Introduction to Corporate Law Changes

A bill drafted by the law firm representing Elon Musk, Richards, Layton & Finger (RLF), has been passed by Delaware’s Democrat-controlled legislature. The legislation, known as SB 21, requires only the governor’s signature to become law. Critics argue that this bill will significantly alter the structure of corporate law in the U.S., potentially allowing corporations to engage in misconduct with minimal legal consequences for consumers or shareholders.

Background on SB 21

SB 21 was originally written by RLF, a firm that counts Musk among its clients. The bill has been a source of concern for worker and consumer groups, who believe it will enable corporate America to behave irresponsibly with fewer repercussions. According to Bloomberg, the bill was passed on Tuesday night, thanks to a substantial pro-corporate lobbying effort. The outlet reports that a team of lobbyists from the American Investment Council, funded by companies like Blackstone Inc. and KKR & Co., pressed lawmakers to support the measure. This "billionaires’ bill" eases standards for insider deals involving controlling shareholders and allows for richer compensation packages for founders like Musk.

The Drama Behind the Bill’s Passage

Delaware has long been home to most American corporations due to its business-friendly laws. Recently, the state’s status as the corporate capital of the country was threatened by a pressure campaign, partially led by Musk, to encourage businesses to leave the state. It appears that the state legislature has acquiesced to businesses’ priorities to prevent companies from fleeing. Critics argue that SB 21 would fundamentally rewrite U.S. corporate law, altering the balance of power between corporate fiduciaries and shareholders. This would enable companies to increase corporate secrecy while making it nearly impossible for shareholders to file lawsuits over corporate misbehavior.

Implications of SB 21

The bill would revoke disclosure requirements for shareholder requests for company documents, records, and internal communications. Plaintiffs would only be entitled to minutes from board meetings, which reveal very little. These changes would make it almost impossible for shareholders to build viable lawsuits that could reach the discovery stage of a court case. In essence, corporate secrecy is likely to increase, and the ability of shareholders to hold large corporate institutions accountable will shrink.

Reasons Behind the Democrats’ Decision

A key reason Democrats caved to the lobbying campaign is their fear of a revenue drain. A significant portion of Delaware’s state budget comes from corporate fees, and an exodus of businesses could severely impact one of its largest sources of public funding.

Musk’s Pressure Campaign

In the months leading up to the bill’s passage, Musk waged a notable pressure campaign on Delaware. He publicly pulled his businesses out of the state in favor of Texas and encouraged other companies to do the same. Musk appears to have soured on the state due to an ongoing legal case. Delaware Judge Kathaleen McCormick has repeatedly thwarted Musk’s attempts to secure his massive corporate pay package from Tesla, which was challenged by a company shareholder in court. McCormick sided with the shareholder, claiming the process leading to the pay package’s approval was flawed and the compensation represents "an unfathomable sum." Some speculate that the new law could pave the way for Musk to receive his money, as the legal changes may render McCormick’s current legal argument moot.