This guest post by BC Law Professor Brian Quinn first appeared in the M&A Law Prof Blog.
Hi. Back again. I’ve generally taken a hiatus from blogging, but felt it important to come back and put some things on the record, as it were. If this has not been on your radar, in the past two months or so, Delaware has been on a mad rush to make some significant amendments to its corporate law. This, after having previously signaled it wasn’t going to make any amendments this year. I’ll go into each of the proposed amendments in subsequent posts and the problems I see with the process, but in this post I want to focus on one of the potential reasons for moving so quickly to make changes to the law.
The amendment themselves are what are being called market practice amendments. Earlier this year the Chancery Court asked itself: “What happens when the seemingly irresistible force of market practice meets the traditionally immovable object of statutory law? A court must uphold the law, so the statute prevails.” Moelis. In all three of these cases, the court effectively dealt a knuckle-wrapping to practitioners.
The response from the bar association has been to move with alacrity to push through amendments to the statute even before the Delaware Supreme Court has had an opportunity to weigh in on any of the cases in question. While the Delaware corporate law amendment process is typically apolitical and attempts to balance various competing interests, what’s happening now strikes me as extremely premature, exhibiting an undue sense of panic.
But panic about what? The world will not end because the Chancery Court has restrained market practice to conform within the limits of the statute. What’s driving this amendment drive this year?
It’s hard to know for sure. Perhaps, the bar is attempting to separate the transactional bar from an iconoclastic tech entrepreneur who is seeking to lead corporations to reincorporate into Nevada and Texas. Perhaps the bar believes by moving quickly to respond to the transactional bar’s concerns about regulation of their market practices that the state bar might forestall any momentum behind corporations considering a reincorporation into other jurisdictions at the instigation of iconoclastic tech entrepreneurs. Maybe. But, if that’s the case, the state bar’s fear is misplaced.
Remember that the last time a well-known stockholder sought to lead a parade out of Delaware was in 2007. Carl Icahn had hopes of moving corporations out of Delaware and to a jurisdiction with laws more amenable to shareholder activists. Mr. Icahn selected North Dakota and worked with their legislature to pass revision of the North Dakota Corporation Law. The sponsors of the legislation intended North Dakota’s corporate law to become an activist-friendly corporate governance regime tilting their law’s balance in favor of stockholders, thereby attracting corporations away from Delaware and Delaware’s board centric governance model. That particular parade made a lot of noise, but ultimately went nowhere. By 2009 only one publicly-traded corporation made the move to North Dakota. During the 2009 legislative session, Delaware adopted (without an unnecessary rush) measured provisions providing for stockholder proxy access and proxy expense bylaws (§§ 112, 113) that maintained a balance between Delaware’s director centric approach and the need for corporate boards to be responsive to the stockholder’s voice.
The current attempt to lead others out of Delaware is similarly likely to fail without regard to the market practice cases or any effort to amend the code. Current motivations for reincorporating out of Delaware this time are mostly self-serving. Certain controllers are in search of a jurisdiction that will protect them at the expense of unaffiliated investors. They are searching for a jurisdiction that will placed its thumb on the judicial scale against stockholders and in favor of controllers. This kind of self-serving campaign is unlikely to succeed, except for maybe a few controlled corporations. Publicly-traded corporations without a controller are unlikely to follow.
A rush to make substantive changes to the corporation law to stem a feared parade out of Delaware will ultimately not be worth the cost. They seem to be at odds with basic governance norms that are at the heart of the corporate law (I’m looking at you proposed 122(18). Rather than, reassure transactional lawyers, these proposed amendments may well erode confidence in the institutional investments Delaware has made in the corporation law over the past five decades, filling in Delaware’s protective moat, making it easier to advise clients to incorporate elsewhere. Seems like a bad idea, right?
I’ll comment on the substance of the amendments in another post.
Brian Quinn is a BC Law professor. He posts at the M&A Law Prof Blog.
BC Law: Impact 