Delaware occupies a central place in American corporate governance. Its corporate code, judiciary, and bar are widely respected for their expertise and responsiveness. Over the years, Delaware has earned a reputation as the jurisdiction of choice for public companies and has become an essential part of the infrastructure of U.S. corporate law. In a new article, I take a close look at how Delaware makes its corporate law – specifically, the process by which statutes are drafted and adopted – and argue that it presents certain institutional risks that merit closer attention.
The concern is not about bad faith but about a second-order agency problem. Corporate law is primarily designed to mitigate first-order agency problems – those that arise when corporate managers, as agents, pursue interests that diverge from those of shareholders, their principals. Second-order agency problems arise when those who design the rules intended to reduce agency costs – legislators, drafters, and intermediaries – have incentives that may shape the content or process of lawmaking in ways that are not fully aligned with the interests of shareholders.
Changes to Delaware corporate statutes are typically proposed by the Council of the Corporation Law Section of the Delaware State Bar Association (the “Council”), a group of experienced attorneys (many of whom represent “defense side” clients), who bring valuable expertise and deep familiarity with Delaware law and practice. These changes are typically enacted by the General Assembly and signed into law by the governor with limited amendment or delay. The process has produced a corporate code that is widely respected for its clarity and practical utility.
At the same time, this model of expert-driven lawmaking operates largely outside the procedural safeguards that characterize other forms of public rulemaking. The Council is not subject to public notice and comment requirements, its meetings are not open to the public, and its deliberations are typically confidential. While this confidentiality supports candid dialogue and timely responses to market needs, it also reduces opportunities for external input – including from shareholder representatives, academics, and corporate governance advocates.
To illustrate how second-order agency problems can arise, the article examines the legislative histories of DGCL sections 122(18) and 144. Both sections were enacted in response to recent decisions of the Delaware Court of Chancery that raised important questions about the boundaries of board authority and the judicial treatment of conflicted transactions. In each case, statutory amendments were introduced and adopted relatively quickly, before appellate review of the Chancery Court decisions and without meaningful stakeholder participation. The process was led by repeat players with direct experience in the transactions under review, and in each instance, the legislative outcome reaffirmed established market practices and clarified legal uncertainty that arose from the court’s decisions.
To be clear, this is not an argument for or against the substantive merits of the statutes. Both sections 122(18) and 144 address issues of real significance to Delaware corporations and their advisors. Nor is it a criticism of the Council or its members, who have long served as stewards of Delaware’s corporate law and who take that responsibility seriously. Rather, the concern is institutional: When a small group of actors repeatedly drafts legislation that is quickly enacted, with limited external input, the result may reflect structural incentives that are not fully visible, but that nonetheless shape outcomes over time.
The article situates this concern within a broader framework, distinguishing second-order agency problems from more familiar accounts such as regulatory capture, interest group politics, and the race to the bottom. Unlike those models, a focus on second-order agency problems assesses the internal dynamics of institutions: How those tasked with creating the rules may face pressures to favor outcomes that reflect their own professional, reputational, or client-related interests. These pressures do not displace the goal of maintaining a credible corporate law regime, but they may complicate it – particularly when the legal framework is itself a collective good, and the costs of incremental change are diffused. In this setting, a stable but suboptimal equilibrium may emerge: Insiders continue to shape the law in ways that reflect immediate professional or client needs, while external stakeholders – dispersed, with limited visibility into the legislative process, or poorly coordinated – choose not to invest in sustained oversight. Each group’s strategy is rational in light of the other’s, yet the result is a pattern of lawmaking that can underrepresent broader shareholder interests. Without structural changes, incentives to deviate from the existing equilibrium remain weak, even when a more transparent or participatory process could yield higher collective value.
Courts, especially the Delaware Court of Chancery, play an important moderating role. Judges are not involved in drafting the statutes they interpret and bring an independent perspective to the evolving body of Delaware law. But judicial review can be constrained when legislative responses precede appellate decisions or when statutory amendments are crafted to preempt ongoing judicial development. This can diminish the courts’ ability to refine doctrine and to serve as an independent source of accountability in Delaware’s corporate governance framework.
The article offers several reforms, drawn from Delaware’s own Administrative Procedures Act, that could help address these structural concerns. They include:
- Public Notice and Comment. Proposals for DGCL amendments could be published in advance, allowing time for meaningful feedback from interested stakeholders.
- Transparent Legislative Record. Council deliberations could be accompanied by published explanations, draft histories, and supporting materials to enhance understanding and facilitate interpretation.
- Public Hearings. For significant amendments, formal opportunities for public testimony – especially from institutional investors and shareholder advocates – could provide a valuable counterbalance to insider perspectives.
- Diverse Input. Expanding participation in the legislative process, whether through broader Council membership or advisory panels, would help surface a wider range of concerns and improve the legitimacy of resulting reforms.
These reforms are not intended to replace the current system, but to complement it. Delaware’s ability to act quickly and with technical precision is a significant asset. The goal is to retain those advantages while improving the transparency, inclusiveness, and accountability of the lawmaking process. Other institutions such as FINRA have adopted procedural safeguards that balance expertise with public oversight. Delaware could do the same, affirming its commitment not only to substantive leadership in corporate governance, but also to the integrity of the process by which corporate governance laws are shaped.
Federal advisory committees operating under the Federal Advisory Committee Act (“FACA”) provide a useful comparison. These committees, although composed of private-sector experts and not themselves regulatory bodies, are required to operate transparently, publish agendas in advance, allow for public observation of meetings, and maintain publicly accessible records. FACA further mandates that membership be fairly balanced and that the advice provided be objective and accessible to policymakers and the public. The rationale behind FACA is instructive – even where technical expertise is essential, process matters, helping ensure that advice offered to public bodies is broadly accountable. Delaware could benefit from adopting analogous practices, particularly given the quasi-public role the Council plays in shaping the law that affects millions of shareholders.
Delaware’s corporate law has long succeeded because it combines deep legal expertise with institutional adaptability. The question now is whether that adaptability can apply to process as well as substance. By adopting procedural safeguards that match its substantive sophistication, Delaware can continue to lead – not just in what corporate law says, but in how that law is made.
This post comes to us from Charles K. Whitehead, the Myron C. Taylor Alumni Professor of Business Law at Cornell Law School. It is based on his new article, “Delaware’s Agency Problem,” available here.