In an exclusive interview with Delaware Call, Sen. Bryan Townsend reveals that some legislators are in full-blown panic mode over announcements by a handful of companies, including Meta and Dropbox, that plan to reincorporate in other states. In this interview, Townsend claims that Delaware corporate law worked fine “just a few short years ago,” but recent court decisions have thrown the law into disarray. According to Townsend, “It’s not really workable anymore.” Read the full interview below.
Jordan Howell: I’ll just get right to it then, because this is not business as usual. This is a departure from what has been the process for many years, and a lot of people are concerned, in part because this amendment could involve Elon Musk. So what assurances can you give Delawareans that this is a thoughtful process, and that we’re not just caving to Elon Musk because he got mad at us?
Bryan Townsend: When Elon Musk announced his departure [from Delaware] in 2023 or 2024 — I don’t remember the exact date — but whenever it was I can tell you not a single legislator I know was concerned about it. We rely on input and advice that relates to a far broader swath of experiences and concerns from Delaware corporations and stockholders. So this wasn’t at all about Elon Musk. The legislation is not retroactive. His specifics have not come up at all in the in the discussions regarding what’s going on, and it was sparked by, in late January and early February, an unpreceded series of announcements — both unprecedented in the moment, certainly as a legislator I’d say it felt unprecedented, and I think it was — but even more troubling was not just those announcements but then the input we were getting as we then reached out deeper and broader to try and figure out what was going on. And it seems an unprecedented amount of discontent had been building for a while, but sort of came to a head. Partly I think it’s because of the rise of apparent alternatives in Texas and Nevada, and people seem willing to explore that. So it kind of makes sense, in a way, that it’s not what we normally would have heard because normally there wouldn’t have been an alternative. But it all kind of came to a head, and so we are grappling very quickly to try and understand the various natures of the concerns, and the possible solutions to them. The word “Elon Musk” has never come up positively, or evenly at all — but especially not positively — in the conversations the past two-plus weeks about what is going on here and the reason for the frustration.
JH: You say that SB21 is not retroactive, and it won’t affect Musk, but there’s nothing in the bill explicitly about that — there’s no effective date. And one of Elon musk’s own lawyers on LinkedIn said the way this law is written would apply to Elon Musk’s appeal, which as you know is still pending before the Delaware Supreme Court. And so even if Elon Musk wasn’t involved, one of his own lawyers seems to think this would apply to him, and the Delaware Supreme Court could possibly rule in his favor and reverse his pay package. Have you thought about that? Or did that come up at all in discussions of this bill?
BT: No. When bills don’t have effective dates listed in them, which is quite common for them not to, they then are by default effective only upon the signature of the governor — so it goes into effect the minute the governor signs it. Legislation is essentially never retroactive. I think on any topic, retroactive legislation faces an exceptionally high constitutional bar as to why you would make a law apply retroactively — not just corporate law, but I think literally just about anything. But it’s certainly corporate law. Every year, we make it very clear this is not retroactive. I don’t believe at all that this affects any litigation, appeal (or otherwise) that Elon Musk or any entity he has is related to.
JH: Even if it doesn’t affect pending litigation, many respected law professors have spoken out against this bill in just the past day: Eric Talley from Columbia, Sarath Sanga from Yale (who I’ve interviewed before), and Gabriel Rauterberger from Michigan, have said: “This is the most significant single-year revision of Delaware’s corporate code since at least 1967, reshaping everything from how controlling stockholders negotiate major transactions to the mechanics of derivative litigation. And Ann Lipton at Tulane said: “Delaware proposes a package of statutory changes that undo certainly the last 10 years of Delaware jurisprudence – if not the last 50 — in favor of a model of corporate self-policing.” I think some of this comes down to a lot of the new liability exemptions in this bill that, apparently, seem to model Nevada law. Basically this bill will allow corporate officers to escape personal liability for decisions they make that may not be in the best interest of the company or stockholders. This seems to be an emerging, consistent complaint about this bill. What do you say to that? That this bill is allowing corporations to basically police themselves.
BT: I respect law professors, generally speaking. If what you have attributed is exact, I respectfully say they have not characterized this accurately — or you have not characterized them accurately, perhaps. A few things, first of all — this does not eliminate fiduciary duty whatsoever for officers and directors — I think what you’re referring to is the provision that relates to eliminating fiduciary duties for controlling stockholders in their role as controlling stockholder only, and that’s only for the duty of care. This does not at all modify duty of loyalty for controlling stockholders, and it doesn’t modify fiduciary duties. More broadly than that, the reason for that provision was a case in early 2024 — I think it was in R Sears — where for the first time the concept was floating that fiduciary control stockholders might have the fiduciary duty of care might not be able to be exculpated for that — and that was that was like a surprise. That was just not how Delaware law has been, and it doesn’t really make sense, frankly, because directors and officers are allowed to be exculpated for breaches of the fiduciary duty of care under Section 102b7 of the [Delaware General Corporation Law]. It doesn’t make sense that you could have the top decision makers — managers and officers and directors — be allowed to be exculpated for breaches of duty of care, which is an absolutely unobjectionable Delaware principle. If you’d allow them to be exculpated, but you wouldn’t allow controlling stockholders to be exculpated — it was just very odd. It was a very odd theoretical type of framing, and so that kind of surprised people. I don’t think it means anything in terms of the actual way the case law is played out, but part of the cleanup that we’re trying to do here is to make clear how Delaware law should read in the wake of recent case law.That doesn’t make any sense for controlling stock owners to be personally liable for breaches of the duty of care, but it also doesn’t make sense to exculpate them in the code because the exculpation provision of the DGCL is in a director’s and officer section of the code. So it just sort of makes sense to say: Yeah, controlling stockholders don’t have duties of care as controlling stockholders. If a controlling stockholder happens to be also a director or an officer, they have a duty of care, but they don’t have it as a controlling stock owner, they have it as a director or an officer, and as a director or officer they can be exculpated for duty of care. So that’s all, like, bread-and-butter Delaware law. It might read in a way where it’s like: “Whoa! What are they doing?” That is all bread-and-butter Delaware law, and this wouldn’t be the first time that a law professor — I know many of them and I went to school with plenty of them — might not actually practice and, quite frankly, understand Delaware corporate law. They read the words in the page on the legislation but do not actually understand how it plays out in practice. So this is actually a very standard type of provision that’s not actually eliminating fiduciary duties that frankly existed at any time in Delaware history, until like early 2024 — kind of random mention in an opinion that sort of surprised everybody. To be very clear — more to the point — this legislation does not at all limit or eliminate fiduciary duty of loyalty, which is the absolute — that is the core. You cannot be disloyal to stockholders. You cannot waive it. If you want to waive those duties you have to form an LLC and have a complete contractual agreement. Delaware corporate law does not allow waiver of duty of loyalty, and this legislation does nothing to weaken that fundamental principle.
JH: You said you spoke with many stakeholders about this. How many corporations are leaving Delaware? Because reincorporating out-of-state can be a complicated process, and as one public interest lawyer explained it: “There’s a difference between widely held public companies that don’t have a charismatic controlling stockholder like Elon Musk which is 99% of companies, and which can’t leave because their investors will vote against the move, and the 1% controlled by companies with super superstar CEOs who can manage to make this work. Some of the criticism out there is that the vast majority of Delaware companies were never going to leave the state anyway, and that this is basically to appease certain people, or at least to try and diminish or put out some of the flames online about companies leaving Delaware just because it’s bad press. So how many corporations are leaving? What is the economic impact if we do nothing?
BT: I really don’t want to try to disagree with you Jordan, but I kindly ask that you don’t — I don’t think that Elon Musk is charismatic. But aside from that point, what I will say is that as the announcements began on Jan. 31 and Feb. 1, the initial reaction was: Are these a few controlled type companies and it’s sort of venting the pressure that we knew was building on controlled issues? Because for years, if you’re a controller, maybe you don’t want to be in Delaware, and maybe you really want to have your way with things, then go to like Texas or Nevada — I mean especially Nevada, like, fine. And so initially those first few hours we were like, Okay what’s really the context here? But we began reaching out broadly — and this it took a few days to confirm — but it clearly relates to traditional, widely held public companies as well. It’s not just the controller context. It’s more broad than that. It’s a variety of other things. That’s why Books and Records are part of this — there’s been building frustration with that over the years. We’re looking at the fees, which is not a legislative proposal now, but we want to have it studied quickly. Even that widely held public companies were saying they were considering leaving [Delaware]. We’re very mindful of the IPO pipeline, and that there’s talk of people switching their plans to incorporate from Delaware to other jurisdictions. IPO season is coming up — annual meetings — and there are companies that are considering their options, and even announcing that they might be looking to leave. And even if they don’t leave in 2025, the fact they might include it as a topic in their 2025 annual meeting for 2026 action is a problem. You asked about economic impact: Every major company that leaves here is $250,000 out of the state’s annual budget, so that’s tremendous. You can’t look at this whole number of entities in Delaware because that includes a lot of LLCs, which are $350 annually to the state, versus $250,000, which at some point is a capital increase for these major companies. So it’s a very, very serious issue. The net we cast very quickly identified that there is a lot of concern and discontent more broadly than just the rockstar CEO context, or the controlled companies context. So we’re hopeful of this proposal, which fundamentally, per the professors, Jordan — It’s not like a reshaping of Delaware law. This stuff was all pretty much bread-and-butter. It is certainly — the way they characterize the idea of the code — yes, as a matter of the code it is not typical to have this in the code. So yes, by that definition it is a significant reshaping of the code, but that’s very different from a reshaping of Delaware law. These are all principles that have been in place for a long time. If conflicted people are making decisions, they are not going to get deference from the court unless they put the decision-making in the hands of independent parties, like directors or disinterested stockholders. And there’s always been this concept of how many guardrails you have to put up for a transaction in order to get deference from the court. So this stuff has always been there. It’s only been the past two, three years where there’s been this building pressure to say, “Wait a second. We’re kind of departing from fundamental Delaware law here, and it’s not really workable anymore.” So that’s where I think it is. I think it’s that combination of incremental departures, plus the rise of Texas and Nevada as viable alternatives to some people, that sort of led to like a run on the bank, so to speak. That’s how someone described it the other day to me, and I said, “Yeah, that’s kind of what it feels like.” It’s like, people are sort of all announcing they’re going to leave, or think about leaving, and if they were saying that and they were asking us to, like, relax the duty of loyalty, we’d respectfully say, “No, thank you.” Right, like, that’s just a fundamental principle that we have to have in place. But when it’s more like, “Yeah, wait a minute — Delaware law was working great, and we feel that these changes have put us back to where it was just a few short years ago.” We talked about it, we’re looking at it, and that sounds right that seems to ring true with most companies. So if you don’t want that, if you want Texas and Nevada, then see you later. But if that’s what you’re asking for, is that certainty, that seems very reasonable to us.
JH: You mentioned the courts, and you mentioned certainty, and the courts have always been part of that certainty of incorporating in Delaware. We got the Chancery Court, it’s like the express lane for businesses to very quickly and efficiently resolve cases, and the rulings are widely respected and followed, and the case law of Delaware has — from what I’ve heard — become a model for other states. But we’ve been seeing in recent years — I think three years in a row now — is the General Assembly introducing bills that are directly responding to unpopular cases that were just resolved, or cases that were resolved before Chancery but are still pending before the Delaware Supreme Court. Last year Moelis, and I know this year the Delaware Supreme Court just ruled on Trip Advisor leaving Delaware, and they’re leaving because Nevada offers more liability shields than Delaware does. Is it dangerous to be undermining the judiciary in this way every single year? Basically saying that if they don’t get the decisions right for the right plaintiffs, or the right defendants, then we’re just going to change the law in order to placate whoever the preferred person is in that transaction? This is like the third year in a row now where the general assembly seems to be directly contradicting rulings from our business and Supreme Court. Why should investors think of it as one of those reasons to come to Delaware if an angry stockholder can influence a political debate here and just get the law changed and then the judges have to rule on the new law? How is that certainty?
BT: This isn’t a matter of angry stockholders influencing a political debate. First of all, you said three years. I don’t recall two years ago, but last year, it wasn’t that we were overruling their decision. They literally in the [Moelis] decision that we are interpreting this as a matter of statutory law, and we know this is going to come as a surprise to people. If the legislature wants to act, then it should act. Then we acted! And certainly, there was a surprise that two of the judges then weighed in — frankly it was a departure from their own opinion, frankly to do that, and it was not a comfortable situation, and it really shouldn’t have happened that way. But this isn’t a matter of trying to overrule courts. This is a combination of a few different things that have happened over the course of a few years that have resulted in building pressure in the system that is being vented in a way that’s resulting in departures, or very seriously considered departures, from Delaware. And fundamentally our reputation is what we want, which is consistency and predictability in our law. So this is not limited to one or two stockholders, and it’s not being driven, at all, by any individual stockholders in that kind of way. I also think that it’s very important — yes the court continues to be that exceptionally important part of this process, where you can have professional, quick resolutions to business disputes. That is critical. And these judges and their staff work tremendously hard to do that, and they should be heralded and they’re key to our success. But when you are a judge addressing the case — the facts before you — and trying to do your best to harmonize those facts with existing law, you’re sort of calling balls and strikes like as as you see them right then and there. That’s a very different policymaking process than those in the legislature, who should not be involved in the court cases calling balls and strikes, but should be trying to figure out what it all means then for the broader perception of how it fits together. That’s what our job is, and the reality of that is, over the course of of time, and not that many years, a relatively few short years, there’s been this sort of incremental change in Delaware Law that surprised people to the point where it’s a big problem now with their frustrations of predictability and certainty as to a few specific issues. So that’s what we’re trying to address with the legislation. We’re taking the common law that judges have developed very thoughtfully over a course of time, and codifying what until very recent years was sort of a very straightforward balanced approach, and we’re having a conversation about it now. And if there are changes to the legislation we want to hear that, but we think that it largely gets it right, and we’ll see what people say. And we just happen to do so at a time where for whatever combination of reasons, and we talked about them a little bit, there was this sort of sudden flurry that led to a snowball, that we really feel is rolling downhill in a direction, and we’ve got to put a stop to it, for the sake of the franchise, for our economy, for our community, and that’s where that is. So it’s not the kind of motivation that you had talked about. The judges need to keep calling balls and Strikes and the legislators need to understand how it’s all adding up.
JH: Do you still then have faith in Chancellor McCormick and Vice Chancellor Laster? Because those are the two who did weigh in last year, as you just mentioned.
BT: Look reading any opinion from Vice Chancellor Laster, you feel you’re getting schooled in a good way. It’s like a law review article and just such depth and breadth of addressing issues, no doubt. Chancellor McCormick is navigating leadership of a court, at a time of unprecedented criticism of it, and I completely admire that. It doesn’t mean that we should not be listening to what the broader set of stakeholders is saying about the direction of the law in totality, right? This isn’t about individual cases. Again, as I said earlier, it was surprising to take their words at face value in the opinions, when they said this could be addressed through statute if people feel that they’re getting it wrong. But they said as a matter of statutory interpretation, this is how we have to rule. I agree with that. I think they got the opinions right. I absolutely think they got the opinions right. But they themselves were indicating that we gotta change the statute then if this is not what really works in the market. So we went and changed it through statute, and I think that we kind of — there was that moment in 2024 where perhaps people didn’t appreciate the differences between what the judicial branch should be doing and the legislative branch should be doing, but I would like to think we got through that. And now sort of unexpectedly early in 2025, there’s just sort of this evidencing of this building pressure that we really can’t take for granted. We can’t just assume it’ll go away. Believe me, Jordan, in the initial hours after some of the announcements I thought, “Oh, okay, Elon Musk had done it a while ago — whatever — don’t let the door hit you on the butt on the way out. But when Zuckerberg announced, and then Dropbox, and then — I can’t remember exactly what order it was — but this a sudden flurry. What is this? Is this sort of just a follow Elon down the road type moment? Or is it more than that? And Jordan, over the past two and a half weeks, it’s very clearly far more than that. Whether it’s because of specific issues, like we think we are addressing through this legislation, or whether it’s also partly just sort of groupthink and reputational, and now people in certain spaces or industries saying: “Oh, I’ve heard Delaware’s not the place to go. Let me just go somewhere else.” I want to say it doesn’t really matter to the cause, although it obviously does matter because you got to address the underlying issues, but either way it’s tremendously challenging for Delaware at this moment. So this is not about any judicial decision, or certainly not critical of anybody. It’s fundamentally saying we’ve got to make sure that ultimately the legislature and the governor, as policy makers in that broader sense, are engaged on this and are updating our law, in this case just turning it back just to the recent years where the balance had been one that seemed to work for everybody. We’ve got to make sure that that’s where we’re at.
JH: You said the words “market practice” and that just brought me back to last year, and a lot of the criticisms of the bill from last year were that we were responding to market practice rather than writing laws that were just good laws that took everyone and everything into account. Because if we are always reacting to market practice then do we really have laws? If we’re constantly changing them to adapt to market practice, or if the CEOs of powerful companies keep threatening us — threatening to leave — that seems at best like pandering, or at worst like we’re being held hostage.
BT: I think that that would not be an acceptable situation for the Delaware General Assembly to act on — and I really can’t imagine legislators acting on it — we’re talking about market practice not as sort of inventive or characterized by somebody who suddenly has a desire to do something. Like if Elon Musk had said: “Hey, Delaware, if you don’t let me do whatever I want, conflicts be damned, I’m leaving.” We would say, “Okay, see you.” The market practice we were talking about with regard to Moelis was 17 years in the making, I think. It was widespread, many years in the making, and frankly to the point people. . .
JH: The stockholder agreements, yeah. They’d been doing them for over — for almost two decades.
BT: Yeah so it’s kind of like, wow, no one ever, I guess, no one ever really challenged that to realize that the code technically might not allow that. Jeez, okay! We’ll see where this goes. Right? And again, that’s why I didn’t fault Vice Chancellor Laster for saying that’s not technically allowed, and if you want that, then the legislature’s got to act. So it’s like: Okay, it makes sense, like we’ll act right? And so I hear your point, but I guess I’d say that’s not the situation we’re in this year. It’s not the situation we were in last year. This is not responding to or caving to anyone who suddenly wants to say: I want something new here. It’s, ironically, as someone says: “Wait a minute, we thought we knew what was here — stockholders liked it, managers and directors liked it. But now we don’t have that, and we’re very confused about what that means, both because it’s not really workable for us anymore at all, and we have no idea what else we’re going to think we have that we suddenly lose.” So it’s just again — I don’t fault a judge for saying: “Look, the legislature didn’t really update this over the years. They should have, and I as a judge can’t sit here and allow this to continue when the code says otherwise.” I respect that. I respect the hell out of that. But then, it’s like they said in the footnotes, and in the text, the legislature needs to go ahead and fix this. And so we tried to, and then we had the kink in the system. But I think again, fundamentally,, the judges are calling the balls and the strikes in the moment on the cases as they see them, they have a key role in developing the common law, and SB21 represents decades of development of common law that had been really agreed upon, and a nice balance had been struck that works for both stockholders and directors and officers. And we need to basically honor that and understand that there are people saying, “Wait a minute, what happened to that?” In a sudden two or three year time span and we need to get back to that, at a time when that’s all they’re asking for. They’re not saying they want us to relax the duty of loyalty. I can’t even begin to imagine. We wouldn’t entertain the conversation.
JH: You just mentioned the governor. I was messaging with him last night, and he said he has not yet taken a position on this bill, but you said you worked closely with him on it. How are Delawareans supposed to square that apparent contradiction?
BT: I guess what I say about it is, I think the governor — I can’t speak for him — but what I assume he means is we certainly welcome the input of council and others on this proposal, which was developed very quickly given the historic circumstances. He was part of the initial meetings to kick it off. His secretary of state was heavily involved in conversations for the past two and a half weeks. Multiple stakeholder conversations. And so their office was fully involved, and they gave a positive statement in the press release of the legislation.
JH: Yeah, I saw that.
BT: So yeah. So the point is that he wants to kind of wait until it’s clear exactly what version is being voted on in the Senate or the House and comes to his desk. And I understand that. But fundamentally, they were all, from the very get-go, a part of convening the meeting after the flurry of announcements in late January. And so I guess what he means is that he anticipates that the [Corporation Law Council] will weigh in, and that’s sort of what he’s looking for. And I appreciate that. It’s legislators names that are on legislation. So our names are on it, but that doesn’t mean that he wasn’t central to the development of legislation.
JH: Senator, thank you for being so gracious with your time tonight.