Bay to Bay News | July 17, 2024 | Opinion
by John Flaherty
The Delaware Coalition for Open Government asks you to veto Senate Bill 313, specifically because the amendment to Section 122(18) of the Delaware General Corporation Law essentially can render shareholder voting rights meaningless.
The current amendment to Section 122(18) will circumvent the Delaware Court of Chancery’s Feb. 23 decision — that is, West Palm Beach Firefighters’ Pension Fund v. Moelis & Company.
Thus, the coalition asks that you veto SB 313, so the Chancery Court’s Moelis decision can be adjudicated in the Delaware Supreme Court, and that you concurrently reconvene the General Assembly for further legislative action on SB 313.
If SB 313 is signed into law as is, Delaware’s stature as the leader in corporate law would be at risk. DelCOG believes your veto is necessary because, as stated in a letter of June 7 to the Delaware General Assembly from 50 corporate legal scholars, the amendment to Section 122(18) “would allow corporate boards to unilaterally contract away their powers without any shareholder input” (corpgov.law.harvard.edu/2024/06/07/letter-in-opposition-to-the-proposed-amendment-to-the-dgcl/#more-165603).
The amendment appears to encourage arbitrary forces in the management of companies that would allow boards of directors to ignore the will (and advice) of shareholders. The implication: Delaware corporate law is turning its back on shareholders. The result: Delaware corporate law will suffer in the eyes of shareholders and in the eyes of the public.
If SB 313 is signed into law as is, the delicate legal balance among the rights of corporate management, the rights of a board of directors and the rights of shareholders would be altered.
As the 50 corporate legal scholars state: “The Delaware Supreme Court may ultimately agree with or tweak the Moelis decision, or even undo it entirely. But it will do so only after careful consideration of the complex interplay between Delaware’s commitment to contractual freedom — a commitment we wholeheartedly support — and its equal commitment to protecting shareholders through an empowered and accountable board of directors.”
If shareholder rights and input can be thrown out the window, leverage will fall decisively on the side of corporate management and will be an affront to investors everywhere.
Moreover, has the state given thought about compliance with the Securities and Exchange Commission’s specific rules on shareholder voting, proxies, annual meetings and selection of a board of directors, if shareholder votes don’t matter?
Has the state consulted with portfolio managers of mutual funds and exchange-traded funds, who, as beneficial shareholders, have voting rights of their clients’ funds under management? And has the state consulted with Wall Street investment advisory firms that have billions of dollars of pension funds under management?
For decades, the General Assembly has passed corporate laws in good faith, based on the recommendations and advice of the Corporation Law Section of the Delaware State Bar Association. And, except for the problems with the secrecy of beneficial ownership, that advice has been beneficial to Delaware.
Thus, the Delaware Coalition for Open Government recommends that SB 313 be vetoed so that the shareholder problem — as described in the Moelis decision — can be adjudicated in the Delaware Supreme Court.
Concurrently, the General Assembly should be called back into session for the purpose of striking out Section 122(18) from SB 313. In this way, the amended bill, with its current recommendations to keep Delaware corporate law competitive, can move forward for your consideration.
John D. Flaherty
on behalf of the Delaware Coalition for Open Government board