The Delaware Supreme Court is considering a constitutional challenge to SB21’s major amendments to Section 144 of the Delaware General Corporation Law. The challenge, in Thomas Rutledge v. Clearway Energy Group, et al, comes as Delaware is ostensibly facing the first real threat to its dominance in the competition for corporate charters. An increasingly vocal minority of corporate law scholars, practitioners, and controlling shareholders are openly questioning Delaware’s primacy, sparking concerns about “DExit”—a term coined by Professor Stephen Bainbridge to describe the wave of companies considering reincorporation in states like Nevada and Texas.

Following Elon Musk’s widely publicized warning to “never incorporate your company in the state of Delaware,” the state legislature passed snap amendments to the DGCL in an attempt to avert just such an exit. However, critics of the amendments worried that the amendments could run afoul of Delaware’s constitution by constraining the Court of Chancery’s ability to provide equitable relief in certain corporate transactions. While this fight continues, companies like Tesla, Coinbase, and DropBox are making noisy exits. Yet Delaware continues to dominate the incorporation game with more incorporations so far in 2025 than last year and continued dominance in IPOs.

SB21 amended Section 144 by revising its safe harbor provisions concerning conflicted directors or officers and provided a statutory definition to limit who could be considered a controller when evaluating potentially conflicted transactions. Prior to SB21, plaintiffs could challenge potentially conflicted transactions for breaches of fiduciary duty by obtaining judicial review under Delaware’s onerous entire fairness standard. Previously, Section 144’s safe harbor provisions only addressed voidability of such transactions, not fiduciary duty liability. However, after SB21 passed, it amended Section 144, effectively disallowing the Court of Chancery from awarding “equitable relief” or “monetary damages” when the safe harbor conditions are met. The overarching effect of SB21’s amendments to Section 144 was to limit the types of transactions challenged, make it easier for boards to shift back to a deferential standard of review, and limit scenarios where prominent and influential shareholders may be considered a “controller,” triggering heightened scrutiny.

Against this backdrop, SB21 has sharpened the divide between two competing visions of Delaware corporate law. One holds that Delaware’s competitive advantage has long depended on judge-made fiduciary doctrines: flexible, equitable, and responsive to evolving business realities. The other view, held by critics of SB21, argues that by converting fiduciary review into a statutory safe-harbor regime that forecloses meaningful remedies when certain conditions are met, the legislature risks hollowing out the very equity tradition that has anchored Delaware’s appeal to managers, investors, and boards.

Clearway makes this divide explicit. Arguing against SB21’s constitutionality, plaintiffs emphasized that the Delaware Constitution guarantees the Court of Chancery an “irreducible minimum” of equitable authority, and that SB21 tramples this: “If the General Assembly can remove the Court of Chancery from one of its fundamental functions, what purpose does Chancery serve?” On this account, SB21 is not simply a policy adjustment – it extinguishes the ability to remedy fiduciary breaches in transactions that may be procedurally cleansed but substantively unfair. That concern has resonated beyond the litigants themselves, prompting a group of corporate law professors to file an amicus brief in support of appellant, warning that SB21 risks eroding core principles of Delaware’s fiduciary jurisprudence.

The competing view, advanced by Delaware’s Governor Matt Meyers and by proponents of SB21, is that the legislature has merely recalibrated the standard of review. Lawyers defending SB21 argued that it “changes the rules that govern how a court decides a case,” but does not eliminate jurisdiction or constitutional authority by substituting “a statutory version of business judgment instead of entire fairness” – a choice the state General Assembly is constitutionally entitled to make. The also stressed that equity “must work in collaboration with statutory law” rather than operate as a free-standing override.

Related critiques, reflected in analyses by professors Jonathan Macey and Robert Miller, underscore how structural forces exacerbate tensions on display in Clearway. Both signed an amicus brief, along with other legal scholars, supporting SB21’s constitutionality. According to them, Delaware now finds itself in a genuine predicament: Its long-standing reputation for jurisprudential excellence and predictable governance has been visibly dented.

Macey points to an emerging “judicial hostility” toward private ordering, which he sees as destabilizing the contractual foundations of Delaware corporate law. Legislative interventions such as SB21, while “necessary,” are characterized in his account as “second-best” tools that cannot, on their own, arrest the growing trend of corporations reconsidering Delaware as their legal home. Macey warns that “if the Delaware Supreme Court prevents the State’s legislature from enacting the needed reforms reflected in SB21, dozens of other statutes will be at risk, corporations will be justified in panicking and shareholders will be flooded with requests by corporations to flee the jurisdiction.” Macey’s newest paper sharpens this point.

Robert Miller goes further, arguing that if SB21 is unconstitutional, “then so too is the LLC Act.” He also contends that “if the Delaware Supreme Court now says that the Delaware legislature cannot by statute overrule those decisions, then the damage not only becomes permanent but also rises to a whole new level. It would be a proclamation that when Delaware courts are wrong, no one can set them right.”

These positions echo a larger debate: Should Delaware corporate law continue to be shaped primarily by judicially developed fiduciary principles, or will legislative directives increasingly define the contours of accountability? If SB21 is upheld, the legislature’s ability to restrict the Court of Chancery’s remedial authority will expand dramatically. If it is invalidated, the decision will reaffirm constitutional limits on legislative encroachment and preserve the longstanding equilibrium between Delaware’s judiciary and legislature.

SB21 undoubtedly strains the line between legislative authority and judicial equity. Even so, the Delaware Supreme Court is well-positioned to draw a firm but balanced boundary: It can affirm the General Assembly’s power to modernize the DGCL while making clear that the core of Chancery’s equitable authority cannot be legislated away.

Such a decision would meet the moment. Delaware’s corporate law regime is under unprecedented scrutiny, as heightened by aggressive competition from Nevada and Texas, and it cannot afford doctrinal uncertainty. The most durable path is a reaffirmation that Delaware’s system rests on a dual architecture: statutory design and equitable oversight, each indispensable.

Clearway will not disrupt that balance, but rather it will clarify it. And the court now has an opportunity to state, with precision, that Delaware’s model endures only when both branches remain fully empowered to do what they do best.

Anat Alon-Beck is a visiting scholar at Harvard Law School and a professor at Case Western Reserve University School of Law. She is the author of Delaware Beware and Incorporating Unicorns: An Empirical Analysis, and she is also one of the signatories on the amicus brief filed in support of the appellant. Sophia Fisher is a third-year student at Case Western School of Law.