As widely reported, the Delaware legislature has responded to increasing chatter and speculation about the intentions of some companies—as well as action in some cases—to change their states of incorporation from Delaware to other states by proposing new legislation, Senate Bill 21. That proposed bill would offer a process for boards to invoke safe harbor protection from litigation over potentially conflicted transactions for directors and controlling stockholders. The bill would also address Delaware’s provisions related to books and records. (For a brief summary of the bill, see this PubCo post.) At this point, the bill has passed the State Senate and been reported out of the Judiciary Committee in the Delaware House. As you probably know, however, SB 21 has been quite contentious. Now, a group of 26 corporate law and governance professors from universities worldwide—apparently representing a broad spectrum of political opinion—have submitted a letter proposing a “pragmatic solution that simultaneously renders much of the debate moot and aligns with Delaware’s longstanding commitment to contractarianism: an opt-in mechanism.” An amendment providing for that opt-in has been introduced.
As noted above, the bill has been mired in controversy. The Delaware Business Times reported that a statement from a group of legislators supporting the bill indicated that it “would ‘restore’ Delaware law, ensuring it is balanced[, would] maintain stockholder rights and [be] workable for corporate leaders and directors.” As reported, the statement also observed that “[f]or the last century, Delaware law and all relevant stakeholders have benefited from our law having balanced protections and being shepherded by expert corporate law practitioners and thoughtful elected officials….That is what this legislation reflects.” However, some legal scholars have suggested that the “amendments amount to a direct rebuke of the Delaware judiciary. They impose a legislative clampdown on the very judicial discretion that, for decades, has defined Delaware’s distinctive brand of corporate governance.” And that view was echoed in a letter from the Council of Institutional Investors, which cited an estimate that “the provisions of SB 21 would overturn at least 34 Delaware Court decisions made by different judges over a more than 40 year period. In addition, and also concerning, the provisions of SB 21 would limit the Delaware Court’s discretion to provide equitable relief in future cases involving transactions between a company and its controller.” See also this letter from CalPERS.
In their letter, the legal scholars acknowledge from the outset “the strong and divergent opinions about [the bill’s] merits. Proponents argue that swift passage is necessary to reaffirm Delaware’s preeminence and to counter the perceived risk of companies reincorporating elsewhere. Critics contend that SB21 disrupts Delaware’s careful balance of fiduciary principles and judicial oversight, imposing rigid statutory rules that undercut the very flexibility and expertise that makes Delaware attractive. Both perspectives have merit, and we do not purport to resolve the substantive debate in this letter.” Rather, they propose an approach that they believe “renders much of the debate moot and aligns with Delaware’s longstanding commitment to contractarianism: an opt-in mechanism.” Rather than imposing the changes in SB21 on all Delaware corporations, they suggest that the bill be amended to allow companies to adopt these provisions voluntarily through charter amendments approved by the stockholders. They observe that this type of mechanism is “consistent with Delaware’s enabling corporate law framework,” and has been employed for other “fundamental corporate governance matters such as duty-of-care waivers, corporate opportunity waivers, dual-class capital structures, and scores of other governance provisions designed to accommodate the diverse needs of Delaware entities.”
In their letter, the professors contend that an opt-in mechanism would offer a number of benefits, including preserving flexibility to accommodate a range of governance preferences, which they view as a source of Delaware’s competitive strength; mitigating concerns about mass reincorporation out of Delaware by offering a ready alternative with familiar substantive law and demonstrating that “Delaware remains responsive to corporate needs without forcing a one-size-fits-all approach on everyone”; mitigating the risk of potential legal and constitutional challenges that a “broad, mandatory limitation on the Chancery Court’s vested equitable powers” might otherwise invite; and allowing the debate about Delaware’s optimal governance structure to be settled and “evolve based on demonstrated market preferences rather than armchair speculation.”
In addition, they suggest, an opt-in mechanism would involve only simple changes to the existing bill. The amendment introduced in the Delaware legislature states, in part, that a certificate of incorporation may provide for a “provision adopting the safe-harbor rules reflected in § 144A of this title and the books-and-records rules reflected in § 220A of this title (an ‘Opt-In Provision’), provided that the Opt-In Provision (i) is in the initial charter of a corporation organized under this chapter, (ii) in the case of an existing corporation with more than one class of common stock, is approved by a majority of the outstanding shares of each class; and (iii) in the case of an existing corporation with a single class of common stock, is approved by a majority vote of the outstanding stock and by a majority vote of the shares not owned or otherwise controlled by a party owning one-third or more of the outstanding 14 stock (a ‘disinterested majority’).”
“By embracing an opt-in framework,” the professors contend, “Delaware can reaffirm its commitment to a corporate governance system that is enabling, adaptable, and responsive. This approach satisfies every legitimate concern of controlled companies with minimal risk to Delaware’s celebrated expert judicial system and rich body of precedent. Adding an opt-in would not only preserve Delaware’s status as the premier corporate law jurisdiction, but it would double down on the key principles that have made the state successful: choice, flexibility, and the wisdom of market-driven evolution.”
