What’s the latest on SB 313, the proposed amendments to the Delaware General Corporation Law largely designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company? That case invalidated portions of a stockholder agreement relinquishing to a founding stockholder control over certain corporate governance matters, a decision that many practitioners viewed as inconsistent with current market practice. The proposed amendments in SB 313 would add a new subsection (18) to Section 122 of the DGCL to allow corporations to enter into the types of stockholder contracts at issue in Moelis, even if the provisions are not set forth in a certificate of incorporation. As discussed in this PubCo post and this PubCo post, those proposed amendments have turned out to be highly contentious: a number of academics and jurists, including Delaware Chancellor Kathaleen McCormick in a seven-page letter to the Delaware State Bar Committee, raised objections to the haste and timing (prior to adjudication of an appeal by the Delaware Supreme Court) of the legislation. And Law360 reports that posts by Vice Chancellor Travis Laster (purportedly not acting as vice chancellor) questioned “S.B. 313’s terms” and contended that “[c]laims by critics that the Moelis decision put thousands of agreements at risk, the vice chancellor wrote, ‘smacks of hyperbole.’” Adding even more fuel to the fire was a letter submitted to the Delaware legislature, posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments, along with these separate posts by noted academics on the HLS Forum and on the CLS Blue Sky blog, with this lonely post in favor. But the bill then “sailed through” the Delaware Senate “without debate or an opposing vote,” on to the Delaware House. (See this PubCo post.) The bill has now passed the House and been forwarded to the Governor for signature—but not without some acrimony.
According to the Delaware Call writing about the meeting of the House Judiciary Committee, the bill “encountered stiff opposition” in the Committee, where the legislators “expressed frustration” at the complexity of the bill and the pressure to rush it through. A representative who opposed the bill explained that what most concerned him was that “‘this legislative body would be acting to effectively reverse the decision of the Court of Chancery in a case that’s still pending and subject to appeal by the Delaware Supreme Court.’” He continued that the Chair of the Corporation Law Council of the Delaware State Bar (which had proposed the amendments) had referred to “‘the “three-legged stool” which is Delaware corporate law, and he is on record as saying that the most important leg is the Judiciary. He told the Senate that….So I feel like this is really taking out the most important leg of the stool by not allowing the Judiciary to conclude its process.’” The Chair responded that he had received a lot of feedback raising issues after the Moelis decision. Another representative asked whether the Delaware General Assembly had ever “‘reversed a decision by the Court of Chancery in a case still pending and subject to appeal to the Delaware Supreme Court. This would be the first time ever. Correct?’” The Chair responded that he thought the amendment clarified Moelis, not reversed it. She then asked whether Vice Chancellor Laster was mistaken when he said that the “‘board’s fiduciary duties will not pose a meaningful constraint’ on limiting stockholder agreements.” The Chair replied that he didn’t know.
The hearing was then opened for public comment, and the Delaware Call quotes a number of commenters who voiced opposition to the amendments. One commenter, a Stanford lecturer and former Delaware Supreme Court clerk, said that “‘[y]ou’ve heard this bill validates long standing market practice, but selling lead paint was market practice. Discrimination was market practice. Backdating options was market practice….Simply because something is market practice doesn’t make it good, or right. Nor is it a reason to change the law to legalize that.’” After the rather acrimonious hearing, the proposed amendment passed out of committee by a vote of six to four, with one absentee. “If anything,” the article concluded, “the hearing exposed new ideological fissures in the General Assembly over the state’s role in corporate governance, with both Democrats and Republicans voting against the measure.”
Describing the subsequent session of the full House, the Delaware Business Times writes that the House permitted only an hour of discussion on the bill before the final vote, 34 to 7 in favor, on Thursday. According to the DBT, one representative argued that she thought that they were being asked “‘to bail out lawyers who wrote illegal agreements instead of having them deal with the consequences of their actions…As legislators, we should never be passing laws to legalize behavior after the fact.’” The founder of the University of Delaware’s Weinberg Center for Corporate Governance, Charles Elson, testified “that he thought SB 313 would threaten Delaware’s dominance in corporate litigation matters. ‘This kind of revision hasn’t taken place since the 1980s, and that took two years of back and forth and compromise. This has taken two months, and I don’t believe there’s significant enough debate or attempts to compromise….Decisions on corporate law should not be a ballgame, because it’s our bread and butter … It constitutes 67% of our revenues, and it’s the reason we don’t have a sales tax.’” A focus of Delaware corporate law, he said, has been investor protection. Delaware’s courts, he said, “have served as an equalizer to keep the companies in check. ‘I always thought that saved Delaware from federalization many years ago: that we were very balanced between shareholder prerogative and managerial director prerogative. It’s a delicate balance….any time you shift one way or another, that veneer of neutrality disappears. You basically lose the basis and the trust of the system itself.’” Law360 reports that, before the vote, Gabriel V. Rauterberg, a professor of law at the University of Michigan law school, commented that “‘the risks of a hasty, consequential, and problematic set of amendments to the DGCL are already visible in the unrest among corporate law academics and the judiciary. Delaware corporate law is currently ‘off the equilibrium path’ so to say; this isn’t its normal state-of-play.’” While it “was unusual for Chancellor McCormick to send a sharply critical letter to the Corporation Law Council, it was “‘also quite unusual for the CLC to propose controversial and important changes to corporate law at the last minute of the legislative season, and in response to a Chancery court opinion that is yet to be heard before the Delaware Supreme Court.’”
Former Chancellor of the Delaware Chancery Court, William Chandler, now in private practice, took quite a different view, testified in favor of the proposed amendments. According to the DBT, he confirmed his “faith in the Delaware Corporate Law Council….’I believe deeply in the process. These are experts who have one mission: to keep Delaware up-to-date and to keep our laws predictable, certain, reasonable and fair … right now, the corporate market is not feeling good about Delaware because of the uncertainty and unpredictability of a few decisions by just two judges.’” Chandler delivered some not particularly veiled criticism at the two judges, Chancellor McCormick and Vice Chancellor Laster, for wading into the dispute over the proposed amendments: “‘As chancellor,’ he said, “‘I was taught that judges need to stay in their lane and need to be applying the law [legislators] give them….Judges don’t need to intrude upon the process of law, because if they do they become the makers as well as the appliers.’” If SB 313 fails, he continued, the “headlines will read that two judges and a lot of law professors succeeded in convincing [legislators] to vote down changes to corporate law that would have preserved the continuity and stability that we have known.’”
Jill E. Fisch, professor at the University of Pennsylvania Carey Law School, who was unable to speak during the hearing, told Law360 that the House session “‘felt like a railroad.…The idea that, if the Delaware franchise is in jeopardy for other reasons, you criticize the Delaware judges who historically and today are the best corporate law experts in the land, making them look bad for no reason just seems like a bush move,’” she said.
The amendments now head to the Governor for signature. A spokesperson for the Governor told Law360 that the bill would be signed into law “soon.”
