In an exclusive interview with Law360, the Delaware legislator who was the primary sponsor of the proposed amendments to the Delaware General Corporation Law that have fueled so much debate recently discusses the thinking behind the proposed legislation. As discussed in this PubCo post, in response to much chatter and speculation about companies changing their states of incorporation from Delaware to other states—in other words, concerns about Delaware’s valuable corporate franchise—the Delaware legislature introduced a bill that, if adopted, would effect “sweeping changes” to Delaware’s corporate law. The 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. The impact could be fundamental. But there has been substantial pushback—some of which is quoted in the referenced post—from critics of the bill. In the Law360 interview, Delaware Senate Majority Leader Bryan Townsend defends the bill, citing the “‘urgency of the moment.’” In his analysis, “‘[w]hat seems to be happening here is growing frustration out there in the marketplace as to what people believe to be a departure in predictability’ in Delaware’s courts, ‘at a time when other states are standing up alternative frameworks that people are seriously considering.’” Check out the article!
As the article observes, the bill, SB21, emerged in the context of debate over “recent large or record stockholder attorney fees awards and breach of fiduciary duty findings,” as well as “contested rulings in cases involving the overshadowing of common stockholder interests by those of controlling investors.” The article also noted “increasing stockholder litigation challenging director independence and conflicts and rulings assigning controlling stockholder status at lower levels of stock ownership—triggering potential heightened court scrutiny.” Another issue identified in the article was “increasing stockholder suits for corporate books and records ahead of any litigation.”
According to Townsend, “‘[f]or whatever reason, there was a critical mass of developments that caused Delaware companies to be very much willing to look elsewhere.’” As he explained in the interview, initially, the legislators hadn’t attributed much significance to the early announcements of potential charter moves—and the number of reincorporations has still not amounted to a surge—but some discussions in late January and early February led them to take a deeper dive and “‘reach out to a broad swath of stakeholders,’ some of whom ‘had frustrations, who weren’t necessarily telling us in recent months and years’ about their concerns. ‘There had not been a critical mass of input to indicate we might have a more serious problem.’” He was pleased to hear, however, when they did canvas the market in February, “‘that people aren’t asking us to abandon fundamental principals and engage in the race to the bottom.’” Townsend pointed out that, although the legislation was crafted by a working group, the corporation law council of the state bar “‘has played and will continue to play a critical role in the evolution of our law.’”
At this point, he said, they wanted “‘to assure people that Delaware law will remain balanced and predictable.’” He characterized the bill as “‘not a departure from fundamental Delaware legal procedures….This is not the first, and it won’t be the last time sensitive issues unfold with regard to Delaware corporation laws.’”
For example, in the interview, Townsend pointed out that, although Nevada—one of the potential competitor states—permits “‘exculpation of loyalty claims[,] that would run counter to Delaware law….That’s not on the table’” in the Legislature. In his view, a balanced system is necessary, and they wanted to ensure that all sides of the debate see that they are committed to maintaining that balance: “‘We don’t want to abandon the absolute commitment to the duty of loyalty for ‘C’ corporations.’ Balance also is important in working out how corporations prove fulfillment of the duty of loyalty, Townsend said.”
With regard to stockholder litigation, Townsend indicated to the author of the article that they were committed to ensuring that there remained “‘proper incentives for plaintiffs firms to bring meritorious cases,’” and “‘proper incentives to find a resolution of the case.’” Commenting on the complaints about “mega fee awards” that are calculated as a percentage of “mega recoveries,” he observed that that money was “‘not going back to the stockholders.’” Although he viewed incentives to be important, he also recognized that some of the fee multipliers went “‘beyond the reasonableness that provides the proper incentive’ for class litigation pursuits. ‘It’s an understandable point of frustration if you don’t have certain guardrails in place to ensure the focus is on recovery for stockholders.’”
As to the dialogue between the judiciary and the legislature that this proposed legislation brings to the fore, Townsend told the author that “there always has been a ‘back and forth’ in caselaw and marketplace developments. However, he said, ‘I don’t think we’ve ever had it occur simultaneously with other states being viewed as legitimate alternatives.’” In the quest for “‘that eternal balance between legislative and judicial roles,’” he said, “[j]udges ‘are there to address the individual trees in front of them, and they can bear the broader forest in mind, but they have to address the individual trees [and cases] in front of them. They render judicial decisions that add up to a forest’ upon which the Legislature is more in a position to opine.”
