As I write this from the Tulane Corporate Law Institute’s annual conference in New Orleans, the energy is palpable. While Mardi Gras revelers have vacated the streets, they’ve been replaced by a different phalanx of uncharacteristically confrontational carousers: corporate law practitioners. At the center of their discussions is Delaware’s proposed Senate Bill 21 (SB21), a legislative initiative that could fundamentally reshape the analysis of fiduciary duties in Delaware courts, particularly regarding controlling stockholders. For Delaware, the stakes are high. As the long-reigning Mecca for incorporations, its preeminence faces new challenges.
Some argue SB21 is a necessary course correction that, if delayed, could precipitate a mass exodus of corporations from Delaware to other states like Nevada or Texas – a phenomenon cleverly dubbed “DExit.” Others counter that there is little empirical evidence of a mass exodus, and in any event SB21 would, if enacted, hasten this exodus by undermining a key aspect of Delaware’s competitive edge: a deep well of predictable common law precedents interpreted by expert judges.
Yet, amidst this Sturm und Drang, one point seems conspicuously overlooked: that Delaware’s historical strength lies not only in its judiciary and precedent but also in its flexible, contractarian approach to corporate law. By making a modest alteration to SB21, Delaware can have its cake and eat it too – safeguarding its contractarian principles while addressing the concerns of both supporters and critics of the bill. That modest alteration is to add an “opt in” feature to SB21, as I explain below.
SB21 and the Risk of DExit
SB21 proposes a substantial restructuring of fiduciary duty analysis, especially with respect to controlling stockholders (but also regarding officers and directors). The bill, recently marked up with suggestions by the Corporate Law Council of Delaware, awaits consideration by the General Assembly. Its supporters claim it fills critical gaps in current Delaware law that, if left unaddressed, will prompt corporations to rush the exits and incorporate elsewhere. They warn that Nevada, Texas, and other jurisdictions are ready to capitalize on any perceived weaknesses in Delaware’s framework.
Critics, though, argue that SB21 would undermine Delaware’s key advantage: the predictability afforded by a mature body of case law interpreted by a highly skilled judiciary. Moreover, the critics warn, passage of SB21 might do more to accelerate DExit than prevent it by tying the hands of judicial expertise and relegating fiduciary duties to a rule-like template with no check by equity.
Both sides present seemingly compelling arguments. And yet, the debate misses a key opportunity: leveraging Delaware’s contractarian traditions to resolve the impasse.
Delaware’s Contractarian Strength
Delaware’s commitment to a contractarian model of corporate law is one of its greatest strengths. The Delaware General Corporation Law (DGCL) provides a set of baseline rules that corporations can opt out of or modify through their charters. A consensus standard bearer for this flexibility is DGCL Section 102(b)(7), which allows corporations to include charter provisions that waive the monetary liability of directors and officers for breaches of the duty of care. This provision has been a success by many accounts, offering corporations a choice in how they allocate risks and responsibilities among corporate fiduciaries. As I, along with Jens Frankenreiter, have documented elsewhere, these waivers have become commonplace for directors and are gradually being adopted for officers as well.
The genius of Section 102(b)(7) substantially lies in its contractarian nature: It provides a default rule of liability exposure but allows corporations to contract around it through a waiver. This flexibility – manifest time and again in other provisions of the DGCL – has been crucial to Delaware’s dominance in the incorporation market. And yet, the current draft of SB21 sweeps aside this valuable flexibility by imposing a one-size-fits-all approach to fiduciary duties of loyalty for all corporations, whether they like it or not.
A Modest Proposal: A Contractarian Alternative for SB21
There is, however, a way to preserve Delaware’s contractarian ethos while addressing the concerns raised by both proponents and critics of SB21. The General Assembly could make a modest modification to SB21, modeling it after the contractarian spirit of Section 102(b)(7).
Here’s how this could work:
- Create a New Contractarian Safe Harbor: DGCL Section 144A
Rather than replacing the existing Section 144, Delaware could adopt a version of SB21 as an additional provision, provisionally titled Section 144A. This new section might generally track the current proposal and would offer a relaxed safe harbor for transactions involving interested directors, officers, and controlling stockholders – but only if the corporation’s charter expressly adopted it.
To effectuate this approach, a simple prefatory sentence could be added to the proposed language of new Section 144A, such as: “Should the certificate of incorporation provide pursuant to Section 102(b), the following safe harbor (and associated definitions) shall apply to acts or transactions involving interested directors, officers, and controlling stockholders.”
- Enable Charter-Based Opt-In: Section 102(b)(8)
To complement this single sentence in new Section 144A, a new enabling provision – Section 102(b)(8) – could be added to the DGCL. This provision would expressly authorize corporations to adopt the new safe harbor through an appropriate amendment to their certificates of incorporation. It might read: “A provision adopting the safe harbor rule as reflected in Delaware General Corporation Law Section 144A.”
The Benefits of a Contractarian Approach
That’s it. The modest change I propose is simple, but powerful: This contractarian solution would preserve Delaware’s flexibility while addressing concerns raised by both sides of the SB21 debate. It would allow corporations to choose the governance framework that best suits their needs, rather than being subjected to a universal, mandatory rule imposed by SB21.
What’s more appealing is that this opt-in approach would not require us to declare a winner in the SB21 debate about the true risk of DExit. Companies who value the proposed safe harbor could adopt it; those who prefer Delaware’s existing fiduciary duty framework could retain it. Neither group would need to leave Delaware. Moreover, if a controlled company opted into the new Section 144A, the decision would be subject to the same type of scrutiny the Delaware Supreme Court recently announced in its TripAdvisor opinion, where the opt-in provision (like a reincorporation decision) would be deemed a controller-conflicted transaction only to the extent it was “material” in magnitude and temporal proximity.
Crucially, this proposal would remedy what may be the most significant drawback of SB21 as currently written: its mandatory nature. By making the proposed safe harbor optional, Delaware would avoid alienating corporations that prefer the predictability of current law mediated by equitable judgments of the Delaware judiciary.
A Proven Path: Learning from Section 102(b)(7)
It bears observing that this contractarian approach is not without precedent. Delaware has recently followed a similar path with the 2023 modification of Section 102(b)(7), which expanded duty-of-care waiver options to include officers. The success of that modification suggests that a similar approach to SB21 could strike the right balance between flexibility and predictability.
In essence, the proposal would transform SB21 from a potential threat to Delaware’s dominance into a reaffirmation of the contractarian principles that have kept Delaware at the forefront of corporate law for decades.
Conclusion: Contractarianism as the Path Forward
The debate surrounding SB21 is not just about fiduciary duties or the risk of DExit; it is about the future of Delaware’s corporate law model. By embracing a modest contractarian modification to SB21, Delaware can address the concerns of both its supporters and critics. More importantly, it can reaffirm its commitment to a flexible, enabling approach to corporate governance – one that allows corporations themselves to decide the rules by which they will be governed.
This post comes to us from Eric Talley, the Isidor and Seville Sulzbacher Professor of Law at Columbia Law School.