Passage of the 'Delaware "Billionaire's Bill"' brings potential negative implications for individuals outside the billionaire bracket.
Delaware Senate Bill 21 Sparks Debate over Corporate Accountability and Shareholder Rights
Delaware Senate Bill 21 (SB 21) has caused a stir, with intense debates centering around corporate accountability and shareholder rights. The legislation, which has been passed by Delaware's Democrat-controlled legislature, introduces more lenient rules for transactions involving controlling shareholders with conflicts of interest and imposes stricter constraints on shareholder litigation [1][2].
Implications of SB 21
Supporters argue that SB 21 could reduce excessive fiduciary litigation and regulatory burdens, potentially lowering costs for corporations and benefiting shareholders overall by promoting efficiency [1]. The bill also creates safe harbor protections, allowing boards to approve conflicted transactions without fear of litigation, shifting the balance of power towards controlling shareholders and management teams [4].
However, SB 21 strengthens limitations on shareholder books-and-records inspections, requiring shareholders to show a “reasonable particularity” of proper purpose and only allowing access to records directly related to that purpose. Corporations may demand non-disclosure agreements and can require shareholders to demonstrate a “compelling need” for additional documents [5].
Controversies Surrounding SB 21
Critics warn that relaxing the scrutiny of conflicted transactions will empower controlling shareholders to extract private benefits at the expense of minority shareholders, undermining corporate accountability [1]. The tightening of access to corporate records and the constraints on fiduciary litigation appear to curtail shareholders’ ability to monitor management and challenge abuses, thereby diminishing corporate governance safeguards [5].
Moreover, SB 21's retroactive application has raised constitutional questions regarding due process and the equitable jurisdiction of Delaware courts [2]. The Delaware Supreme Court has accepted these constitutional questions, questioning whether these provisions violate constitutional protections by cutting off vested causes of action and stripping judicial powers from the Court [2].
Critics also argue that the legislative process was rushed and one-sided, limiting meaningful debate and stakeholder input on such a pivotal overhaul of Delaware’s corporate law [1][3]. The bill is partly seen as Delaware’s response to competitive threats from other states like Texas, aiming to maintain Delaware’s premier position by creating a more management-friendly legal environment—even if at some cost to shareholder protections [4][5].
Impact on Corporate Accountability and Shareholder Rights
The long-term effects of SB 21 on shareholder value and corporate governance depend on empirical outcomes and how Delaware courts interpret the constitutional challenges raised [1][2][5]. SB 21 likely reduces litigation and transaction costs but at the expense of stronger protections for minority investors and transparency.
Critics claim that SB 21 will fundamentally rewrite the norms of corporate law in the U.S., altering the balance of power between corporate fiduciaries and shareholders, and increasing corporate secrecy while making it difficult for shareholders to file lawsuits against corporations over misbehavior [6]. An exodus of businesses could potentially crater one of Delaware's largest sources of public funding [7].
Notable Connections
The legislation SB 21 was originally drafted by Richards, Layton & Finger (RLF), a law firm that represents Elon Musk [8]. Musk has publicly moved his businesses out of Delaware in favor of Texas, citing an ongoing legal case involving a judge's repeated thwarting of his attempts to secure a massive corporate pay package from Tesla [9]. The American Investment Council, funded by companies like Blackstone Inc. and KKR & Co., played a significant role in lobbying for SB 21 [10].
In an effort to stop companies from fleeing, the state legislature has acquiesced to businesses' priorities, potentially paving the way for Musk to receive his contested pay package, as the legal changes may render the judge's current legal argument moot [11]. The Lever previously reported on the bill's ability to rewrite current protections for shareholders [12].
In summary, the impact of SB 21 on corporate accountability and shareholder rights is deeply debated. The bill likely reduces litigation and transaction costs but at the expense of stronger protections for minority investors and transparency. Its long-term effects on shareholder value and corporate governance depend on empirical outcomes and how Delaware courts interpret the constitutional challenges raised.
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