Lawmakers in the US have just approved a controversial bill that will curtail the rights of public equity investors.
The proposed change to Delaware law, known as SB 21, seeks to make the state more attractive to businesses with controlling shareholders – especially big tech firms that use dual-class share structures to give founders more decision-making power.
Joel Fleming, a lawyer with Boston-based law firm Equity Litigation Group, describes the proposed bill as containing plans for “the elimination of key protections for minority shareholders”.
These include introducing limits on the information they can access from companies to scrutinise conflicts of interest, and reductions to associated legal guardrails.
The context
A large majority of publicly-listed companies in the US are incorporated in Delaware, partly because the state’s laws are widely considered to treat both management and shareholders fairly.
Board directors cannot be sued, for example, as long as they can demonstrate they are independent and acting in the best interest of the company.
Delaware’s popularity has made its Court of Chancery the primary regulator of corporate governance in the US.
This includes intervening when controlling shareholders try to do something that benefits them at the expense of the broader investor base.
For instance, selling corporate assets to themselves, or refusing to sign off on an M&A deal unless they receive a greater payment than minority shareholders. In cases like this, the Court of Chancery can step in.
This happened last year, when the court ruled that Elon Musk’s $56bn (€52bn) compensation package from Tesla was obtained unfairly.
Shortly after that decision, Musk – Tesla’s largest individual shareholder – began urging companies to leave Delaware; and in January, Meta was reported to be thinking of reincorporating elsewhere, along with a number of other prominent tech companies such as Dropbox and Tripadvisor.
“It’s just a handful, but it’s spooked the Delaware political class,” Fleming explained, adding that revenues from incorporation activities account for around a quarter of the state’s entire budget.
What does SB 21 mean?
SB 21 promises to reduce the oversight powers of the Court of Chancery, and remove a requirement for companies to get sign-off from minority shareholders for key transactions.
Instead, such transactions would only need to secure the approval of a committee appointed by the board.
“So it will become easier to push through some extremely unfair transactions at the expense of minority investors, and avoid any kind of court review,” said Fleming.
Earlier this month, the chief executive officer of Swedish pension fund Sjunde AP-fonden (AP7), said he was “deeply concerned” about the proposals.
In a letter to the Delaware General Assembly, Pål Bergström wrote: “For over a century, Delaware’s courts have maintained a careful balance – ensuring accountability for fiduciaries while allowing responsible corporate leadership to manage companies effectively.”
He added: “SB 21 threatens to upend this balance, shielding disloyal fiduciaries from meaningful shareholder litigation and removing critical legal protection that underpin investor confidence.
“By insulating controlling shareholders and executives from accountability, this legislation would risk to encourage reckless decision-making, erode corporate governance standards, and put long-term shareholder value at risk.”
Bergström urged state lawmakers to reject the plan. However, in a vote by Delaware’s House of Representatives on Tuesday, the proposal was approved by 32 to seven, and subsequently signed off by governor Matt Meyer.
The decision is the latest sign that regulators and politicians in the US are clamping down on shareholder rights.
The Securities and Exchange Commission has recently introduced a series of changes that make it harder for investors to file proposals at annual meetings or influence company management in regard to corporate strategy.
“It’s all the same story,” said Fleming.
“At a very high level, the folks in charge [of companies] are unhappy about having even minimal rules apply to them, and they see this moment as the opportunity to push back on those constraints, including ones imposed by the institutional shareholder community.”
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