Proposed legislation to reform the Delaware General Corporations Law (DGCL) is now rapidly moving to consideration and could have a significant impact on institutional investors.
Delaware has long been the preeminent jurisdiction for companies to incorporate within the United States. In fact, as of recently, 68.2% of the Fortune 500 and 65% of the S&P 500 were incorporated in Delaware, along with 79% of all IPOs.[1] Not only does this represent a critical economic interest for Delaware—according to two Delaware legislators, approximately one-third of Delaware’s government revenues came from corporate fees and related taxes, allowing the state to have no sales tax[2]—but it also gives Delaware an outsized role in corporate governance.
A person or entity that neither is part of management nor owns a majority of the voting stock of corporation has several means of influencing that corporation, such as working as an activist investor through seeking board seats or preparing public commentary making recommendations to improve performance. However, one important, though potentially overlooked, way for shareholders to try to have some control over corporations is through litigation. Securities cases (litigated overwhelmingly in federal courts) are one type of such litigation familiar to ISS SCAS clients.
Another, perhaps less familiar, type is shareholder derivative/corporate governance litigation. These may be less familiar because such suits provide compensation directly to shareholders only in limited occurrences. As this litigation is premised on state law, Delaware, its state courts, and the DGCL are the focal points of this litigation. Because of this, Delaware has long had a dedicated Chancery Court, staffed by long-tenured judges called chancellors, to hear such cases without juries.
Here are some examples of some types of cases litigated in these courts. First is a “deal” case where shareholders whose shares were forcibly bought or exchanged claim that they received too low a price through some breach of duty by the board, officers, and/or controlling shareholders. One such case involving Dell Technologies Inc. recently settled for $1 billion in 2023. Plaintiff alleged that the company’s controlling shareholders shortchanged holders of Dell’s class V stock by forcing them to convert their shares into cash or class C stock at an unfair price. Another example of a derivative case is where shareholders claim that board or controllers harmed the company by forcing it to enter into a deal under unfair terms. An example of this was a suit related to New Senior Investment Group Inc., where a settlement of $53 million paid to the company was approved in 2019, and which concerned allegations about the company’s acquisition of properties from an affiliate of its investment manager at an allegedly too high a price. Another classic type of case is where a company’s board was aware of extremely serious problems at the company and failed to act, causing great harm. An example of this was a case involving the Boeing Co. which settled for $237.5 million in 2022 and related to allegations that the company’s board failed to implement controls to prevent safety failures that caused two plane crashes after ignoring red flags of safety issues.
Recent decisions from the Delaware Chancery Court, such as one invalidating certain of Elon Musk’s compensation (worth over $50 billion) at Tesla, Inc., have galvanized some companies to reincorporate in other states such as Texas or Nevada and resulted in public criticism from famous CEO’s and entrepreneurs, a trend ISS SCAS noted in our February 4, 2025 webinar. Tesla, Dropbox, and TripAdvisor, among others, have left the state, while Meta was recently reported to be considering leaving. Former CEO of Zynga Inc., Mark Pincus, recently wrote an article critical of the Delaware Chancery Court, warning vociferously, “No founder-led startup (or public company) should incorporate in Delaware—its courts hate founder control.”[3]
Given the economic importance to Delaware of incorporations, Delaware Senate Majority Leader, Bryan Townsend, along with other sponsors, introduced a bill, SB 21, on February 17, 2025, which would amend sections 144 and 220 of the DGCL, pertaining directly to Chancery Court litigation.[4] Meanwhile under Senate resolution SCR 17, the Delaware legislature would request that a section of the State Bar Association make recommendations for legislative action on attorneys’ fee awards in certain corporate litigation cases.[5] Legislative reform related to Chancery Court is not a new concept. Just last year, Delaware passed SB 313 to amend DGCL Section 122, effectively overturning a Chancery Court decision involving Moelis & Co. that certain shareholder agreements related to control of the company were invalid under Delaware law.[6]
The specific reforms in SB 21 and SCR 17 are somewhat complex, but what follows is a summary.[7]
First, SB 21 would amend DGCL Section 144 substantially in ways that would make it more difficult for a shareholder to successfully show that a corporate action was improper, thus potentially reducing such suits materially. One set of provisions would reduce scrutiny for many transactions by controlling shareholders. Other provisions, among other things, define a controlling shareholder as having at least one-third of the corporations voting power and limit liability of controllers for monetary damages in their capacities as controllers (notably Musk was deemed a controller in the case involving Tesla with a lower percentage). Still others define a disinterested director in a way to make it harder to show that a director was not independent. These measures are complicated, but the net effect is to reduce the number of instances where shareholders can show that transactions were unfair and obtain redress for the company or for themselves. The fact that these measures relate significantly to companies with actual or putative controlling shareholders suggests Delaware is most worried about corporations with these controllers leaving.
Second, SB 21 would amend Section 220 of the DCGL, which governs “books and records” requests. Under this provision, shareholders can formally request corporations provide certain documents related to board actions hoping to uncover alleged or perceived malfeasance. Indeed, these shareholders often use these records to assist in drafting derivative complaints. However, such requests can be costly for companies to comply with. The amendments could makes these requests harder and limit the scope of materials available for such requests. Furthermore, they could force such materials to be produced confidentially, meaning that the public might not be less able to gain access to these. If enacted, the biggest effect might be to make less information available to plaintiffs before formal discovery, making it harder for shareholders to prevail. Analogously, Congress, through passing the Private Securities Litigation Reform Act, barred discovery in securities cases until after a motion to dismiss to curtail suits, and this represents a significant hurdle to plaintiffs in those cases to this day.
Third, SCR 17, concerning potential limitations on attorneys’ fees, provides few details but does mention potentially implementing a lodestar cap on fees. Lodestar is the value of all time a law firm has expended on a case. For example, if a law firm had only one attorney billing at a rate of $1,000 per hour spend 1,000 hours on a case, the law firm’s lodestar would be $1 million. This figure could be used as a comparison to any requested fee from a fund. Consider a $5 million settlement with this same hypothetical law firm. A fee request of 30% would be $1.5 million or 1.5 times the value of the labor expended, a fee request of 20% would be $1 million or equal to the value of the labor, and a fee request of 10% would be $500 thousand or just half of the value of the labor. Several federal circuits use lodestar as a cross-check to assess the fairness of any fee request where a fund has been created. A lodestar cap would mean that fees should not exceed some multiple of lodestar. Courts employing a lodestar cross-check typically award multiples over the value of the labor, recognizing that law firms will not be successful in all cases and that they should be rewarded for undertaking risk and for good results. In any event, this resolution may be a response to a perception that fees in these cases are too high.
The proposed measures have generated considerable opposition.[8] Professor Ann Lipton of Tulane University Law School posted on her blog that SB 21’s reforms “undo certainly the last 10 years of Delaware jurisprudence, if not the last 50, in favor of a model of corporate self-policing” and that it would have been “simpler, and more honest” to “eliminate shareholder litigation altogether.”[9] Professor Brian Quinn of Boston College Law School stated, “The real role of corporate law is to protect minority investors” but with “this bill the legislature is saying, ‘Now you know what? Protect them less.’”[10] A number of institutional investors (mainly large public pension funds from both blue and red states) wrote a letter on March 7 in opposition to SB 21, stating that the proposed legislation would “hamstring[] the Delaware judiciary in its critical role as a cross-check of fiduciary overreach” and that they would “not support reincorporation to a jurisdiction with lesser protections for investors” and would consider voting against “directors who proposed such reincorporation.[11] The Council of Institutional Investors (“CII”) stated in a letter to Delaware’s governor that they opposed SB 21 for “overtun[ing] at least 34 Delaware Court decisions made by different judges over a 40 year period” and because “the swift and atypical manner in which SB 21 was drafted and proposed is a stark deviation” from prior practices.[12] CII also asserted that limiting the Chancery Court “risks weakening the attractiveness of Delaware as a place of incorporation[.]”[13]
A group of prominent Delaware plaintiffs’ attorneys from five firms wrote a letter to the Delaware General Assembly in which discussed the proposed reforms at length.[14] These attorneys noted that while there was realm to make some changes, SB 21 is “a direct attack on [Delaware’s] courts that will destroy Delaware’s reputation for balance, eliminate Delaware jobs, and hurt Delaware residents by putting the corporate franchise at grave risk” and says that the Delaware “Supreme Court and the Court of Chancery have been getting it wrong for forty years.”[15] In fact, they contend that passing SB 21 would make Delaware look like a state “where powerful people can change the law,” there is no evidence of a serious threat to Delaware from reincorporation (indeed, they say that similar arguments were made years before), and the departure of a small number of companies would not have a material effect on revenues for the state.[16] The attorneys claim that previously the Corporation Law Council of Delaware would draft proposed changes to the DGCL but that SB 21 “was drafted in secret,” and the “Council’s review process was a sham” as its members “were told that they could not reject SB 21 or make any material changes to it.”[17] In sum they argue that “SB 21 is not about eliminating weak claims” but “about eliminating strong claims [,] . . . takes away rights from investors who trusted in Delaware to protect them”, and “means that controlling stockholders and senior executives will have every incentive and opportunity to take advantage of minority investors.”[18]
Proponents of the legislation (or those in favor of some sort of significant reform), make many counterarguments. Sen. Townsend in an interview with the Delaware Call, stated, “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.”[19] He added that the bill represented, “decades of development of common law that had been really agreed upon, and a nice balance [that] had been struck that works for both stockholders and directors and officers.”[20] He also asserted that the, “legislation is not retroactive.” [21] Renowned corporate attorney and founding partner of Wachtell, Lipton, Rosen & Katz; Martin Lipton, wrote that the amendments will “ensure that Delaware law gives full respect to the good-faith decisions of independent directors and recognizes the primacy of disinterested directors when they vote for a transaction[,]” “place sensible limits on requests for corporate book and records[,]” and “restore conventional rules that have long served Delaware well.”[22]
Lisa Schmidt, President of Richard Layton & Finger, a prominent Delaware corporate law firm (and reported to have been involved in drafting the bill), prepared a message to the Delaware Legislature, stating that SB 21 was sponsored by a bipartisan group of leaders in the Legislature and addresses “a concerning trend where Delaware law was applied in a way that created uncertainties” both in certain corporate approval processes and as to the “scope of corporate records a stockholder is entitled to receive.”[23] She stated that delay in passage would mean “more corporate departures and an immediate loss in revenue” for the state, which could “hamstring the state’s ability to provide core services to all Delawareans[.]”[24] Furthermore, Schmidt asserted that SB 21 “provides greater clarity about the meaning of director independence and disinterestedness … [and] for planning transactions” and brings the scope of books and records requests “back in line with historical expectations[.]”[25] Schmidt also pointed out frustrations due to attorneys’ fees due to the size of awards.[26]
William Chandler III, a former Chancellor of Delaware and now partner at corporate law firm Wilson Sonsini Goodrich and Rosati, and Lawerence Hamermesh, professor emeritus of Widener University Delaware School of Law, who both assisted in drafting the legislation, published an editorial on the reforms.[27] To them, the speed of the legislation is “laudable” because multiple corporations “had begun to consider alternatives to Delaware as their state of incorporation[,]” and the reforms “respond to a trend in Delaware court decisions [] where changes to judge-made law have made it easier to challenge company actions in court, often by expanding critical concepts beyond earlier boundaries.”[28] They argue that courts have been using too loose a standard for finding board conflicts, have errantly begun considering superstar CEOs as controllers through sheer force of personality, and permit books and records requests that “cover emails, text messages, and other material that goes beyond that term’s normal and intended meaning.”[29] SB 21 instead “reflects a good faith attempt to ensure that Delaware corporate law, as was understood and applied for many years, can be relied upon.”[30]
SCAS asked ISS’ Head of US Benchmark Research, Marc Goldstein, for some perspective on behalf of investors and some facts. Goldstein noted that the number of companies reincorporating out of Delaware has slightly exceeded the number reincorporating into Delaware — with the net outflow increasing from 2 companies in 2022 to 7 in 2024—but this is dwarfed by the number of new companies choosing a Delaware domicile. The vast majority of companies exiting Delaware are opting to reincorporate in Nevada or one of the tax havens, and the most commonly cited reason for doing so is the cost savings associated with leaving Delaware. Large companies have been especially unlikely to redomicile out of Delaware: Tesla is the only S&P 500 company to have done so in more than five years. Goldstein explains that although several states have made a push to lure companies away from Delaware, for example by establishing their own specialized business courts, companies may be skeptical that other jurisdictions will be more favorable than Delaware. Texas, for example, provides for jury trials in its new business court, and Texas juries have not necessarily been viewed as pro-management in other types of litigation.
While ISS SCAS takes no position on these reforms, these are important issues for investors to consider, as they could have major impacts on the important tool of litigation for influencing corporations and incorporation trends.
1 Wilson Sonsini Goodrich & Rosati LLP. “Delaware’s Status as the Favored Corporate Home: Reflections and Considerations.” April 23, 2024: https://www.wsgr.com/en/insights/delawares-status-as-the-favored-corporate-home-reflections-and-considerations.html#_edn2.
2 Poore, Nicole and Minor-Brown Melissa. “Corporate Law Structure Plays Vital Role in Delaware.” The Cape Gazette, February 4, 2025: https://www.capegazette.com/article/corporate-law-structure-plays-vital-role-delaware/286558 .
3 Pincus, Mark. “Founders, Leave Delaware (While You Still Can).” Pirate Wires, February 11, 2015: https://www.piratewires.com/p/founders-leave-delaware-while-you-still-can .
4 See, https://legis.delaware.gov/BillDetail/141857.
5 See, https://legis.delaware.gov/json/BillDetail/GenerateHtmlDocument?legislationId=141858&legislationTypeId=3&docTypeId=2&legislationName=SCR17.
6 See, https://legis.delaware.gov/BillDetail/141480.
7 There are numerous articles and posts about the reforms of varying detail on the legislation, well. See, e.g., Sullivan & Cromwell LLP. “Delaware General Assembly Proposes Important Corporate Law Reforms.” February 18, 2025, available at https://www.sullcrom.com/SullivanCromwell/_Assets/PDFs/Memos/Delaware-General-Assembly-Proposes-Important-Corporate-Law-Reforms.pdf; LaCroix, Kevin. “Critics Launch Campaign Opposing Delaware SB 21.” The D&O Diary, February 25, 2025: https://www.dandodiary.com/2025/02/articles/director-and-officer-liability/critics-launch-campaign-opposing-delaware-sb-21/; Talley, Eric; Sanga, Sarath; and Rauterberg, Gabriel. “Delaware Law’s Biggest Overhaul in Half a Century: A bold reform — or the Beginning of an Unraveling.” The CLS Blue Sky Blog, February 18, 2025: https://clsbluesky.law.columbia.edu/2025/02/18/delaware-laws-biggest-overhaul-in-half-a-century-a-bold-reform-or-the-beginning-of-an-unraveling/; Klinger-Wilensky, Eric; Lafferty, William; and DiTomo, John. “Thirty Years Later —Why Corporations Continue to Choose Delaware: General Perspectives and Thoughts on Proposed Amendment.” Harvard Law School Forum on Corporate Governance, February 21, 2025: https://corpgov.law.harvard.edu/2025/02/20/thirty-years-later-why-corporations-continue-to-choose-delaware-general-perspectives-and-thoughts-on-proposed-amendment/.
8 Indeed, opponents have created a website devoted to opposing the bill: www.stopsb21.com, which provides a lot of materials on their position.
9 Lipton, Ann, “Delaware Decides Delaware Law Has No Value,” Business Law Prof Blog, February 17, 2025: https://www.businesslawprofessors.com/2025/02/delaware-decides-delaware-law-has-no-value/.
10 www.stopsb21.com/what-people-are-saying
11 Letter to Governor Meyer and Members of the Delaware General Assembly, March 7, 2025.
12 Mahoney, Jeffrey. Letter to Governor Matt Meyer. March 6, 2025: https://www.cii.org/files/issues_and_advocacy/correspondence/2025/March%206%202025%20CII%20letter%20to%20Delaware%20Governor%20(Final).pdf
13 Id.
14 Varallo, Gregory; Weinberger, Ned; Reliford, Justin; Friedlander, Joel; and Mackintosh, Christine. Letter to the Delaware General Assembly. March 4, 2025: https://s3.documentcloud.org/documents/25551057/joint-letter-to-delaware-general-assembly-from-shareholders-counsel.pdf
15 Id.
16 Id.
17 Id.
18 Id.
19 Howell, Jordan. “Delaware Call Interviews Sen. Bryan Townsend About SB21.” Delaware Call, February 21, 2025: https://delawarecall.com/2025/02/21/delaware-call-interviews-sen-bryan-townsend-about-sb21/.
20 Id.
21 Id.
22 Lipton, Martin. “Delaware.” Harvard Law School Forum on Corporate Governance, February 21, 2025: https://corpgov.law.harvard.edu/2025/02/21/delaware/.
23 Schmidt, Lisa. “A Message from RLF President Lisa Schmidt.” February 26, 2025: https://www.rlf.com/a-message-from-rlf-president-lisa-schmidt/
24 Id.
25 Id.
26 Id.
27 Chandler III, William; and Hamermesh, Lawrence “Viewpoint: Delaware’s Corporate Law, Proposed Amendments Play Fair.” Delaware Business Times, March 6, 2025: https://delawarebusinesstimes.com/news/viewpoint-sb21-chandler-hamermesh/
28 Id.
29 Id.
30 Id.
“No portion of this insight constitutes legal or financial advice, and no attorney-client relationship is intended or is established.” ISS SCAS takes no position on this legislation.
By: Donald F. Grunewald, Director of Litigation Analysis, ISS SCAS
