprise among corporate law firms, which for years had been writing these contracts for their clients. In response, corporate interests in the state of Delaware went into overdrive to quickly draft amendments to the corporate code that would retroactively legalize the very kinds of stockholder agreements that the Court had just invalidated, and those amendments are now before the General Assembly as SB 313.
“Rather than hastily rewriting the rules, we should give the Delaware Supreme Court time to carefully weigh the issues and provide clear, reasoned guidance,” more than 50 law professors wrote in an open letter sent to the General Assembly ahead of yesterday’s hearing. “The issues at stake warrant careful judicial review, not hasty legislative action.”
Opponents of SB 313 speak out
Delaware’s legislators don’t usually write or even debate amendments to the corporate code. As Delaware Call has previously reported, that is done by a special subcommittee within the Delaware State Bar Association known as the Corporation Law Council, which is predominantly composed of corporate attorneys. The CLC meets in secret to deliberate on changes to state law, and after proposals are approved, they are sent to friendly legislators in the General Assembly, who shepherd the bills through the legislative process with little or no public dissent.
But not this year. In a stunning rebuke to the bar association, more than a dozen legal scholars lined up in the Senate chamber to voice their opposition to SB 313 and called on senators to send the legislation back for further revisions.
“This bill is a solution to a problem that doesn’t exist,” said attorney John Livingstone, a lifelong Delawarean currently living in Pike Creek. “The majority of shareholders are the retirement funds of working families, the pension funds of firefighters, teachers, and cops. This bill is simply unnecessary, and it actively harms them.”
Proponents of SB 313 have urged the General Assembly to quickly amend the law because the Court’s ruling in Moelis — the claim goes — has injected much “uncertainty” into corporate America, according to Srinivas M. Raju, chair of the Corporation Law Section of the Delaware State Bar Association and corporate attorney with the law firm Richards, Layton & Finger. Raju was called as a special witness in support of SB 313 by the bill’s sponsor, Sen. Bryan Townsend.
But Livingstone voiced skepticism of these claims and asked lawmakers how they would respond to “substantial empirical data that indicate these agreements in public companies are overwhelmingly given to private equity.”
“This isn’t about a board seat or two,” he continued. “It is about private equity deciding that they do not want to have to listen to the majority of shareholders.”
Another Delaware resident and attorney, Lauren Pringle, editor of the Chancery Daily newsletter, called on lawmakers to be more skeptical and not rubber stamp this legislation simply because the state bar is asking them to.
“What if? What would it look like if the Corporation Law Council made a proposal that truly was not in the best interest of Delaware?” Pringle asked. “I submit that it would look exactly like this.”
“This is not a small amount of opposition,” she continued. “This is basically everyone who feels free to speak out, speaking out. I respectfully request the Committee goes back to the Corporation Law Council and ask them to more narrowly tailor the language of these amendments to meet the immediate needs of the situation, and not to rewrite Delaware corporate law wholesale in the process.”
Among the opponents speaking out against SB 313 was Boston College professor of law Brian Quinn, who called proposed amendments “premature, and ill considered” and urged lawmakers to send the amendments back to the state bar for reconsideration.
“My fear is that these amendments will have unintended consequences that may materially harm the stability and value of the Delaware franchise,” he said.
Law professor Usha Rodrigues from the University of Georgia described SB 313 as a “radical change in Delaware law,” likened it to “bringing a sledgehammer to the operating table” when what’s needed is a “scalpel,” and called on senators to reconsider.
“I’m here now because I care about Delaware. . . . I’ve lived in Wilmington. I’ve taught Delaware corporate law for over 20 years. I love Delaware,” she said. “Most of the time, amendments to the [corporate code] come from the CLC, and that’s it. You don’t hear a lot of comments. But you have a lot of comments. You have a lot of attention now. That should give you pause.”
Indeed, after Rodrigues there were even more public comments. Historian Dael Norwood, resident of Newark, Delaware, asked the Judiciary Committee to “kill Senate Bill 313, which I regard as a hasty, dangerous piece of legislation that threatens Delaware’s privileged position as a center for corporate law and thus the stability of the state’s revenues.”
Norwood reminded legislators that Delaware became the corporate capital of the United States “by mistake” because New Jersey acted hastily to amend its corporate code in 1913 to serve the short-term interests of its lame duck governor, Woodrow Wilson.”
Corporations left New Jersey in droves, and Delaware — having already copied its neighbor’s corporate code — stood ready to accept them.
“I urge you to put our state’s needs before the transient tantrums of the small number of private equity special pleaders,” he concluded. “And I urge you to keep New Jersey’s example before you and remember that Delaware’s privileged status can vanish with one bad decision.”
In total, 18 legal experts spoke out in opposition to SB 313, with virtually all of them urging the Senate to send the legislation back to the state bar for further revisions, which would also delay passage of similar amendments until after Moelis has been reviewed under appeal by the state Supreme Court.
Although SB 313 was still voted out of committee later in the day, the impassioned objections from so many Delaware residents and legal scholars clearly had some effect on members of the Judiciary Committee, which has seven members but only four who voted in favor of the legislation. Because the legislation was approved “on its merits,” Senate rules do not require the votes of each member to be published.
Delaware Call reached out to the chair of the Judiciary Committee, Sen. Kyle Evans Gay, for more information about the vote. Her office had not returned our request by the publication of this article.