Optionality is optimal: Talley, Gordon, Bainbridge et al Law Professor Letter to the Delaware Legislature Urging SB 21 be Made Optional

03/18/2025

Optionality is optimal: Talley, Gordon, Bainbridge et al Law Professor Letter to the Delaware Legislature Urging SB 21 be Made Optional

Eric Talley, Jeff Gordon, and I have each posted proposals that Delaware SB 21 be amended to make it optional. Over the weekend we worked up a letter to the Delaware legislature advancing just such a proposal (Eric deserves full credit for pulling the laboring oar). (Download Talley, Gordon, Bainbridge, et al SB21 Letter here.) We ended up with 25 corporate law professors cosigning the letter.

The letter argues that an opt-in approach offers several advantages:

Preserving Flexibility and Market Choice – Delaware’s competitive strength lies in its ability to accommodate a range of governance preferences. That strength is part of what attracts highly heterogeneous companies to incorporate in the state. Granting corporations the ability to opt into the provisions of SB21—rather than imposing them immutably and mandatorily—ensures that each company can make an informed decision about its governance structure while preserving Delaware’s reputation as the jurisdiction of choice for corporate flexibility.
Mitigating the Risk of Reincorporation – Providing corporations with an option to adopt SB21’s provisions circumvents the concerns over mass reincorporation out of Delaware, so-called “DExit.” Companies objecting to the common law regime will now have a ready alternative that obviates the need to explore alternatives in other states. Moreover, corporations that opt in would still benefit from the familiar substantive law of Delaware as to other corporate attributes—one superintended by an expert and nimble court applying a rich body of precedents. A corporation contemplating leaving Delaware could now get the model it wants without having to reincorporate. And, providing this flexibility alleviates critics’ concerns that a rigid statutory mandate will accelerate rather than dampen an incorporation exodus. Put simply, an opt-in model would demonstrate that Delaware remains responsive to corporate needs without forcing a one-size-fits-all approach on everyone.
Avoiding Constitutional and Legal Challenges – A voluntary opt-in framework would also be more robust to constitutional challenges than a broad, mandatory limitation on the Chancery Court’s vested equitable powers under Delaware’s constitution. Allowing opt-in would invite Delaware corporations (and not the General Assembly) to experiment with their governance structures, obviating thorny questions about separation of powers and legal validity that are commonplace with abrupt and mandatory statutory shifts such as the one SB21 proposes.
Leveraging Market Forces to Settle the Debate – The competing claims about SB21’s long-term impact—whether it strengthens or weakens Delaware’s franchise—could be field tested empirically by allowing corporations to choose for themselves. Those who find the new provisions attractive can adopt them, while those who prefer the status quo can maintain their current governance structures. Over time, Delaware’s corporate governance framework will evolve based on demonstrated market preferences rather than armchair speculation.

The letter also argues that the proposal could be adopted with just a few minor tweaks to the current bill:

To take just one example, a one-sentence addition to Section 102(b) of the DGCL could provide that Delaware corporations may, through an express charter provision, opt into the new rules on conflicted transactions and inspection rights contained in SB21. Under this approach, the current versions of Sections 144 and 220 would remain intact, and SB21’s key provisions would be codified into new DGCL Sections 144A and 220A that are turnkey ready for companies to embrace through charter provisions as they see fit. This minor textual revision involves minimal legislative alteration while upholding the core strengths of Delaware’s corporate law tradition.

My coauthors and I are not unanimous in our view of SB 21. Some of us (including yours truly) think that if the legislature is unwilling to make SB 21 optional, the legislature should go ahead and pass the bill as is. Others think that unless the bill is made optional, the bill should not be passed. But all of us agree that optionalty is the optimal solution.

Update: Ann Lipton reports that "a Delaware rep introduced a proposed amendment to SB 21 that would adopt Eric Talley's opt-in proposal (also endorsed by Jeffrey Gordon and Stephen Bainbridge)."

Lauren Pringle reports:

It got more than traction! It got pre-filed as House Amendment 1 to Senate Substitute 1 for Senate Bill 21!

You can download the proposed bill here.

Posted at 06:14 PM in Corporate Law, Dept of Self-Promotion | Permalink

Comments

The letter argues that an opt-in approach offers several advantages:

Preserving Flexibility and Market Choice – Delaware’s competitive strength lies in its ability to accommodate a range of governance preferences. That strength is part of what attracts highly heterogeneous companies to incorporate in the state. Granting corporations the ability to opt into the provisions of SB21—rather than imposing them immutably and mandatorily—ensures that each company can make an informed decision about its governance structure while preserving Delaware’s reputation as the jurisdiction of choice for corporate flexibility.
Mitigating the Risk of Reincorporation – Providing corporations with an option to adopt SB21’s provisions circumvents the concerns over mass reincorporation out of Delaware, so-called “DExit.” Companies objecting to the common law regime will now have a ready alternative that obviates the need to explore alternatives in other states. Moreover, corporations that opt in would still benefit from the familiar substantive law of Delaware as to other corporate attributes—one superintended by an expert and nimble court applying a rich body of precedents. A corporation contemplating leaving Delaware could now get the model it wants without having to reincorporate. And, providing this flexibility alleviates critics’ concerns that a rigid statutory mandate will accelerate rather than dampen an incorporation exodus. Put simply, an opt-in model would demonstrate that Delaware remains responsive to corporate needs without forcing a one-size-fits-all approach on everyone.
Avoiding Constitutional and Legal Challenges – A voluntary opt-in framework would also be more robust to constitutional challenges than a broad, mandatory limitation on the Chancery Court’s vested equitable powers under Delaware’s constitution. Allowing opt-in would invite Delaware corporations (and not the General Assembly) to experiment with their governance structures, obviating thorny questions about separation of powers and legal validity that are commonplace with abrupt and mandatory statutory shifts such as the one SB21 proposes.
Leveraging Market Forces to Settle the Debate – The competing claims about SB21’s long-term impact—whether it strengthens or weakens Delaware’s franchise—could be field tested empirically by allowing corporations to choose for themselves. Those who find the new provisions attractive can adopt them, while those who prefer the status quo can maintain their current governance structures. Over time, Delaware’s corporate governance framework will evolve based on demonstrated market preferences rather than armchair speculation.

The letter also argues that the proposal could be adopted with just a few minor tweaks to the current bill:

To take just one example, a one-sentence addition to Section 102(b) of the DGCL could provide that Delaware corporations may, through an express charter provision, opt into the new rules on conflicted transactions and inspection rights contained in SB21. Under this approach, the current versions of Sections 144 and 220 would remain intact, and SB21’s key provisions would be codified into new DGCL Sections 144A and 220A that are turnkey ready for companies to embrace through charter provisions as they see fit. This minor textual revision involves minimal legislative alteration while upholding the core strengths of Delaware’s corporate law tradition.

Update: Ann Lipton reports that "a Delaware rep introduced a proposed amendment to SB 21 that would adopt Eric Talley's opt-in proposal (also endorsed by Jeffrey Gordon and Stephen Bainbridge)."

Lauren Pringle reports: