Delaware aims to remain top US corporate legal home; Texas marshals a challenge

By Tom Hals

WILMINGTON, Delaware (Reuters) - A year after Elon Musk urged U.S. companies to abandon Delaware as their legal home and follow Tesla to Texas, legislators in the two states on Wednesday considered bills in an unusual battle over corporate law that critics say benefits powerful shareholders.

Until recently, Delaware was the undisputed home to Corporate America, even though few companies have significant operations in the state. Most large public companies charter their business in Delaware to take advantage of its corporate law governing relations between boards of directors and shareholders. More than 20% of state budget revenue comes from corporate fees.

Last year, after a Delaware judge rescinded Musk's $56 billion pay package as CEO of electric car maker Tesla, a trickle of companies departed the state. Delaware leaders fear that could turn into a stampede -- dubbed "DExit." In February, state lawmakers proposed major changes to the corporate law.

On Wednesday, witnesses told the Delaware Senate Judiciary Committee the bill was not driven by Musk but by recent court decisions that created uncertainty about the corporate law.

"His commentary had a megaphone effect, but the legislation expressly doesn't help him, and we're addressing the deeper concerns from many companies and investors beyond just one person," Amy Simmerman, a corporate attorney in Delaware, told the committee.

The Delaware bill creates "safe harbors" from litigation for transactions involving controlling shareholders, such as buying a controlling shareholder's business or restructuring a class of stock, although it will not impact a takeover of the company by the controlling shareholder.

If a deal is approved by a board committee that has a majority of independent directors or by a vote by unconflicted shareholders, the deal cannot be reviewed by a court. Currently, litigation can only be avoided if both steps are used and the committee must be entirely made up of independent directors. 

The bill also makes it harder to challenge whether a director is independent. It defines "controlling shareholder" and limits records available to shareholders who want to investigate a deal for conflicts. 

The bill aims to give Wall Street dealmakers confidence that they can structure deals involving controlling shareholders to avoid lengthy legal challenges by investors. Sponsors said it also protects shareholders. 

Opponents call it a "billionaires' bill," that favors powerful controlling shareholders like Meta Platforms CEO Mark Zuckerberg and makes it harder for public shareholders to monitor conflicts. Meta is reportedly considering leaving Delaware.

Christopher Foulds, a Delaware attorney who represents shareholders, told the senate committee that investors holding trillions of dollars of capital oppose the bill, which he said prevents stockholders from challenging conflicted transactions.

"The controlling stockholder could put their best friend on a committee and negotiate against them, and that's fine, according to their bill," he said.

State Senator Bryan Townsend has said the bill was drafted with support from Governor Matt Meyer and is sponsored by the legislative leadership of both parties.

The committee ended the hearing without taking action.

On Wednesday morning in Austin, Texas, state legislators discussed Texas House Bill 15, which would enshrine in the code the so-called business judgment rule. This protects boardroom decisions, even if they turn out poorly, as long as they were taken in good faith by independent directors.

The bill also allows companies to bar derivative lawsuits unless they are brought by an investor with at least 3% of the company's stock. Derivative lawsuits are cases brought by investors against the directors for the benefit of the company.

Musk's pay case was a derivative lawsuit, which was brought by an investor with nine Tesla shares. 

Governor Greg Abbott has said he would sign the bill. Its sponsor, Representative Morgan Meyer, told a state House of Representatives committee the bill would "make Texas the best state to incorporate in," although only a few large companies have. The committee heard testimony without taking action.

Brian Quinn, a professor of corporate law at Boston College Law School, said there is no recent precedent for states to compete so openly over corporate law. "That's like an old topic from the 1930s," he said. "That's over, because Delaware won the race."

(Reporting by Tom Hals in Wilmington, Delaware; Editing by David Gregorio)