By Lee Rudy, Partner, who manages the Firm's corporate governance litigation practice.
On March 26, 2025, Delaware Governor Matt Meyer signed into law a sweeping package of legislative amendments explicitly designed to protect conflicted corporate transactions from legal challenge. The bill (“SB 21”) was broadly opposed by institutional investors, unions, and the academic community, but still passed handily on a bi-partisan basis in the state legislature.
I have dedicated more than two decades of my legal practice to litigating in the Delaware courts. I have won and lost plenty of cases in the Delaware courts. The passage of SB 21 solves a made-up problem that needed no fixing. The bill is an affront to investors, and invites corporate fiduciaries to lie, cheat, and steal. Its passage was abrupt and one-sided. The bill’s proponents ignored the views of institutional investors managing trillions of dollars of capital. They also squelched the views of academic experts, who were nearly unanimous in condemning SB 21. The bill was rushed through the legislature in a month, as the proponents knew that the more daylight SB 21 received, the more terrible it looked.
Background
Proponents of SB 21 argued that without substantial legislative change, Delaware risked losing its preeminent spot as the most-desirable state in which to incorporate. Currently two-thirds of the Fortune 500 companies are incorporated in Delaware. Other states, including Nevada and Texas, have aggressively courted companies to reincorporate there by wooing them with legal regimes that are more protective of corporate directors’ and controlling stockholders’ decisions.
Delaware generates $2 billion in revenue annually from “franchise taxes” paid by Delaware corporations. SB 21’s proponents argued that without a drastic change in the law, that tax revenue would be at risk. The bill’s proponents argued that Delaware court decisions “of recent vintage” had unfairly tilted the balance too far against corporate fiduciaries, and that SB 21 was needed to “restore balance” in the law.
These arguments were all frivolous. Franchise taxes are capped at $250,000 per company, so hundreds of companies would need to leave Delaware before it would even start to affect the state’s budget. In fact, the data showed that in 2024, eight companies left Delaware, but 85 new companies came to the state.
Nor was there any evidence that “recent” decisions had caused Delaware law to become “unbalanced.” In fact, one academic report listed 36 decisions of the Delaware Supreme Court that would be overruled by SB 21. These included seminal opinions that had guided corporate behavior for decades.
The Match Litigation
SB 21 explicitly sought to overrule a specific 2024 decision of the Delaware Supreme Court, In re Match Group, Inc. Derivative Litigation. In Match, the plaintiff, a minority stockholder of Match Group, Inc. (“Match Group”) (represented by Kessler Topaz and its Delaware co-counsel) challenged the fairness of a reverse spinoff transaction, through which the parent company—IAC/InterActiveCorp (“IAC”), an internet and media conglomerate—would separate from its controlled subsidiary Match Group.
Plaintiff argued that under a series of seminal Delaware Supreme Court cases, the Match transaction was subject to “entire fairness” review because it was proposed by Match Group’s controlling stockholder IAC, and IAC was being treated differently in the transaction than Match Group’s minority stockholders. Entire fairness review requires the controlling stockholder who stands to benefit from the proposed transaction to prove that both the “process” and the “price” were fair. The only way for the Match defendants to avoid entire fairness review would have been to subject the transaction to approval of both a committee of disinterested Match Group directors and a majority of Match Group’s public minority stockholders. Since the transaction in Match was not subject to approval by Match Group’s minority stockholders, plaintiff argued that the transaction was subject to entire fairness review, and could not be dismissed on the pleadings.
Defendants argued that transactions like a reverse spinoff did not require approval by both the independent directors and the minority stockholders to escape entire fairness review; rather, they argued that only “freeze out” mergers required both of those stockholder protections. Other transactions involving controlling stockholders, defendants argued, could be insulated from entire fairness review as long as just one of those protections (either independent director approval or minority stockholder approval) was employed. Because the Match transaction was approved by a committee of independent directors, defendants argued that it was not subject to entire fairness review, and should be dismissed on the pleadings.
The Delaware Supreme Court ruling in Match rejected defendants’ argument. The Court held that a string of precedents going back decades had held that all controller transactions, not just “freeze out” mergers, were subject to entire fairness review. To argue that SB 21 only reverses decisions of “recent vintage,” therefore, ignores the Delaware Supreme Court’s holding in Match that Delaware law has consistently evaluated all controller-led transactions under the entire fairness standard.
Defendants’ counsel in Match was a major proponent of SB 21. The bill explicitly reverses Match, as well as the precedents Match cites, by subjecting only “freeze out” mergers to the requirement that both independent director and minority stockholder approval is required in order to avoid entire fairness review. Under SB 21, all other controller conflict transactions would avoid entire fairness review as long as the company’s independent directors approve them.
Loosened Independence Standard
At the same time, SB 21 also loosens the definition of who is an “independent director” and makes it difficult to challenge the board’s designation of directors as “independent.” SB 21 creates a presumption that a director is “disinterested” so long as the board determines her to be so. That presumption “may only be rebutted by substantial and particularized facts that such director has a material interest in [the] act or transaction or has a material relationship with a person with a material interest in such act or transaction.”
Historically, by contrast, Delaware law has always taken a “flexible, fact-based approach” to determining whether a director is independent. This quote is from In re Oracle Corp. Deriv. Litig., which was authored by then Vice Chancellor Leo Strine of the Delaware Court of Chancery.
Former Chief Justice Leo Strine
Vice Chancellor Strine became Chancellor of the Delaware Court of Chancery in 2011, and then served as the Chief Justice of the Delaware Supreme Court from 2014-2019. In 2019, he joined a New York-based defense firm – the same firm that represented defendants in Match. The former Chief Justice is reported to have been a major proponent of SB 21.
The former Chief Justice’s journey from the bench to the defense bar has caused him to reverse far more than his definition of an independent director. In 2001, he authored an article that extolled the incremental “evolution” of Delaware law through court decisions, as opposed to abrupt legislative change. “The Delaware Model,” then Vice Chancellor Strine wrote, “while perhaps not optimal, does allow for a more unfettered evolution of corporate practice than would the hasty adoption of legislative standards about which substantial disagreement persists. Uncertainty has its costs, but so does ill-advised certainty....”
Voices Ignored
SB 21, of course, hastily adopted a legislative standard about which substantial disagreement persists. ICGN – the International Corporate Governance Network – sent a letter to the Delaware legislature on behalf of institutional investors holding more than $90 trillion in capital by investors in more than 40 countries. ICGN wrote to express its concern that “some of the proposals in Senate Bill 21 will be detrimental to shareholder rights, with potentially significant negative implications for long-term returns for investors, including people saving for their retirements, current retirees and other individuals investing their savings.” CII – the Council of Institutional Investors – sent a similar letter on behalf of “U.S. public, corporate and union employee benefit funds, other employee benefit plans, state and local entities charged with investing public assets, and foundations and endowments with combined assets under management of approximately $5 trillion.” CII expressed its concern that “the provisions of SB 21 are a direct rebuke to the Delaware Courts and the body of case law developed by those courts.” CII also observed that “the enactment of SB 21 could make Delaware substantially less attractive to institutional investors when evaluating where the corporations that they own should be incorporated.” CalPERS, the largest public pension fund in the United States, with over $500 billion in global assets, wrote that SB 21 “would effectively immunize corporate insiders who commit industrial-scale self-dealing.” CalPERS “urge[d] the legislature “to reject SB 21 and send its drafters back to the drawing board, with appropriate input from representatives of investors.” The list goes on.
These voices were shut out of the drafting process, and were ignored and shouted down during legislative “debate.” The Delaware legislature gave hours of time to SB 21’s proponents, while restricting its opponents to minutes. The day SB 21 passed in the legislature, the Delaware House Speaker yelled at an esteemed professor and former SEC Commissioner and abruptly ended his testimony mid-sentence.
Drafted in Secret by Elon Musk and Mark Zuckerberg’s Lawyers
SB 21’s adoption was not just “hasty,” it was unusual and unsavory. The bill was proposed on February 17, 2025. It did not originate in the Delaware bar’s Corporate Law Council, where all prior legislative proposals concerning Delaware corporate law have begun. Rather, the record reflects that SB 21 was borne of the efforts of a small group of defense lawyers called upon in early February 2025 to advise Delaware’s brand-new Governor Matt Meyer. These lawyers included the former Chief Justice, as well as current counsel to Elon Musk and Mark Zuckerberg.
CNBC reported on March 19, 2025 that the Governor convened this group on February 1, 2025, the day after the Wall Street Journal reported, based on unnamed sources, that Zuckerberg’s Meta Corporation, the parent company to Facebook, was “in talks to reincorporate in Texas or another state.” Meta currently faces stockholder litigation in Delaware relating to, among other things, the Cambridge Analytica scandal for which Meta paid a $5 billion fine to settle related charges with the Federal Trade Commission. Former Chief Justice Strine’s firm represents Meta. Call me a cynic, but was Meta actually contemplating leaving Delaware? If Meta wanted to leave, Mark Zuckerberg has the votes to make it happen. For all I know, this story was simply planted in order to help spur legislative change and help Mark Zuckerberg win.
Elon Musk helpfully amplified Zuckerberg’s message when Musk tweeted on February 1, 2025: “Companies are flooding out of Delaware, because the activist chief judge of the Delaware court has no respect for shareholder rights.” The truth is that this “activist chief judge” – Chancellor Kathaleen St. Jude McCormick – only got Musk’s knickers in a twist when she ruled against him as a litigant.
Chancellor McCormick first did so during pre-trial proceedings in a lawsuit brought by Twitter after he promised to buy the company and then tried to wriggle out of the deal. Musk saw the writing on the wall and caved, agreeing to buy Twitter (and subsequently ruin the company). The Chancellor then ruled against Musk after trial in a stockholder lawsuit challenging his $56 billion compensation package at Tesla. To be clear, Chancellor McCormick also throws out lots of stockholder lawsuits. In today’s world, however, a judge who ever rules for stockholders, even in meritorious litigation, is labeled an “activist.”
SB 21’s proponents trotted these statements by Musk and Zuckerberg into the Governor’s office with a ready-made legislative plan. Two weeks later, they introduced SB 21. Governor Meyer had been elected after receiving a million-dollar donation from Phil Shawe, a former disgruntled loser in a 2016 business dispute before the Delaware Court of Chancery. On February 2, 2025, the Governor told a reporter about “things that need to change” in the Delaware courts. “It’s really important we get it right for Elon Musk or whoever the litigants are in Delaware courts,” he said. That’s a pathetic thing for anyone, let alone a Democratic Governor, to think, let alone to say out loud. Let Elon Musk take his $250,000 in franchise taxes for Tesla and leave if he wishes. We’ll see how well he likes facing a jury of regular Texans, rather than a sophisticated judge on the Court of Chancery, the next time he gets sued.
Restrictions to Books and Records Requests
In addition to legislating a more permissive standard of review for conflicted controlling stockholder transactions and redefining what an “independent director” is, SB 21 also significantly hampers stockholders’ ability to investigate potential claims of all kinds, not just those relating to controller conflict transactions. Stockholders of Delaware corporations have a right to review the company’s “books and records” if they have a “proper purpose.” Investigating potential breaches of fiduciary duty is one such proper purpose.
Prior to SB 21, a stockholder serving a books and records request would typically only be entitled to board-level materials, such as board minutes and presentations. But if a court found that the board materials failed to fairly explain the board’s consideration of the issue being investigated, it was authorized to direct that additional materials, such as emails, be produced. The law, prior to SB 21, thus incentivized drafters of corporate board minutes to include sufficient detail in the minutes to avoid being ordered to produce additional documents.
SB 21 specifically delineates the board-level materials that are subject to production on a books and records request, and only authorizes stockholders to review additional documents upon a showing of “compelling need.” SB 21 thus encourages drafters of minutes to include the barest of details, because they know stockholders will not be able to review emails or other documents that might expose the truth of what actually happened inside and outside the boardroom.
Read in conjunction, SB 21 (i) prevents stockholders from investigating the conduct of corporate directors and officers, including conflicted, self-dealing transactions; (ii) insulates those transactions from judicial scrutiny as long as the board’s self-designated independent directors approve them; and (iii) redefines independent directors as those individuals deemed by the board to be sufficiently independent, taking the determination out of the hands of the Court of Chancery. These three provisions, together, are likely to strangle off the investigation or prosecution of even the most significant corporate wrongdoing.
The true ‘secret sauce’ that has kept companies incorporating in Delaware has always been the combination of its bench of hard-working judges and deep well of precedent. SB 21 overrules decades of precedent, and tells judges it doesn’t trust them to decide cases. Ironically, SB 21 may make it less likely that companies would choose to incorporate in Delaware, since any number of other states’ corporate law relies on strict legislative pronouncements, rather than nuanced case precedent developed by an expert bench.
Southern Peru
On a personal level, I keep thinking about Southern Peru. A career highlight for me was when in 2011, I helped lead the prosecution of In re Southern Peru Copper, which went to trial before then-Chancellor Strine. After trial, Strine ruled that the company’s controlling stockholder Grupo Mexico had caused Southern Peru to overpay for mining assets owned by Grupo Mexico by $1.3 billion. With interest, the Southern Peru verdict totaled $2 billion, still the largest verdict for stockholders in Delaware history.
In coming to his verdict in Southern Peru, Chancellor Strine found that the directors on the special committee that negotiated with Grupo Mexico were independent. They were also “competent, well-qualified individuals with business experience.” They also hired top-tier advisors and met dozens of times over several months while they considered Grupo Mexico’s proposal.
So how did these independent directors end up agreeing to overpay Grupo Mexico by more than a billion dollars? Chancellor Strine found that “from inception, the Special Committee fell victim to a controlled mindset and allowed Grupo Mexico to dictate the terms and structure of the Merger.” This “controlled mindset,” he wrote, “too often afflicts even good faith fiduciaries trying to address a controller.”
Exactly. Even independent directors sometimes succumb to controlling stockholders. Non-independent directors even more so. Conflicted transactions need to be investigated and tested in the courts. If the Southern Peru transaction came around today, after SB 21, it would get thrown out on a motion to dismiss. First, a books and records demand would simply show that the directors met several times with their expert advisors before agreeing to the deal. Second, even if we had arguments that those directors lacked independence, the courts would be instructed to defer to the board’s determination that they were independent. And third, the transaction would not be subject to entire fairness review, because the company’s independent directors approved it. Case dismissed.
So, prior to his joining a defense firm, then-Chancellor Strine found in Southern Peru that “independent” directors, acting in “good faith” can sometimes fall victim to a “controlled mindset” and cost their companies more than a billion dollars. After joining a defense firm, he then helped lead the charge to pass legislation that would make it impossible for stockholders to uncover, investigate, or seek redress for similar wrongdoing in the future. And the legislature listens to him because he is an “esteemed former jurist.” Perhaps, but Mark Zuckerberg is paying his bills.
What’s next? SB 21 will need to be tested in the courts. Meanwhile, stockholders of Delaware corporations should understand that lots of corporate misconduct will simply not get addressed. As one opponent of SB 21 dubbed the bill, it is a “license to steal.”