Bipartisan leadership seeks to stop corporate exodus

A Senate bill awaiting committee action when the Legislature resumes in March is meant to curb the cascading exodus of corporations from the First State.

“We had to signal that we were serious about making some changes, and time was of the essence,” said Senate Minority Leader Sen. Brian Pettyjohn, R-Georgetown, who is among Republican and Democratic leadership sponsoring the bill in the General Assembly. “We needed to start something, and we needed to do it quickly.”

Recently elected Gov. Matt Meyer weighed in on the issue Feb. 4 during a CNBC interview, saying he understands there are threats to Delaware’s Chancery Court supremacy, but he intends to work to win back companies that have left, and keep the roughly two-thirds of Fortune 500 companies still incorporated in Delaware and the 81% of IPOs that incorporated in Delaware in 2024.

“We’re going to be out front making sure we win this business,” he said. “I think there’s a question of balancing stockholder and management rights.”

Meyer said he’s heard from companies and attorneys that feel like they get the same judge whenever they come to Delaware’s Chancery Court, even though the court has seven chancellors that serve for 12-year appointments.

“They don’t feel like they’re getting a fair hearing,” he said. “We need to make sure not only is it actually fair, but there is also an appearance of fairness to any litigant who comes before our court.”

While fairness is key, Lawrence Cunningham, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, who is also an attorney, said it’s unlikely that Delaware law, which allows one person the right to sue a company, even if they only own one share of stock, will change.

“It is one of the strangest, weirdest things in corporate law that any person who owns the tiniest percentage, even a single share, is entitled to file a lawsuit,” he said. “When I teach corporate law, that’s one of the first things I tell students, and everyone falls out of their chair.”

There are, however, protections against nuisance lawsuits. Plaintiffs are ethically bound against filing frivolous lawsuits, and defense attorneys can make motions to dismiss or for summary judgment if they believe the case has no merit.

Senate Bill 21, introduced Feb. 17, seeks to amend General Corporation Law in Delaware Code, and make clear that board of directors and shareholder decisions stand.

“The rules for approving certain transactions are focused entirely on the controlling shareholders. That’s the concern or problem that Delaware has identified, and that’s the surgery that the statute is trying to operate on,” Cunningham said.

The bill is the direct result of the tumultuous aftermath of a 2024 Chancery Court decision invalidating a Tesla shareholder-approved compensation package for Elon Musk.

The saga began in 2018 when a Norristown, Pa. man, Richard Tornetta – the owner of a mere nine shares of Tesla stock, and described by Reuters as a former heavy metal drummer who also has an interest in audio systems for cars – filed a lawsuit in Chancery Court challenging Musk’s board-approved $56 billion compensation package.

Chancellor Kathaleen McCormick ruled in favor of Tornetta, despite two shareholder votes in favor of the compensation package, prompting Musk to post on X, “Never incorporate your company in the state of Delaware.”

In her decision, McCormick disregarded the shareholder votes, stating in her opinion that the proxy statement voted on by shareholders was materially false or misleading.

“Under Delaware law, ratification cannot be deployed post-trial to extinguish an adjudicated breach of the duty of loyalty,” the opinion states, referring to the second vote. “The proxy statement’s multiple, material misstatements concerning the effect of the stockholder vote, ironically, independently bar that vote from having any ratifying effect.”

In other words, McCormick discounted an affirmative vote of shareholders because she said it could be tainted by post-trial bias.

She also awarded Tornetta’s attorney $345 million in compensation. They had asked for $5.6 billion. She has given Tesla the option “to pay in freely tradable Tesla common stock.”

Cunningham said Tornetta’s attorney proved breach of fiduciary duty, which goes to Tornetta’s harm when his nine shares of stock dropped, resulting in the massive payout.

“The sums involved in this are hard to visualize,” he said, adding Musk’s $56 billion is equally staggering. “Ordinary people like you and I say that’s a huge amount of money. It’s a big topic, as big as the numbers.”

But SB 21 offers no solution to big payouts, he said, other than to ask the bar association to make rules or policies that put limits on how much a lawyer can get paid in a case like this. “They’re putting that on the table,” Cunningham said.

McCormick’s decision continues to have a rippling effect throughout the business community.

At the turn of February, Dropbox filed its intent to leave Delaware with the Securities and Exchange Commission, followed a day later by billionaire Bill Ackman announcing he would be leaving as well. Ackman’s Pershing Square Capital Management has significant holdings that include Hilton, Chipotle and Uber. No decision has been made whether they will go to Nevada or Texas, but Ackman said in a post that “top law firms are recommending Nevada and Texas over Delaware.” 

Meta is reportedly in talks with Texas about relocating.

With about a third of the state’s budget relying on fees and taxes of companies incorporated in Delaware, the loss of billions of dollars would have a chilling effect on state finances.

Not the first time

Although Musk’s name has drawn the most attention in recent months, a 2014 Chancery Court decision sent similar shockwaves in the business community. The case involved TransPerfect, a New York-based translation company owned by a couple once engaged. When the engagement ended, so did the company partnership.

A year later, the court appointed a custodian to break up the company, despite opposition from owner Phil Shawe. He fought the custodianship, and the millions of dollars given to lawyers overseeing the custodianship, and finally won the right to buy out his former partner.

After the lengthy litigation, Shawe announced his plans to reincorporate in Nevada, stating that “Delaware was the default option for most companies, including TransPerfect, but times have changed. Other states, Nevada being one of them, have presented themselves as a compelling alternative.”

Shawe has actively sought changes in Delaware’s Chancery Court, at times paying for vehicles placarded with anti-Chancery Court billboards to drive by the Wilmington courthouse, and hiring Al Sharpton to make periodic visits to speak against the court.

The TransPerfect decision followed by the high-profile Musk decision has many questioning Delaware’s Chancery Court’s position as a premier institution for corporate law.

Pettyjohn said there was a time when Delaware’s Chancery Court followed decisions by a company’s independent board of directors and its shareholders, but recent decisions have shown otherwise.

“That used to be the standard here,” he said. “Recently, you’ve got companies that felt more and more that the courts were second-guessing those independent boards and stockholders, and interjecting what the courts thought and making their own decision about what’s right and wrong versus what the shareholders say,” he said.

In addition to clarifying the roles of a corporate board of directors and the shareholders, the bill also addresses requests for books and records.

“You really shouldn’t use the books and records request to go on a fishing expedition,” Pettyjohn said, which is what has happened. “It was never intended to be a full-on discovery, which is allowed in a typical lawsuit.”

Cunningham said over the years plaintiffs have gradually expanded the scope of their request for information to include emails and texts. SB 21 specifically excludes a request for emails and texts.

“I think you have to draw the line somewhere. We can’t just say anything that is inside any device or any company record,” he said. “I think that will have the effect of reducing or curtailing some of these requests, and that’s part of the debate.”

For someone such as Tornetta, who owns a small number of shares, they have a right to access books and records, Pettyjohn said, but it should be a streamlined process to get core corporate documents and figure out if there was any wrongdoing.

“Our companies need to have that assurance that our historic focus on the core documents will be the point moving forward so that books and records aren’t this big gotcha,” he said.

Pettyjohn said the timing of the bill is important since companies commonly hold stockholder meetings early in the year. It will hopefully quell any jitters, especially from start-ups structured with majority or large numbers of stock shares for their founders.

“Honestly, those were the innovators. They took the risk to form the company. To develop the technology, they like to maintain some sort of control over it, even when the company goes public,” Pettyjohn said. “We just need to do a good job of balancing the interests of them as the founder and majority stakeholder of the company with the shareholders.”

While newer companies with heavy-founder stock packages may have reservations about incorporating in Delaware, Cunningham said he believes established blue chip companies, such as Exxon-Mobil and IBM, will stay.

“Data shows that none of the big, old blue chips have left or are threatening to leave,” he said. “It's the new group that has controller-shareholders or founders – like Tesla, Dropbox, and Tripadvisor – which is the group that’s loudest.”

As the initial bill makes its rounds, it is already receiving some criticism. Most notably, the Corporate Law Council has taken issue for not being more involved with its creation. And some are criticizing the fact that a Delaware law firm that represented Elon Musk in his court battle was involved in writing the bill.

Pettyjohn said the law firm and former Chancery Court chancellors were among those who helped craft the bill, but in the end it is a legislative bill.

“We had a lot of people involved in this. It wasn’t Elon Musk’s lawyer who wrote this for us,” he said. “At the end of the day, we control the pen. We still control what that bill says. We did go through and come up with a very balanced piece of legislation.”

The bill is expected to be heard in committee March 12, and Pettyjohn said he expects there could be changes. However, he stands by the bill.

“We need to signal as the legislative body that we hear what’s going on, and we’re taking substantial steps to listen to the concerns of the boards and balance the interests of stockholders,”  he said. “It’s going to calm the waters. I don’t think it’s going to say we’re out of the woods yet. In my opinion, there are some things that the court should do procedurally to help as well.”