Special interests pull back on Delaware corporate law changes after Wilson-Anton amendment

Draft documents indicate very few changes will be sent to the General Assembly this year

 · January 22, 2024
Outside the Wilmington, DE offices of Skadden, Arps, Slate, Meagher & Flom LLP, one of the largest and most influential corporate law firms in the world

The secretive group of unelected legal specialists that has for years quietly revised Delaware’s corporate code with the unquestioned support of the General Assembly will not put forth in 2024 any changes to the Delaware General Corporation Law (DGCL), the state’s rules that govern the country’s largest corporate entities, according to draft legislative documents shared with the Delaware Call.

Because of rules unique to the DGCL — as well as the ability of the state’s Court of Chancery to fast-track corporate disputes — nearly two-thirds of Fortune 500 companies including Amazon, Coca-Cola, Comcast, and Google’s parent Alphabet now call Delaware their legal home. Most of these corporations are not headquartered in Delaware, mind you; rather, their presence in the state is usually limited to a handful of forms, fees, and filings with the state kept on a computer or in a cabinet. Nevertheless, the incorporation industry is a local cash cow, accounting for more than a third of the state’s $3 billion budget.

Changes to the laws that govern these corporate entities are almost always drafted by a group called the Corporation Law Council (basically a subcommittee within the Delaware State Bar Association’s Corporation Law Section) and presented to the General Assembly in late spring to be brought to vote before each house adjourns in late summer. Lawmakers rarely write these bills. Even so, amendments to the corporate code are usually pitched as noncontroversial and are expected to pass with large majority votes after little discussion or debate. This is the (Delaware) way.

But it didn’t go down that way in 2023. Last summer, state Rep. Madinah Wilson-Anton challenged changes to the corporate code that some activists and court watchers considered to be highly controversial. The changes, sought by the Corporation Law Council and introduced in the General Assembly by Sen. Kyle Evans Gay as Senate Bill 114, in part allowed corporations to dilute the voting power of retail investors in corporate decision-making with a lower standard of votes cast as opposed to votes outstanding. Previously, not voting was a vote against such dilution. With the amendments, only votes cast were counted. 

Why is all this noteworthy?

Retail stockholders frequently have trouble with the logistics of voting, and perhaps for that reason are notorious non-voters in corporate governance. But the voting power of stockholders is one of the few quasi-democratic (albeit extremely flawed) systems remaining in corporate America, and in recent years retail investors have taken advantage of shareholder voting rules in attempts to hold company executives accountable. One of the most noteworthy cases is at the movie theater company AMC, where an army of retail investors challenged the settlement of a case attempting to enjoin the issuance of preferred stock with more voting power than common stock. 

AMC’s board wanted to issue more shares of common stock to raise capital, which would dilute the voting power of retail investors, but the company’s charter prevented this absent a shareholder vote. So instead, AMC issued preferred stock that effectively held more voting power than common stock, according to documents filed by lawyers representing the stockholders in a class action when they sued in the Delaware Court of Chancery because — you guessed it — AMC is incorporated in Delaware.

Although the litigation between AMC and its retail investors was pending before the Court of Chancery during the summer of 2023, the Corporation Law Council, with the support of elected officials within the General Assembly, moved forward with changes to the DGCL that made it easier for powerful majority shareholders to block the potential influence of retail shareholders’ voting rights by changing the standard by which votes are counted.

“There’s a big joke every year: What cases did the plaintiffs win last year? Because those are the changes you’re going to see in the Delaware General Corporation Law,” the author of The Chancery Daily Substack said on the Highlands Bunker podcast last year. “But it’s always at least a year or two in the rearview mirror. And that’s kinda cute and a little annoying, but at least it’s already done business. Right? It’s complete. This [AMC case] is en medias res. This is like, we’re sitting inside the middle of it. You can say that it’s settled, but it’s not.” 

At that point, the lawyers representing stockholders had reached a settlement with AMC, but the settlement was hotly contested by many of the retail stockholders, who submitted objections to attempt to block its approval by the court. In a class action, even after the parties agree to a settlement, the Court of Chancery still has to approve its terms. 

In an attempt to block SB114 from harming retail stock investors, Wilson-Anton proposed an amendment that would have prohibited corporations from abusing their power to dilute the voting power of existing stockholders. Wilson-Anton’s amendment was defeated on the last day of the General Assembly’s 2023 session in an 11-29 vote in the House.

“When we amend our state’s laws, the conversations in favor and opposition should be open to the public. The changes to the General Corporation Law have far-reaching, international impacts and deserve robust debate in committee and on the floor in both houses of the General Assembly — just like other bills,” Wilson-Anton said in an interview with Delaware Call. “No area of our state’s laws should be allowed to be amended without the input of the legislature, or Delaware residents who wish to weigh in. Unfortunately, that has not been the case for the General Corporation Law amendments for too long.” 

The AMC litigation was still pending when last year’s changes to the DGCL went into effect.

So what is changing this year in the other relevant sections of the corporate code? Not much. Current proposals for changes to the Delaware Limited Liability Company Act, such as minor revisions to Title 6 laws regulating limited liability companies and partnerships — specifically, rules about mergers and which parties are responsible for filing certain paperwork. Similar amendments are proposed to the General Partnership Act and the Limited Partnership Act. On first blush, the changes don’t appear to be much beyond the ministerial-type of changes that the legislature has always been told they were making to these statutes over the years. Whether that is the truth remains to be seen.

Does that mean big changes are coming in 2025? Delaware Call – for one – will be watching.

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Read more from Jordan Howell.