Editor’s note: Since the publication of our interview with Sen. Bryan Townsend about SB 21, the Delaware Call team has spoken with legal experts in corporate law, and here are their point-by-point responses.
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.
[N.B.: Elon Musk tweeted “Never incorporate your company in the state of Delaware” on Jan. 30, 2024; shortly after Chancellor Kathaleen McCormick ruled that his $56 billion equity compensation package should be rescinded because, among other reasons, “the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process.” Governor Meyer told Business Insider earlier this month that, “It’s really important we get it right for Elon Musk or whoever the litigants are in Delaware courts[.]”]
Bryan Townsend: We rely on input and advice that relates to a far broader swathe of experiences and concerns from Delaware corporations and stockholders. So this wasn’t at all about Elon Musk. The legislation is not retroactive.
[N.B.: Multiple law professors think otherwise. A lawyer representing Elon Musk has said that the bill “should be construed as stating the current state of the law, and not simply to apply prospectively.”]
Bryan Townsend: 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.
[N.B.: “The unprecedented series of announcements” was from four controlled companies, not all of whom announced a decision to redomesticate. Neither Senator Townsend nor any other proponent has given additional specifics about what kind of discontent they were hearing or from whom.]
Bryan Townsend: 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.
[N.B.: Again, Governor Meyer told Business Insider earlier this month that, “It’s really important we get it right for Elon Musk or whoever the litigants are in Delaware courts[.]” Neither Senator Townsend, nor the Governor, has explained their basis to believe that the proposed changes will impact the decision by of any company of whether to redomesticate.]
BT: 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.
[N.B.: Last year, the bill amending the DGCL, SB313 contained express language regarding retroactivity. This year’s bill is silent].
Bryan Townsend: 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.
[N.B.: Senator Townsend is incorrect. Section 144(a) of the proposed bill eliminates remedies for breaches of fiduciary duty by officers or directors for any non-controlling-stockholder transaction that is approved by a majority of disinterested directors even if the majority of the board is conflicted. In otherwise, approval of a transaction in which 19 of 20 members of the board are conflicted cannot be subject to judicial review if approved a single disinterested director with the conflicted directors in the room].
Bryan Townsend: This does not at all modify duty of loyalty for controlling stockholders, and it doesn’t modify fiduciary duties.
[N.B.: Senator Townsend is, again, incorrect. Section 144(b) of the proposed bill provides that a “controlling stockholder transaction (other than any going private transaction) may not be the subject of equitable relief, or give rise to an award of damages or other sanction against a director or officer of the corporation or any controlling stockholder or member of a control group, by reason of a breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group” as long as the transaction is approved by a committee with a majority of disinterested directors].
Bryan Townsend: More broadly than that, the reason for that provision was a case in early 2024 — I think it was In Re 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
[N.B.: In fact, Section 102(b)(7) of the General Corporation Law was adopted in the 1980s. It has never provided for exculpation of controlling stockholders. In 2020, in the United Food & Commercial Workers Union v. Zuckerberg case, the Court of Chancery stated “the plain language of Section 102(b)(7) does not extend to controlling stockholders.” That decision was subsequently affirmed by the Supreme Court].
Bryan Townsend: 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.
[N.B.: The Vice Chancellor who decided Sears, Vice Chancellor J. Travis Laster has been a sitting member of the Court of Chancery since 2009. Prior to that, he was a practicing attorney and named partner of a leading Court of Chancery litigation firm. Senator Townsend is of counsel at Morris James. A review of Court of Chancery filings shows that Senator Townsend appeared in eight cases in the Court of Chancery in the last twelve months
Importantly, while Senator Townsend wants to focus on aspects of the bill that are insignificant—and that have not generated any pushback—the vast majority of the bill focuses on restricting the Court of Chancery’s ability to review the most significant transactions that are impacted by the both significant of conflicts.
For example, 144(c) radically departs from existing law by allowing conflicted fiduciaries to avoid judicial review of stock-for-stock mergers (or transactions in which the controlling stockholder receives billions of dollars more than its pro rata share) so long as the merger is approved by either a special committee or stockholders. And 144(b)(1) radically changes the role that special committees have historically needed to play to serve as a cleansing mechanism, removing the requirements that the committee: (i) act with due care; (ii) be uncoerced; (iii) negotiate the transaction, and (iv) be entirely independent. In tandem, 144(b)(1) and 144(c) allow for a controlling stockholder to avoid judicial review of a controlling stockholder stock-for-stock merger (or a non-ratable benefit transaction) that is negotiated between the controller and his brother and that is overseen by a committee that includes his brother.
Senator Townsend has refused to address the fact that many of Delaware’s most successful cases—cases that have returned billions of dollars for stockholders, such as the Southern Peru case adjudicated by one of the bill’s authors—would have avoided judicial review altogether under the new statutory regime.]
Bryan Townsend: 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.
[N.B.: Senator Townsend is incorrect. Section 144(b) of the proposed bill expressly eliminates remedies for that a “a breach of fiduciary duty by a director, officer, controlling stockholder, or member of a control group” as long as the transaction is approved by a committee with a majority of disinterested directors in a non-going-private transaction].
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.
BT: 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.
[N.B.: Zero widely held public companies reincorporated out of Delaware in 2024 or 2023.]
Bryan Townsend: 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.
[N.B.: The only companies suggesting that they might leave Delaware have been controlled companies. And the IPO pipeline shows that Senator Townsend’s stated concerns are not based on facts. The last 15 IPOs have all chosen Delaware because that’s where the capital wants to be and, for the same reason, zero non-controlled Delaware corporations left Delaware in 2023 or 2024.]
Bryan Townsend: 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.
[N.B.: Neither Senator Townsend nor any other proponent has ever identified a single non-controlled company threatening to leave Delaware. Senator Townsend also fails to address the cost of the bill. Far less litigation results in fewer jobs, fewer taxpayers, lesser tax revenues, and fewer people attending Wilmington’s hotels and restaurants. This is not hyperbolic. Wilmington law firms are already rescinding offers in anticipation of the bill passing. The economic consequences of the bill passing will far exceed the economic consequences of it not passing, and that’s without even getting into downstream effects of the capital no longer supporting incorporation in Delaware because of the lack of protections.]
Bryan Townsend: So we’re hopeful of this proposal, which fundamentally, per the professors, Jordan — It’s not like a reshaping of Delaware law.
[N.B.: A prominent corporate law professor Ann Lipton has said, “the changes represent a wholesale repudiation of Delaware’s common law approach to lawmaking.” Professor Charles Elson, the founder of the University of Delaware’s Weinberg Center for Corporate Governance has said that the bill “would “destroy the typical traditional balance” of Delaware’s corporate law.]
Bryan Townsend: 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. . . . This isn’t a matter of angry stockholders influencing a political debate.
[N.B.: Again, Governor Meyer told Business Insider earlier this month that, “It’s really important we get it right for Elon Musk or whoever the litigants are in Delaware courts[.]”]
Bryan Townsend: 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!
[N.B.: Last year, Senator Townsend stated that Moelis was correctly decided].
Bryan Townsend: 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.
[N.B.: There is a long history in Delaware of members of the Court of Chancery—including former Chancellors Leo Strine and William Chandler III weighing in on legislation that affects corporate law. Senator Townsend has never criticized either Strine or Chandler.
And the judges did not weigh in because they had a problem with the legislator acting. The judges weighed in because they had a problem with the lack of process and with the bill’s content, which was not adequately vetted because of the lack of process. Vice Chancellor Laster in fact proposed specific changes to the bill so that it would accomplish what it set out to accomplish while avoiding significant uncertainty down the line.
Senator Townsend also fails to mention that the proponents of the Moelis amendment assured people that the bill would have little impact because of the fiduciary duty overlay, but this bill eliminates that fiduciary overlay by creating a bright line rule of who constitutes a controlling stockholder.]
Bryan Townsend: 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.
[N.B.: Professors Eric Talley, Sarath Sanga, and Gabriel Rauterberg state that “If adopted, these measures would mark the most significant single-year revision of Delaware’s corporate code since at least 1967.” As noted above, the changes to the law go far beyond any of the issues identified by Senator Townsend with current Delaware law.]
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.
[N.B.: Again, there is a long history in Delaware of members of the Court of Chancery—including former Chancellors Leo Strine and William Chandler III weighing in on legislation that affects corporate law. Senator Townsend has never criticized either Strine or Chandler.]
Bryan Townsend: 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.
[N.B.: Zuckerberg never announced anything. The Wall Street Journal reported on rumors that Meta was exploring a potential reincorporation. Meta and Dropbox are both controlled companies. Townsend did not provide any specifics on what was “clearly far more.”].
Bryan Townsend: 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.
[N.B.: This is essentially what happened.]
Bryan Townsend: 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.
[N.B.: No member of the Court of Chancery or the Supreme Court has ever called for anything like the changes proposed in SB21. In a Feb. 20, 2025 presentation to the General Assembly’s Joint Finance Committee, Chief Justice Colin Seitz made a thinly veiled statement against SB 21, stating that the judiciary “will respect the legislative judgments made by the General Assembly and the Governor … [W[ith our respect for your legislative judgments I ask you to consider the importance of judicial independence. . . . It’s important now, more than ever, that the other branches of government support the third branch of government in its mission to provide equal justice to all.”]
Bryan Townsend: 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.
[N.B.: The Match decision that Senator Townsend has discussed says exactly the opposite. Instead of reflecting a change in the law, the Delaware Supreme Court held in Match that the position being advocated by the defendants in Match—and the changes that are in SB21—conflicted with decades of unbroken precedent. If Senator Townsend was correct that Match changed the categories subject to judicial review, there would have been a flood of litigation after Match. That affirmatively did not happen.]
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.
[N.B.: In the press release announcing the bill, the Governor was quoted as stating “Clarity, predictability and fairness remain the hallmark of our franchise. I thank the Legislature for moving swiftly to respond to the evolving needs of the global market.”]
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.
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.
[N.B.: The CLC has been told by the SOS and drafters of the bill that they are NOT permitted to make meaningful changes to the bill.]