Delaware lawmakers this week pushed through controversial changes governing corporate behavior in a scramble to keep more businesses from leaving the state following the dramatic exit of Elon Musk.
Gov. Matthew Meyer signed the SB 21 legislation into law Tuesday and said the changes would maintain Delaware's place as the best place in the world to incorporate a business — "ensuring clarity and predictability, balancing the interests of stockholders and corporate boards."
The revisions came in response to a string of complaints from prominent CEOs, including Tesla (TSLA) CEO Musk, who moved incorporations out of state or threatened to do so. The exits even gained a nickname: "Dexits.”
Musk has already moved the incorporations of Tesla and his rocket-building company SpaceX (SPAX.PVT) to Texas. Neuralink (NEUR.PVT), Boring and the social media platform X — three other companies he oversees — have left for Nevada.
Over the past year, Meta (META), Dropbox (DBX), hedge fund Pershing Square Capital Management, Trade Desk (TTD), Fidelity National Financial (FNF), and Sonoma Pharmaceuticals (SNOA) have all floated plans to move their incorporations.
The talk of high-profile departures is roiling a state that, for roughly the past century, has been the dominant place to incorporate because of its so-called corporate-friendly laws, specialized business courts, and ease of filing company documents.
The state touts that it is home to more than two-thirds of all Fortune 500 companies. In 2023, Delaware hit a record 2 million total incorporations but saw a drop in the percentage of Fortune 500 companies registered there to 67.6% from 68.2% in 2022.
The state's newly elected Democratic governor, Meyer, launched a working group to study mounting complaints, and lawmakers rushed to push through a bill that would limit investor lawsuits by allowing corporate boards to further insulate their directors, officers, and controlling shareholders from liability.
Musk decided to leave the state after a controversial decision by a Delaware judge to wipe out his $56 billion performance-based compensation plan. He is now appealing that decision.
The billionaire, along with current and former Tesla directors, argued in a recent appeal to the Delaware Supreme Court that the refusal by Delaware Chancery Court judge Kathaleen McCormick to reinstate Musk’s pay contained multiple errors that should lead to the ruling’s reversal.
The new law passed this week by the state legislature and signed by the governor extends more leeway to board members in transactions where their interests or relationships raise conflicts of interest.
It also broadens the set of conditions that investors must meet before inspecting company records, making it more difficult for plaintiffs to find evidence supporting a lawsuit.
Semafor reported that the legislation was prompted by warnings from key corporate attorneys that more big-name companies, including Walmart (WMT), might move out of the state.
Critics say the amendments amount to a handout for billionaires because they broaden safe harbor protections for corporate directors. They also object to the legislation being put to a vote without more deliberation.
Columbia University School of Law professors criticized Delaware lawmakers for pushing what they describe as major overhauls so quickly.
“Ordinarily, reforms of this magnitude pass through the deliberate, consensus-driven process of the Delaware Bar’s Corporation Law Council. This time, however, the route appears more compressed,” the lawyers said.
Eric Talley, one of the Columbia University law professors who co-authored the critique, said parts of the new law may be vulnerable to state constitutional challenges.
"I suspect a challenge to be made imminently," Talley said.
He added that the most serious consequence for investors under the new rules is that they have less protection against actions by insiders — officers, directors, and especially large stockholders — that attempt to funnel assets away from outside investors and into the pockets of the insiders.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on X @alexiskweed.
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