UPDATED: On June 20, 2024, SB 313 was passed by the Delaware House with 34 votes in favor and 7 against.
The most controversial amendments to Delaware’s corporate code in decades took yet another small step toward becoming law yesterday when the House Judiciary Committee narrowly voted to release Senate Bill 313. Unlike in the state Senate, where the bill sailed through committee and floor votes with no meaningful dissent from lawmakers, SB 313 encountered stiff opposition in the House Judiciary Committee, where lawmakers expressed frustration at having to rush debate on yet another important amendment to the corporate code in the final days of the legislative session.
“I am going to vote to release the bill so that my other colleagues can hear this and know exactly how complicated this is, because this is very complicated and something that I don’t appreciate on June 18th,” said Rep. Franklin Cooke. “I’m going to say it for the record: I don’t appreciate it on June 18th.”
With just two days left in the current legislative calendar, the bill will likely go to a vote either tomorrow or on June 30, the final day of the session. Because the General Assembly must finish official business on the last day of the session, the evening of June 30 usually turns into an all-night vote-a-rama, with little or no meaningful debate as legislators rush to pass their bills before the end of the session.
If anything, the hearing exposed new ideological fissures in the General Assembly over the state’s role in corporate governance, with both Democrats and Republicans voting against the measure.
Why critics say SB 313 is bad for Delaware
The House hearing yesterday on Senate Bill 313 did little to solve the contentious debate over the intent and likely effect of the bill should it become law. Sponsored by Senate Majority Leader Bryan Townsend, SB 313 makes major changes to Delaware’s corporate code, which dozens of experts have gone on the record claiming will dismantle corporate democracy as we know it and damage the state’s reputation.
In short, critics contend the amendments will give companies carte blanche to enter into secret side deals with powerful investors that will give them the same powers as directors, or control over decisions made by directors, but without needing approval from shareholders.
Back in February, the Court of Chancery ruled in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company that one of these side deals went too far, giving too much power to the defendant’s eponymous founder, Ken Moelis. That agreement violated Delaware law, said Vice Chancellor Travis Laster, because boards of directors shall not confer their authority to a third party unless it is written into the certificate of incorporation, which requires a vote of approval from all shareholders.
“What happens when the seemingly irresistible force of market practice meets the traditionally immovable object of statutory law? A court must uphold the law, so the statute prevails,” Laster wrote in the Moelis decision. “Market participants must conform their conduct to legal requirements, not the other way around.”
The Moelis decision proved an unwelcome surprise among corporate lawyers and their clients, who apparently had no intention of abiding by Laster’s call to bring problematic contracts into alignment with Delaware law. Rather, they moved quickly through proxies in the Delaware State Bar Association to draft amendments to the corporate code and rush them through the approval process before the end of the legislative session — and also before the Moelis case could be appealed to the Delaware Supreme Court.
The urgency among corporate lawyers to draft these amendments before the case even had a chance to be appealed did not sit well with some legislators.
“One of the things that concerns me the most is that this legislative body would be acting to effectively reverse the decision of the Court of Chancery in a case that’s still pending and subject to appeal by the Delaware Supreme Court,” said Rep. Sean Lynn, who then took aim at Srinivas M. Raju, chair of the Corporation Law Council, which is the special subcommittee within the state bar entrusted with writing the corporate amendments every year.
“Mr. Raju in his opening remarks described the ‘three-legged stool’ which is Delaware corporate law, and he is on record as saying that the most important leg is the Judiciary. He told the Senate that,” Lynn said. “So I feel like this is really taking out the most important leg of the stool by not allowing the Judiciary to conclude its process.”
Mr. Raju, whose primary employment is as a corporate attorney with the law firm Richards, Layton & Finger, was called as a special witness in support of SB 313 by Rep. Krista Griffith, one of the bill’s sponsors, and was the target of criticism and pointed questions throughout the hearing.
“I just want to ask on record: Is your firm, or do other firms that are members of the Council, currently have paying clients that have a financial stake in the legislation being proposed today?” Rep. Sophie Phillips asked.
“I don’t know how to answer that question,” Raju responded, and then appeared to suggest such is the case. “I’m sure we represent stockholders who have signed these agreements.”
During his opening remarks, Raju testified the amendments in SB 313 were necessary in part because of feedback the Council had heard following the Moelis decision in the Court of Chancery. Latching onto that detail, Rep. Wilson-Anton asked Raju for more information about these communications, which she described as lobbying.
“You mentioned that you all are lobbied by lots of people,” Rep. Wilson-Anton said. “Who lobbies you? Can you share some examples of folks who are unhappy with this?”
“We hear from everyone around the country,” Raju replied.
“Could you be more specific?” Rep. Wilson-Anton asked.
“No!” Chair Griffith interjected. “He needs to be allowed to answer his question.”
Mr. Raju concluded his response without including any specific information about individuals or organizations that had lobbied him or members of the Corporation Law Council for changes to the corporate code.
Rep. Wilson-Anton continued her line of questioning, asking Mr. Raju to clarify remarks he made before the Senate that were allegedly inaccurate. At issue was the “unprecedented” nature of SB 313: Had the state legislature ever stepped in to change the law in response to a Chancery Court decision before the appeal was heard by the Delaware Supreme Court?
Mr. Raju had previously testified there were several other instances where the General Assembly had stepped in to change the law.
“In fact, you were incorrect,” Rep. Wilson-Anton replied. “The Delaware General Assembly has never reversed a decision by the Court of Chancery in a case still pending and subject to appeal to the Delaware Supreme Court. This would be the first time ever. Correct?”
“I don’t view what we’re doing here as reversing Moelis,” Mr. Raju replied. “I believe what we’re doing is clarifying the statute.”
“You’re not answering my question,” Rep. Wilson-Anton said.
“Representative Wilson-Anton!” Chair Griffith said. “I will be the judge if someone is answering or not answering a question as chair.”
Rep. Wilson-Anton then asked about the impact the bill would have on the fiduciary duty of boards of directors, quoting Vice Chancellor Laster, who said, “The board’s fiduciary duties will not pose a meaningful constraint” on limiting stockholder agreements.
“Is he mistaken?” she asked.
Mr. Raju replied: “I don’t know.”
Kowalko returns for public comment
After more than an hour of debate and calling witnesses, the hearing for Senate Bill 313 transitioned into public comment. In his return to the House chamber, former Rep. John Kolwalko called on legislators to not rubber stamp legislation drafted by the CLC.
“During the course of eight terms, I had frequent opportunities to review and sometimes oppose these Corporate Law Council bills such as Senate Bill 313, which is before you today,” Kowalko said. “This particular bill intends to blur the Constitutional line of separation of powers by having the state legislature pass a law that can hamstring the judiciary, even as active cases are being judged. So I strongly urge this committee to hit the pause button and not release — or in fact table — Senate Bill 313 until next session when a thorough and public discussion of this matter can take place with all stakeholders, all shareholders, and members of the public, including the judiciary.”
Speakers lined the walls of the House chamber waiting for their chance to comment on a bill that has raised alarm bells across the country, including here in Delaware. Except among an exclusive cadre of Wilmington corporate lawyers who have claimed repeatedly that the bill will have no meaningful impact on corporate law, the vast majority of experts have gone on the record voicing their dismay with the changes SB 313 will make to Delaware’s corporate code, which governs nearly 2 million businesses incorporated here, including two-thirds of Fortune 500 companies.
Because so many companies are incorporated in Delaware, and because so much corporate litigation takes place in the Court of Chancery, “the corporate law of the state is de facto the law of the land,” writes journalist Hal Weitzman in his book, What’s the Matter with Delaware? (Princeton University Press, 2022).
LISTEN TO HAL WEITZMAN DISCUSS HIS BOOK ON THE HIGHLANDS BUNKER PODCAST
“I’ve heard that this really damages our reputation as being a neutral player. It looks like we’ve tipped [the scales] in a particular way that does not protect all shareholders and that’s damaging,” said retired University of Delaware Professor Charles Elson. “They’re making a terrible mistake . . . If this bill does pass, it’s damaging to Delaware. The argument that we have to pass it to protect the state — I think frankly it’s just the opposite.”
“You are being asked for the first time in the history of the General Assembly to overturn a decision of the Court of Chancery in an actively pending case which has not yet had the opportunity to go to the Delaware Supreme Court,” said Delaware attorney and resident Lauren Pringle, who is also editor of the Chancery Daily newsletter.
Joel Fleming, a Boston-based attorney who represents public investors like fire departments and union pension funds — “public servants who deserve a safe and secure retirement” — said this bill will hurt his clients.
“Mr. Raju in response to your question said it’s no big deal whether you put this in the charter or a stockholder’s agreement. Yes, it is!” he said. “Public investors get a vote when you change the charter. They do not get to vote on these agreements. It is taking their voting power away. It is destroying corporate democracy.”
“You’ve heard this bill validates long standing market practice, but selling lead paint was market practice. Discrimination was market practice. Backdating options was market practice,” said Jim An, lecturer and fellow at Stanford Law School and former clerk in the Delaware Supreme Court. “Simply because something is market practice doesn’t make it good, or right. Nor is it a reason to change the law to legalize that.”
Some commenters also targeted the process for amending the corporate code, including informal rules that place limits on what legislators can and cannot do.
“Bills relating to corporations must go through the CLC, and legislators must not bring corporate bills without going through the council; historically, they have been chastised for doing so,” said Connie Merlet. “You legislators need to break free of that rule because actually the public thinks legislators write laws and corporations are supposed to abide by them.”
The final in-person speaker was University of Delaware historian Dael Norwood, who called on legislators to not leap “before they look” and in doing so damage the state.
“If you pass this law you as legislators will send a clear message: Delaware courts don’t matter, Delaware jurists are not the legal experts we advertise them to be, and Delaware law is not a sound foundation upon which to make business decisions,” he said. “Remember that Delaware’s privileged status can vanish with one bad decision. SB 313 is that bad decision. You should reject it.”
At the end of the hearing, Chair Krista Griffith called for a vote on the legislation, and it passed with 6 yes votes — including a highly skeptical Rep. Cooke — four no votes, and one absent. Rep. Valerie Jones Giltner was the lone Republican vote against the legislation. Delaware Call reached out to her office for comment but as of publication had not returned our request.