Corporate Law and Culture War: Delaware Faces Major Business Shifts

The Facts -

The Shifting Landscape of Corporate Law: Delaware Faces a New Challenge

Recent disruptions in corporate law have drawn the focus of business leaders and lawmakers alike, as Delaware, long considered the nucleus of corporate governance, finds itself at the center of a heated debate. This burgeoning dispute has prompted some major corporations to reconsider their legal domiciles.

Elon Musk's vocal critiques of Delaware began when the state's Chancery Court, led by Chancellor Kathaleen McCormick, dismissed a significant compensation package he proposed. In response, Musk opted to incorporate Tesla in Texas. Following suit, Dropbox received shareholder approval to re-incorporate outside Delaware, and Meta is contemplating similar actions. This trend, as reported by DealBook, has other companies evaluating their options.

Nearly 70% of Fortune 500 companies have traditionally called Delaware their legal home, a fact underscored by Musk's criticism, which has brought corporate law to the forefront of national discussions and linked it to broader societal debates regarding diversity and inclusivity.

Robert Anderson of the University of Arkansas School of Law noted, "You can blame McCormick or you can blame Musk — or you can say it’s a combination of the two of them — but it has turned it into a highly ideologically charged political issue, which it never, ever was before."

Delaware's significance is not just symbolic; it's economic. Corporate franchise revenue forms about 30% of the state's budget, a fraction that swells when considering the secondary economic impacts from tax contributions tied to legal services details here.

The core issue revolves around the influence of minority shareholders in companies, especially those controlled by founders. While some argue that visionary founders need control to steer their companies effectively, others believe these controlling interests can lead to governance challenges.

McCormick's rulings have faced criticism, notably her stance on Musk's $44 billion Twitter acquisition. She rejected his compensation package, citing insufficient shareholder notification and lack of board independence, even after shareholders voted in favor. Musk lambasted the decision as "absolute corruption."

The ripple effects continued when J. Travis Laster, another Delaware court vice chancellor, ruled against board delegation of authority to shareholders, a decision that was later countered by legislative amendments permitting such agreements.

William Chandler, a former state judge, remarked on the growing discontent, attributing it to "the uncertainty and unpredictability of a few decisions by just two judges," referring to McCormick and Laster.

In response, Delaware's Governor Matt Meyer has embarked on a media campaign read more, asserting Delaware's commitment to maintaining its business-friendly environment amidst these controversies. With the stakes high, any significant corporate migration could devastate the state’s economy, a sentiment echoed by Jonathan Macey of Yale Law School, who warned that such a move "would be crippling."

Delaware is also adjusting its legal landscape to retain its appeal. Recent court rulings, like the one regarding TripAdvisor, have simplified the process for companies seeking to relocate their incorporation, potentially shifting the balance of power in corporate governance.

Governor Meyer has signaled a willingness to consider changes, such as limiting judicial discretion in case assignments, to address business community concerns. As Meyer observed in a CNBC interview, "Companies and their lawyers feel like they get the same judge every time when they come to Delaware business court, and they don’t feel like they’re getting a fair hearing."

---
Read More USA Works News