Musk’s War on Delaware Spurs Law Pushed by Private Equity

(Bloomberg) — The lobbying powerhouse for the private equity industry was rewarded Tuesday night when a controversial bill overhauling Delaware’s corporate law was passed, potentially making it harder for shareholders to beat companies and executives in court — a long-simmering campaign reignited by Elon Musk.

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A team of five lobbyists hired by the American Investment Council, which is funded by the likes of Blackstone Inc. and KKR & Co., had pressed lawmakers to support the measure. The “billionaires’ bill,” as some detractors called it, eased the standards for insider deals involving controlling shareholders and for rich compensation packages for founders like Musk. An army of professional influencers had been “swarming the statehouse,” as one legislator put it.

The bill, which had advanced out of the state Senate on a 20-0 vote, passed Delaware’s House of Representatives on Tuesday by 32-7 and was quickly signed into law by the governor. Proponents say the law doesn’t represent a radical rewrite but instead creates a road map for companies to follow for better governance.

The legislation comes after growing criticism that the state’s corporate law had become obstructive. But the effort gained new urgency when Musk, the world’s richest person, gave Delaware a scare by reincorporating his companies in Texas and Nevada. He acted after the Chancery Court’s chief judge shot down his Tesla Inc. pay package, the largest ever awarded to a business leader.

Big Stake

Private equity firms had a big stake in Senate Bill 21 because they often retain a significant holding in companies after listing them through initial public offerings, exposing them to potential shareholder lawsuits that can drag on fund returns. Among the PE players, the biggest firms have the most to gain from the law, since it may help contain shareholder suits in take-private or take-public transactions, said Bill O’Neil, a partner at Winston & Strawn who advises corporations and private equity firms.

“There is no bad news here for private equity,” O’Neil said.

Critics of SB 21, including public pension funds and shareholder advocacy groups, say fears of a corporate exodus are overblown and have been conjured up to push through a giveaway to billionaires and powerful corporate insiders at the expense of smaller stockholders.

“The lobbying over this bill is getting intense,” Delaware Representative Sophie Phillips, a Democrat who opposed the bill, said before the House vote. “Lobbyists for both sides have been swarming the statehouse. This is the most intense lobbying I’ve ever seen on a single piece of legislation.”

Going Too Far?

Phillips said she’s concerned that advocates for a less intrusive body of corporate law are going too far in loosening the reins on controlling shareholders and will make Chancery Court unfriendly to shareholders seeking to rectify corporate wrongs.

The law defines that control with specific parameters, which could make it harder for an investor to show that an influential founder, for example, owed shareholders a fiduciary duty in vetting an acquisition or pay package. It also strengthens the presumption of director independence so it can’t be as readily called into question by shareholders who don’t like such a deal. And it cuts down on the range of records smaller shareholders can access in building a case.

The private equity industry, like others, had fired a warning shot: It could be part of a wave of companies that might leave Delaware, unhappy with court rulings against controlling shareholders.

The bill would provide “needed predictability” to Delaware law as private equity firms have been considering “their options relating to the incorporation of new and existing companies,” Will Dunham, executive vice president for government affairs at the AIC, wrote in a March letter to the Delaware General Assembly. Dunham urged the body to adopt the bill because it offered “greater predictability” for “deciding where to incorporate, what directors to select or how to execute a going-private transaction.”

Meta and Walmart

Delaware has long been the preferred corporate home to big companies, including private equity firms, because of its generally business-friendly environment and its Chancery Court judges, business law experts who hear cases without a jury and usually much faster than other courts. More than 60% of Fortune 500 companies are incorporated in the state.

But it has proved vulnerable to critics like Musk, 53, who not only left but used his social media platform X to encourage others to follow him. Dropbox Inc. and TripAdvisor Inc. did just that, while fund manager Bill Ackman has said his management company will do the same.

After news that Meta Platforms Inc. was also considering decamping, Governor Matt Meyer invited company executives to a Sunday meeting, and the bill ultimately followed, according to records cited by CNBC. Meta, led by controlling shareholder Mark Zuckerberg, has been sued in Chancery Court by a pair of pension funds seeking internal documents to help determine whether its leadership is to blame for a $1.3 billion European Union fine over its privacy practices. The company declined to comment.

Meanwhile, Walmart Inc., the world’s largest retailer, lobbied for the bill.

Even in deep blue Delaware, where both legislative chambers are controlled by Democrats, a bill favored by big business was signed by the Democratic governor — a measure of how important the distinction, and revenues, of the nation’s premier business court is to the state. Incorporation fees make up about a third of its annual budget.

Multiplier Effect

Blake Rohrbacher, a lawyer at Richards, Layton & Finger, said he held discussions with private equity firms about possible conversions to other states. His firm helps represent Tesla in the Musk pay case, which is on appeal, and was among various parties that offered suggestions to a panel that drafted the bill.

“The loss of one significant private equity company to another state represents far more than one corporation,” Rohrbacher said. “It would mean the loss of tens or hundreds of other corporations, as the entire structure would move and new corporations would not be formed here.”

The bill’s adversaries say they were outgunned in the lobbying showdown.

“The proponents have far more resources,” said Joel Friedlander, a plaintiff’s lawyer at Wilmington-based Friedlander & Gorris, before the vote. “But we are doing what we can to educate the public and the General Assembly about how Delaware’s governor and legal elite want to rebrand Delaware as a place where the judiciary cannot oversee self-dealing by billionaires.”

A spokesperson for the governor declined to comment on Friedlander’s remarks.

–With assistance from Jef Feeley and Riley Griffin.

(Updates with bill’s being signed into law.)

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