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Delaware bill would limit investor lawsuits as companies threaten to leave the state

Delaware bill would limit investor lawsuits as companies threaten to leave the state

Reuters18-02-2025

WILMINGTON, Delaware, Feb 17 (Reuters) - Delaware lawmakers on Monday proposed changes to the U.S. state's widely used corporate law that would limit shareholder lawsuits after several high-profile companies said they might move their legal home to another state.
The bill sets out steps that corporate boards could take to insulate directors and controlling shareholders from litigation over alleged conflicts. The bill would also limit the kinds of internal records that shareholders can access, which they need to build their cases. The bill is sponsored by leaders of both parties in both houses of Delaware's state assembly.
Delaware's corporate law governs relations between company boards and their investors for around two-thirds of the S&P500 index. Companies tend to charter their businesses in the state for its stable law and well-respected courts and the fees those companies pay to the state generate around a third of Delaware's general budget revenue.
But several companies, including Meta Platforms (META.O), opens new tab, Dropbox (DBX.O), opens new tab and Bill Ackman's management company, recently have said they were moving or considering moving their incorporation out of Delaware, which prompted the bill, according to the sponsor, Delaware state Senator Bryan Townsend, a Democrat and senate majority leader.
"And it also comes at a time when you have a couple other jurisdictions in particular that are seeming to gain some traction with being viewed as legitimate alternatives to Delaware," Townsend told Reuters.
Texas has established a business court that is meant to rival Delaware's Court of Chancery for specializing in business and investor disputes. Elon Musk's Tesla (TSLA.O), opens new tab and SpaceX moved their state of incorporation to Texas from Delaware after a Chancery judge last year ordered Musk's $56 billion pay package from Tesla to be rescinded.
Townsend said he'd like to move quickly on the bill, which he said was drafted with input from the state's recently elected Governor Matt Meyer, a Democrat. The bill was not drafted by the state's bar association, which typically oversees changes to the state's corporate law.
Townsend said the bill would not change the case challenging Musk's pay, which is on appeal before the Delaware Supreme Court. "This has nothing to do with Elon Musk. And I'll note that this legislation is not retroactive," Townsend said.
Townsend also introduced a bill that asked the state bar association to prepare a report on awarding attorneys fees. Delaware judges have awarded several fees that were among the largest ever in the past two years.
In recent years, several corporate leaders who lost costly cases in the Court of Chancery have attacked the state's judiciary, most notably Musk. Another outspoken critic was Phil Shawe, who was embroiled in a long-running case over control of TransPerfect, a translation provider. Shawe has run ad campaigns in local media criticizing Chancery judges and was a leading proponent of Meyer's campaign for governor.
Several rulings in recent years have held controlling shareholders liable over deals that corporate lawyers thought were properly structured, fueling criticism that the state was becoming too favorable to shareholder lawyers.
State lawmakers took the unusual step last year of amending the corporate law in response to three rulings before those cases had even been appealed, which was widely criticized by academics.
Ann Lipton, a professor of corporate law at Tulane Law School, said Monday's bill would make shareholder litigation in Delaware "dramatically less successful."
The exact impact of that is unclear. Some experts argue shareholder lawsuits prevent the worst board room abuses and self-dealing. But others say litigation acts as kind of tax on companies that rarely results in much benefit for shareholders and that the real policing of corporate boards comes from institutional investors such as large pension funds.
However, the administration of Republican President Donald Trump may loosen federal securities regulations and place constraints on the ability of institutional investors to apply pressure to corporate boards. "That mechanism is failing at exactly the same time," Lipton said.

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