Understanding Delaware’s Senate Bill 21 and the Growing Opposition

Delaware Senate Bill 21 (SB 21) has sparked significant controversy by proposing major changes to corporate laws, including "safe harbor" protections for insiders and limiting stockholder inspection rights. Proponents believe these changes are necessary to retain corporations in Delaware. However, a coalition of consumer rights organizations, legal scholars, and public interest advocates argue that SB 21 undermines corporate governance and favors billionaires over everyday investors. The debate over SB 21 continues to intensify as it moves forward.

In recent months, Delaware Senate Bill 21 (SB 21) has become a hot topic of debate, sparking significant controversy and opposition. (Bill Detail - Delaware General Assembly) This proposed legislation aims to introduce substantial changes to Delaware's corporate laws, which have long been considered the gold standard in the United States. Here’s a closer look at what SB 21 entails, the factors that led to its proposal, and the mounting opposition it faces.

What Senate Bill 21 Proposes

Senate Bill 21 introduces several key changes to Delaware's corporate governance framework. Among the most notable provisions are:

1. Safe Harbor Protections: The bill proposes creating "safe harbor" protections for directors, officers, controlling shareholders, or control groups. This means that these individuals would receive liability protection even if they have interests that make them "not independent" with respect to certain transactions or actions.
2. Thresholds for Controlling Shareholders: The bill defines a controlling shareholder as owning at least half of a company’s shares or a third of shares plus a managerial role. Simultaneously, the bill requires controlling shareholders to obtain minority shareholder approval or independent board approval, but not both, as was previously required.
3. Amendments to Stockholder Inspection Rights: SB 21 also seeks to amend the rights of stockholders to inspect corporate records, potentially limiting their ability to access crucial information.

These changes are seen as a way to bolster the defenses of corporate insiders and reduce the risk of litigation against them. (Landmark Delaware corporate law changes aim to stem exits - Spotlight Delaware)

The Catalyst for SB 21

The proposal of SB 21 can be traced back to a broader debate about the future of Delaware as the preferred state for corporate incorporation. This debate gained momentum when Elon Musk, following a Delaware court decision that struck down his substantial Tesla pay package, called for companies to consider reincorporating in other states like Nevada and Texas. This movement, often referred to as "DExit," has raised concerns among Delaware legislators about a potential exodus of corporations from the state. (Elon Musk pulling companies out of Delaware prompts other businesses to follow.)

In response to these concerns, Delaware legislators proposed SB 21 as a way to retain companies and prevent them from seeking more favorable legal environments elsewhere. The bill is seen as an attempt to address the perceived retreat of companies from Delaware by offering more robust protections to corporate insiders.

The Opposition Campaign

The introduction of SB 21 has not gone unchallenged. A coalition of consumer rights organizations, legal scholars, corporate governance specialists, and public interest advocates has launched a vigorous campaign against the bill. Critics argue that SB 21 undermines corporate governance and disproportionately favors billionaires at the expense of everyday investors. Key points of contention include:

1. Erosion of Corporate Governance: Opponents, such as Tulane Law Professor Ann Lipton, argue that the bill would undo decades of Delaware jurisprudence and make it easier for corporate insiders to evade accountability. Lipton contends that the changes would allow for the appearance of procedural regularity while denying shareholders access to necessary information to challenge corporate actions. (Landmark Delaware corporate law changes aim to stem exits - Spotlight Delaware)
2. Public Opposition Campaign: The opposition has organized a public campaign complete with a dedicated website (stopsb21.com) and billboards. The website features imagery of Elon Musk wielding a chainsaw with the caption "Protect Delaware from Elon Musk. Save Your Pension," highlighting the perceived threat to pension funds and everyday investors.
3. Social Media Advocacy: Leading plaintiffs' lawyers, such as Bernstein Litowitz attorney Jeroen van Kwawegen, have taken to social media to criticize the bill. Van Kwawegen described the proposed legislation as "a license to steal from institutional investors and pension funds," emphasizing the potential harm to public servants like teachers, police officers, and firefighters. ((12) Post | LinkedIn)

Looking Ahead

SB 21 is set for its first hearing in a Senate committee on March 12, 2025. As the debate continues, fundamental questions remain about the necessity and impact of the legislation. Critics argue that the flow of corporate departures from Delaware is not as significant as proponents of the bill suggest, and that Delaware's historical reputation and legal framework will likely continue to attract corporations.

In conclusion, Senate Bill 21 represents a significant shift in Delaware's corporate governance landscape, prompting a fierce debate about the balance between protecting corporate insiders and safeguarding the interests of shareholders. As the bill moves forward, it is clear that the opposition will continue to voice their concerns and advocate for the protection of everyday investors.

Written by:

Michael Watson

 Senior Legal Counsel