Sparks fly in final hearing on corporate law amendments

Amid political division in the House, former chancellor William Chandler took shots at chancellors McCormick and Laster for speaking out against the bill.

 · June 22, 2024
The chamber of the Delaware House of Representatives in Legislative Hall in Dover.

The final hearing for Senate Bill 313 in the House chamber was about as contentious as they get in Delaware, where politics is usually the sort of cordial horse-trading that seems like something from a bygone era.

Thursday evening was much different. Before the debate over SB 313 even started in the House chamber, it was clear that most lawmakers had already made up their minds about the bill, which has been described as “routine” by supporters and “major surgery” to Delaware law by opponents. After one hour of debate that left “blood on the floor,” according to the legal news outlet Law360 — and included intense questioning of a University of Delaware professor and a former chancellor — no one appeared to change sides. Some lawmakers were visibly frustrated with the opposition for holding up the process, while the opposition appeared stunned that so few legislators showed concern for the public outcry against the bill.

The final vote was 34-7 in favor of SB 313, which now heads to Gov. John Carney, who has indicated that he will approve the measure, according to the Delaware Business Times

This likely ends — for now at least — the divisive saga that was SB 313. Ultimately, legislators sided with private equity and powerful corporations over union pension funds and ordinary minority investors, including those who buy stocks through apps such as Robinhood. 

Corporate interests wage war against Court of Chancery

At the heart of the debate Thursday evening in the House was whether or not it was appropriate for the General Assembly to change the law in response to a decision in the Court of Chancery when the case at issue had not yet been resolved, nor had the opportunity to be heard by the Delaware Supreme Court.

On Feb. 23, 2024, Vice Chancellor Travis Laster issued a decision that allegedly stunned Delaware’s legions of corporate attorneys. In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, Laster ruled against an investment bank that had entered into a special agreement with its eponymous founder, Ken Moelis. Within this agreement, Laster explained, Moelis was given the power to control decisions made by the board of directors, which the agreement also stipulates must include a majority of his preferred candidates, thus ensuring that, for all intents and purposes, he is in total control of a publicly-traded company.

The agreement contained provisions that delineated “eighteen different categories of action” that must be pre-approved by Moelis in writing and, according to Laster, these requirements “encompass virtually everything the Board can do.” Moelis was entitled to nominate a majority of the Board seats, and the current Board “must recommend that stockholders vote in favor of Moelis’ designees,” “must use reasonable efforts to enable Moelis’ designees to be elected and continue to serve,” and “must fill any vacancy in a seat occupied by a Moelis designee with a new Moelis designee.”

That agreement violated Delaware law, Laster said, 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.”

In response to Laster’s opinion in the Moelis decision, corporate interests in Delaware went into overdrive to change the law to “favor big shareholders,” according to the Financial Times. Within weeks, the Corporation Law Council (CLC), which is basically a special subcommittee within the Delaware State Bar Association, had drafted amendments to the corporate code that would become SB 313. The Moelis case had not even reached summary judgment in the Court of Chancery and was still months away from a likely appeal to the Delaware Supreme Court.

“Critics of the bill suggest that it’s unusual and problematic to reverse a Court of Chancery decision by legislation while it is still being litigated and before there’s been an appeal to the Supreme Court,” Rep. Madinah Wilson-Anton said on the House floor Thursday evening while questioning Charles Elson, founder of the University of Delaware’s Weinberg Center for Corporate Governance. What would be, she asked, “the long-term implications for Delaware if we set a precedent that the General Assembly will reverse decisions made in ongoing cases before they get to the Supreme Court?”

“Once the Supreme Court has ruled, if you disagree with the opinion, or think the Supreme Court’s approach was problematic, that’s typically when you see a legislative response,” Elson responded. “Quite frankly, that’s why you have a Supreme Court. For a disappointed litigant to come into a legislature to seek to change the ruling of a lower court before there’s an appeal side-steps the process and is really problematic for an effective judicial system.”

Instead of waiting for the appeals process to play out, corporate interests in the state bar association, along with their allies in the General Assembly, started working overtime to get a bill drafted and passed before the end of the current legislative session on June 30. The text of proposed amendments to the corporate code, formally known as the Delaware General Corporation Law (DGCL), became public in early April when draft copies were distributed to members of the state bar association. That first version of the bill generated pushback almost immediately from law professors and advocacy groups.

“It’s really a bit of a dramatic expansion of what you can do by a contract between a corporation and a given stockholder,” law professors Gabriel Rauterberg and Sarath Sanga said in an interview with Delaware Call in early April. “Changes to the DGCL are usually explicitly and finely targeted at a problem. And I think what is causing consternation in this proposed amendment is it’s taking a sledge hammer to hit a nail, tackling something in one unpopular opinion by purporting to legalize virtually anything by contract.”

There was also dissent within the state bar association itself. According to testimony at both the Senate and House committee hearings — and the final debate in the House chamber on Thursday — members of the state bar repeatedly spoke out against the proposed amendments. The pushback was so intense that, after the proposed amendments were approved by the CLC, the process was paused temporarily to hold what they called a mediation to supposedly resolve differences. However, during the SB 313 hearings, opponents of the bill suggested that meeting was really just a cover to give the impression that the state bar was listening to all sides on the issue.

“There was no mediation,” Wilson-Anton said on the House floor, pointing in the chamber to Jill Fisch, Saul A. Fox Distinguished Professor of Business Law and Co-Director at the Institute for Law & Economics at the University of Pennsylvania, who had attended that meeting but, due to the unusual terms of the floor debate on SB 313 set by the House Democratic leadership after the start of the hearing, was not allowed to speak. “She was in the so-called mediation. Her perspective is that there was not a mediation. There was a discussion, and a conclusion, which they were made aware of after the meeting. So they were not actually party to the decisions that were being made,” continued Wilson-Anton.

After the mediation, members of the CLC made additional alterations to the proposed amendments — changes which were not put to a vote — and then sent the bill to the DSBA Executive Committee for approval. Only after the Executive Committee’s approval does the DSBA allow use of its lobbyist and officially send proposed amendments to friendly legislators in the state Senate, who filed the bill on May 23 — approximately three weeks later in the session than when the corporate amendments were filed last year.

Not widely known at the time was that Chancellor Kathaleen McCormick had written a private letter to the DSBA Executive Committee urging them to slow down. She called the amendment process “flawed” and criticized the state bar for fast-tracking amendments that would substantively alter Delaware corporate law while litigation is still pending in the courts. 

“The Proposal was the product of a rushed reaction,” McCormick wrote in April. “The Proposal has moved forward at a pace that forecloses meaningful deliberation and input from diverse viewpoints. It reflects the broadest set of substantive amendments since the 1960s. It is controversial. It preempts the Delaware Supreme Court’s opportunity to act as the final arbiter of Delaware law, striking at two cases still being litigated before the Court of Chancery.”

A few weeks later, a current member of the DSBA Executive Committee publicly reiterated McCormick’s call to slow down the process.

“I remain disappointed in the rushed process by which these proposed amendments have made their way to the General Assembly and wish there had been more opportunities for others to offer their input to the Council,” Secretary Mae Oberste said in an exclusive interview with Delaware Call

Around the same time, Vice Chancellor Laster, who authored the Moelis decision, started posting his thoughts about the proposed amendments on LinkedIn. 

“This is not the annual tweaking,” of the corporate code, he wrote. “That’s a cosmetic procedure by comparison. This is major surgery.”

Remarks by McCormick and Laster about the corporate code amendments eventually became something of a rallying cry among opponents of SB 313. However, among supporters of the bill, remarks by the chancellors were framed as an uncomfortable break with tradition.

“As chancellor, I was taught that judges need to stay in their lane and need to be applying the law that [legislators] give them. Judges don’t need to intrude on the process of making law,” said former chancellor William Chandler in the House chamber Thursday evening, and then gave lawmakers dire warnings should SB 313 fail to pass. “The headlines will read that two judges and a lot of law professors succeeded in convincing you to vote down changes to corporate law that would have preserved the continuity and stability that we have known.”

To the contrary, in a 2006 law review article published while Chandler was serving his 17th year on the Court of Chancery, Professor Lawrence Hamermesh — at the time a member of the Corporation Law Council and the sole law professor to write publicly in favor of SB 313 — wrote that:

Delaware’s judges, particularly of late, have publicly expressed their individual views — formed out of their extensive experience with the corporate cases presented to them — on potentially desirable changes to the DGCL. Similarly, and in view of the small size and close-knit character of the relations among Delaware’s judges and corporate lawyers, private conversations among members of these two groups on the subject of potential changes to the DGCL have not been uncommon. 

Moreover, Canon 3.1 of the Delaware Judges’ Code of Judicial Conduct provides that: “A judge may speak, write, lecture, teach, and participate in other activities concerning the law, the legal system, and the administration of justice (including projects directed to the drafting of legislation).” 

Chandler served on the Court of Chancery from 1989 to 2011, when he retired to join the corporate law firm Wilson, Sonsini, Goodrich & Rosati. When asked during the hearing if he thought McCormick and Laster were wrong in their criticisms of SB 313, Chandler answered, “Yes, I do. I served longer than both of them — combined.”

Debate over corporate amendments divides lawmakers

Throughout the debate over the amendments to the corporate code, supporters of the bill that include powerful law firms frequently suggested that changes to the law are necessary to bring Delaware’s corporate law “in line with market practice” after the Moelis decision threatened the legality of potentially thousands of stockholder agreements. Many lawmakers appeared genuinely concerned about the consequences of their actions.

“I feel like there’s this rush. That we have to do something today. That we have to pass a law today,” Rep. Eric Morrison said to Professor Elson. “What happens if we wait on this?”

“Absolutely nothing happens,” Elson replied. “Certainly in this case, the world isn’t going to end if you wait until the Supreme Court rules on the case, and at that point look at it and decide. The fact that, again, you have so many folks opposed to it, is to me very troubling.”

Whereas opponents of the bill largely used Elson’s time as a witness to explain the flaws in SB 313, supporters seemed mostly concerned with attempting to poke holes in his credibility.

Rep. Krista Griffith asked only one question of Elson: “Are you a member of the state bar?” To which Elson responded, “No.”

Rep. Franklin Cooke’s ire over the late timing of SB 313 was strangely directed not at the bill’s sponsors, who introduced it three weeks later in the session than last year, but rather at the witness, Professor Elson, who Cooke accused of not speaking up when he had the chance.

“Lawyers had their chance to speak, but didn’t,” Cooke said in reference to the Corporation Law Section meeting in May when members were not allowed to offer amendments to the proposed legislation. Nor was that meeting open to the public. 

“I wasn’t at that meeting,” Elson pleaded. “I wasn’t invited!”

And when Elson suggested that SB 313 was designed to overturn the Moelis decision, outgoing Rep. Paul Baumbach accused Elson of playing fast and loose with the facts.

“Respectfully, responding to a case and reversing a court decision are very different, but you seem to be lumping them together,” said Baumbach.

“I think you’re getting into semantics,” Elson replied.

“Important semantics.”

To which Elson responded: “Well, respectfully, I would disagree.”

Baumbach interjected multiple times while Elson was speaking, at one point cutting him off mid-sentence to say that a yes-or-no answer “would be fine.”

Meanwhile, during his time as witness, former chancellor Chandler doubled down on the importance of the CLC to Delaware’s incorporation industry.

“I believe deeply in the Corporation Law Council process,” Chandler said, claiming the Council “has never failed” the state of Delaware. “These are experts who have only one mission: To keep Delaware up-to-date. To keep our law predictable, certain, reasonable, and fair. That’s their job.”

Chandler not only went to bat for the CLC. He also had some harsh words for Chancellors McCormick and Laster, not only for speaking out against SB 313 but also for rulings they’ve issued to which he appeared ideologically opposed.

“Right now, the corporate market is not feeling good about Delaware,” he said. “It’s not feeling good about Delaware because of the uncertainty and unpredictability of a few decisions by just two judges. And remember, that’s not a court of two judges. That’s a court of seven judges. But only two judges are telling you there’s some concern about this legislation affecting their decisions.”

Although Chandler did not use the phrase “judicial activists” to describe McCormick and Laster, he strongly hinted at it.

“They have become really powerful,” he said. “They’ve now become makers of the law as well as the adjudicators of the law. That to me is even more worrisome and concerning than whether or not this legislation passes at all because that’s never happened in our history. Never.”

(Boston-based attorney Joel Fleming, who practices in the Court of Chancery, pointed out in a comment to Delaware Call that this claim contradicts Chandler’s own record, as he and then-Chancellor Leo Strine urged the General Assembly to make specific changes to the corporate code back in 2002, and legislators complied. Strine did the same for another amendment in 2014).

“You can say that this is the first time this has happened,” Wilson-Anton said in response to Chandler’s remarks. “But when we start the clock with the Chancellor and Vice Chancellor responding to legislation, I think that’s doing everyone a disservice. I think really we should start the timeline with: A decision was made by the Court of Chancery, and the CLC responded by saying, ‘We don’t like it. We think legislators should step in.’ And that’s what I think is the most historic part about all this.”

When Wilson-Anton then asked the former chancellor about his compensation as a lawyer for a big corporate law firm, the chair cut her off, calling her line of questioning “offensive.”

The chair called a vote on SB 313 shortly thereafter, and the bill passed 34-7. All votes against the bill were Democrats. The sole Republican who voted against SB 313 in the House Judiciary Committee, Valerie Jones Giltner, ultimately voted to approve SB 313. In an email to Delaware Call, Jones Giltner said she was “able to contact several corporate lawyers that are practicing corporate law and ask defining questions and seek their input. I am now in support of SB 313.”

The next day, Wilson-Anton said on social media that she was “disappointed by the manner in which these experts, my guests, were treated. Unfortunately, this week the bully tactics and double standards of the House Democratic leadership were on full display. If you have to change the rules to win, maybe you don’t have the winning argument.”

The debate over SB 313 not only left “blood on the floor” of the House chamber, as reporter Jeff Montgomery figuratively characterized the hearing, but was also one of the most direct challenges in recent memory to the politics of civility that usually guide decorum within the General Assembly, which critics have long pointed out is weaponized to crush dissent, especially when it comes to amending the corporate code.

“The Chancellor and Vice Chancellor are dedicated public servants who enforce the law. Bill Chandler is a dedicated servant of Wilson Sonsini’s venture capital clients who didn’t feel like following [the law]. What he said was shameful and reveals the cynicism of [Delaware’s] civility norms,” wrote attorney Joel Fleming. “There are those whom the civility norms bind but don’t protect. And then there are those whom the civility norms protect but do not bind.”

Although SB 313 will almost certainly go into effect later this year, chancellors McCormick and Laster are still on the bench, their politics and perceptions of corporate law are unlikely to change, and they will likely continue to issue rulings that powerful corporate interests and private equity firms may not like. 

So what happens next? Will the General Assembly continue to step in — perhaps annually — to curtail judicial review? 

Delaware Call will be watching.

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Read more from Jordan Howell.