Public pension funds and other institutional investors worldwide are weighing in to oppose proposed changes to Delaware corporate law they contend will shield corporate directors and officers from stockholder litigation at the expense of public shareholders.
The proposed legislation –- Delaware’s Senate Bill 21-– will be taken up by the state senate’s judiciary committee on March 12.
Thomas P. DiNapoli, New York State Comptroller, in a March 7 letter to Delaware Governor Matt Meyer and state legislative leaders, expressed strong opposition to a bill that would “significantly curtail shareholder rights for the benefit of corporate executives.”
SB 21 would expand safe harbor provisions for corporate directors or officers, and lower the hurdle for designating those directors or officers as independent or disinterested, among other changes.
The bill, noted DiNapoli, would limit shareholders’ ability to legally challenge related-party transactions, while setting a rigid, unworkable definition of “controlling stockholder.”
More than 45 U.S. pension funds
A separate letter, dated March 7 and signed by more than 45 U.S.-based public pension and Taft Hartley funds, predicted the proposed amendments to corporate laws which have made Delaware the premier destination for companies looking to incorporate in the U.S. would cause “a substantial wealth transfer from our beneficiaries, and millions of normal stockholders nationwide, to misbehaving fiduciaries.”
The letter’s signers included Brad Lander, the Comptroller of the City of New York overseeing the funds of the city’s retirement systems, as well as city pension funds for Boston, Los Angeles, Atlanta, Miami.
Corporate retirement plan executives appear concerned as well.
Jeffrey P. Mahoney, general counsel for the Council of Institutional Investors, whose public, corporate and union retirement plan members manage roughly $5 trillion in assets, said the proposed bill would “inhibit shareholder rights” - a big part of CII’s advocacy.
“This won’t benefit corporate governance,” Mahoney said. “I think our hope is it doesn’t pass in its current form,” he added.
International institutions
Such concerns, meanwhile, extend far beyond America's borders.
In a March 11 letter to Delaware legislative leaders, Jen Sisson, CEO of the International Corporate Governance Network - which boasts members from more than 40 countries with combined assets under management of more than $90 trillion - warned the proposed changes to Delaware law would "lower the safeguards that currently protect minority investors from potentially abusive acts," reduce judicial oversight and sharply pare back shareholder access to the internal records of companies they invest in.
Lowering corporate governance standards "would undermine the attractiveness of Delaware incorporated companies for investors and be detrimental to the state's reputation," Sisson warned.
The proposed legislation was introduced against the backdrop of Elon Musk’s high-profile decision earlier this year to re-incorporate his companies in Texas after a Delaware court ruled against a $56 billion pay package for the Tesla CEO that had been approved by the firm’s board.
The public fund/Taft Hartley plan letter addressed that apparent challenge to Delaware’s status as a premier incorporation hub.
“We understand that the supposed need for these amendments is that controlling stockholders are threatening to leave Delaware because of the complaints of a handful if disgruntled litigants," the letter said.
Signatories said they would not support re-incorporations to jurisdictions, such as Nevada, that offer fewer protections for investors, adding “we will consider voting against directors who propose such reincorporation in order to diminish the rights of their stockholders.”
"For now, at least, I'm not aware of any credible evidence indicating there's a groundswell of companies looking to leave Delaware to reincorporate elsewhere, "the CII’s Mahoney said.
