A controversial bill that modifies Delaware’s corporate code was signed into law this week. Until now, Democrats who control both houses of the General Assembly have mostly refrained from commenting on the unusual furor over the bill, which critics say will mainly benefit powerful shareholders at the expense of everyone else.
The annual update to the state’s corporate code typically attracts little attention and less opposition, but as our Jordan Howell has reported, this year was decidedly different.
Dozens of prominent law professors as well as the Chancellor and a Vice Chancellor of the state’s Court of Chancery and assorted others in a position to know what they are talking about urged the General Assembly to slow down consideration of SB 313, particularly since the proposed changes seemed to directly challenge a recent ruling in the Court of Chancery (by Vice Chancellor J. Travis Laster in a case known as Moelis) that is still working its way through appeals.
The bill, which has been described as “routine” by supporters and “major surgery” by opponents, was discussed last month at a House hearing so contentious that one news outlet said there was “blood on the floor.”
Nevertheless, the bill sailed through both the House and the Senate with overwhelming majorities, including among Democrats, who apparently disregarded the vocal opposition of advocates for corporate democracy. Last week, the Delaware Coalition for Open Government sent a letter to Gov. John Carney, urging him to veto the measure. Carney signed it into law on July 17.
After the bill’s passage, Delaware Call reached out to several top Democrats seeking an explanation for why the bill appeared to circumvent the courts in the Moelis case and why the concerns of the law professors, chancellors and others were seemingly ignored.
The bill’s sponsor, Senate Majority Leader Bryan Townsend (D, Newark-Bear), emailed the following statement:
“To address your question directly: we did not circumvent a judicial process. It is not a legal or practical requirement that the Delaware General Assembly hold off on statutory modification of a provision of the Delaware General Corporation Law until litigation relating to that provision has exhausted the appeals process. The sudden framing of that as some kind of requirement was a bit surprising in this legislative process, particularly when advanced by learned attorneys or judges. In fact, the Moelis decision itself noted that the General Assembly is the body to make statutory modifications to the DGCL. It certainly is important to note that SB313 is not retroactive, and so the Moelis case needs to play out based on the facts and law of that case, including the DGCL as it existed prior to the effectuation of SB313. Also, SB313 specifically stated the new provisions would not apply to any lawsuit brought by August 1, 2024, which was another mechanism we used to make clear that anyone with a pre-SB313 concern would have time to express that concern in the form of litigation, if they so choose.
“In addition to those procedural points, it is important to be clear that few people, if any, criticized the Moelis decision as flawed from the perspective of statutory interpretation. In other words, people are saying that Vice Chancellor Laster got it right: technically, the DGCL did not permit certain kinds of contracts that for 17+ years everyone seemed to have thought were permitted. As the Moelis decision explains, a judge is not permitted to set aside clear statutory language in deference to market practice, however widespread or meritorious that practice is. It is the General Assembly’s job to recraft the statute if so desired, not a judge’s. This is another reason that waiting for the Supreme Court to hear an appeal did not seem to be the optimal approach to clarifying the law for thousands upon thousands of other contracts that suddenly were thrown into question; we should not want the Supreme Court to be expected to set aside clear statutory language to make a policy call. Again, that is the job of the General Assembly.
“So, knowing it is our job to ensure final and full clarification of the DGCL when a question arises, and knowing that Delaware is known as a place where we can be dynamic and responsive to developments in the corporate law arena, we were open to the standard path for doing so: a vetted proposal from the Council of the Corporation Law Section, if approved by the Section and DSBA Executive Committee. Some expressed concern about a DGCL bill coming before us in May/June, rather than earlier in session. It is worth noting that the Council could have sent a proposal to the General Assembly as early as early April, but instead opted to offer an intermediate 5+ week period in which law professors could engage in discussions and submit comments to the DSBA Executive Committee, before bringing the proposal to the General Assembly. Once the proposal came forward, we held the standard committee hearings to receive testimony. I can only speak for myself in noting that a letter received from a few dozen law professors opposing SB313 contained a surprisingly inaccurate characterization of how Delaware law operates, and in addition to that unpersuasive input, I heard no testimony that led me to believe there was substantive concern with advancing SB313, particularly given that: (1) these kinds of stockholder agreements already are permitted through multiple other mechanisms, and we have not seen evidence of abuse; (2) for public companies that do not already possess the mechanism, the agreements would be subject to federal securities laws disclosure requirements; (3) for private companies that do not already possess the mechanism, stockholders are few in number and have other agreements in place that would protect various rights even with the new mechanism; and (4) perhaps most importantly, in all instances these agreements still would be subject to fiduciary duties and Court of Chancery review, and so whether for a company that already had this mechanism or the rare scenario of one that did not, the mechanism is not blessed as one to use to harm stockholders.
“In short: there are many checks in the system, and SB313 was a means to restore everyone’s understanding that the DGCL permitted this kind of contractual flexibility, still subject to fiduciary duties and court review.
Sincerely,
Bryan”
We at Delaware Call will continue to report on this bill, including following up with Townsend to ask what he considered “inaccurate” about the law professors’ letter, but we want to get his statement to our readers without further ado since it’s the first explanation we’ve seen of what Delaware Democrats have been thinking with regards to SB313, its relation to the Moelis case, and the opposition to the bill.