Delaware Bill Limits Shareholder Lawsuits to Prevent Corporate Flight

Is Delaware trying to woo back Elon Musk and major corporations by changing rules to shareholder lawsuits? Delaware’s general assembly may be concerned that high profile companies such as Tesla, Meta, and others may move their corporate home from Delaware to other jurisdictions, namely Nevada or Texas.

Delaware lawmaker Bryan Townsend introduced the bill to curtail shareholder lawsuits. The bill addresses ways in which boards could protect directors and controlling shareholders from liability related to their corporate governance. It also proposes to make it more difficult for shareholders to access information needed for shareholders’ lawsuits.

Delaware Is the "First State" for Corporations

Most of the Fortune 500 companies and S&P 500 companies are incorporated in Delaware due to its corporate-friendly laws. There are many incentives to incorporate in Delaware such as:

• Tax Free: There is no income tax for companies that incorporate in Delaware but don’t do business in the state.
• Privacy: Companies may keep details, such as personal information about directors or officers, confidential.
• Low cost: The corporation process is inexpensive and streamlined.
• Established Delaware General Corporation Law: The Delaware Court of Chancery is known for its knowledge of Delaware corporate law and settled case law. Unlike most court cases, decisions are made by Delaware judges, not juries. Therefore, outcomes of class action lawsuits are more predictable.

Revlon has headquarters in New York. Apple’s is in California. However, both companies are incorporated in Delaware. Delaware is still a popular place for incorporating a business. However, in recent years, there have been more successful legal actions from shareholders, which makes corporations concerned. For example, Elon Musk recently posted on X: “Never incorporate your company in the state of Delaware.” There is some speculation other corporations may follow Musk out the door.

Major Shareholder Lawsuits

Because Delaware is the home for many companies, stockholders typically must bring their cases to Delaware. The plaintiffs initiate a derivative suit in which they sue a company’s board of director or officer on behalf of a public company for their breach of a fiduciary duty to the company. A fiduciary duty is a board member’s responsibility to act in the best interest of the company.

In recent years, court decisions against corporate boards have favored shareholders. For example:

• The Court of Chancery awarded shareholders $148 million in damages from Dole Foods. The court held CEO, David Murdock and COO, C. Micheal Carter, liable for manipulating the stock and undervaluing the company for shareholder approval in a buyout.
• Shareholders sued Boeing Co. over its breach of fiduciary duty and gross negligence with supervision of the issues involving Boeing 737 Max airplanes that caused two plane crashes. Boeing settled the lawsuit for $225 million.
• In 2024, the Court of Chancery invalidated Elon Musk’s $56 billion Tesla compensation package. It is currently on appeal with the Delaware Supreme Court.

Delaware lawmakers have an interest in keeping corporations in Delaware as it generated $1.33 billion in revenue for the state in 2024.

Impact of the Bill on Shareholder Lawsuits

The bill, if passed, could significantly deter successful shareholder lawsuits. Both parties in both houses of the state assembly support the bill. Even if these changes are not enough to retain corporations in the “First State,” moving the state of incorporation is not an easy process. In 2022, Delaware passed a state law requiring the approval of a majority of shareholders for reincorporation, perhaps to avoid a mass "dexit."

Related Resources

Why Does Elon Musk Want to Move Tesla’s Incorporation From Delaware? (FindLaw Law and Daily Life)

Incorporating in Delaware - Is It Worth It for My Small Business? (FindLaw Learn About The Law)

Shareholder Rights and Derivative Actions (FindLaw Learn About The Law)