Delaware statute amendments

Welcome to shareholder Primacy from free float media. A podcast about activist investing Securities Law and all the ways, the financial and legal roles intersect and Collide in real life. I'm here with an Lipton as always a law professor at Tulane in New Orleans who teaches and researches Securities and business law. She holds up the legal end of our podcast. And that's Michael Levin. An Activist investor who lives and works in Chicago. He covers the financial side of our podcast. Well, this weekend, I've been thinking hard a lot eagerly about this discussion because we're going to continue to look at some of the legal changes and changes as probably miles come up in the past few weeks earlier. We looked at some new SEC rules that apply to shareholders are really big index funds. How they interact with portfolio companies, that was like nothing compared to what's going on in Delaware. And like I said, I've been waiting eagerly to have this discussion and and get, you know, have your views about what's happening and explanation because it's a lot going on. Um, you know, at its core. There was a legislation of bill was introduced into the Delaware legislature earlier this month and it has the potential really shake up, corporate governance and and Securities Law and Delaware and all sorts of fun stuff. So yeah, I mean the changes in Delaware. I think they represent this other dimension of what looks like a shift in power in general, from in to insiders from investors. So we'll talk about what got changed and then you can tell us how that's likely to affect activism, right? And then and then we can have a fun discussion about like what it means. Yeah. Well, you know, at least this early stage because it's all about this quite a bit, right? What's he brought intro? But there are some there are some broad themes and some conclusions that we've started hinting at right here, about for Delaware and corporate law, generally and, and, and power really between between companies between investors between minority, investors and majority investors. There's a lot of power down here exactly what this is. This is Just like this is the theme for the moment. It's this power shift, right? Well, so let's, let's ask, so what's what happened in? What happened in Delaware? So what let's let's let's let's let's leaving round work here. Okay, so, um, on February 17th Delaware's legislature, two weeks ago, this bill, that would make these really major changes to Delaware's corporate law. Now, the governor Matt Meyer, he'd actually been telegraphing that the changes are in the wind for a while but this was really a shock partly because of how extensive the proposals turned out to be but also because of the process. Normally Delaware has this really specific process for amending its corporate law. First, the changes the statute. Yeah, statute. So the changes aren't actually usually proposed by the legislature. They're proposed by the corporation law. Council of the Delaware State Bar Association is called the CLC. It's just a council of Delaware attorneys. They draft the changes. They vote on them within their little group, and then they passed those on to the legislature, which usually, just an accident. Is written, but this time, they completely bypass the CLC. Instead, the changes were drafted by a small group of attorneys working as I take it with the governor and maybe some members of the legislature. And I think now, that after they were introduced, they were finally passed on to the CLC to review, but I don't have a sense that the CLC really is going to make any changes, or it understands that it's not supposed to make changes. So the changes are pretty dramatic but even how they were drafted, is a huge departure from Howell are usually. So, um and there's there's a couple things that I'm just aware of though. I don't follow the machinations of Delaware, nearly as closely as you do. So this the bar association, you know, through a deliberative process normally you know, and they'll be Consulting with, you know, plaintiffs attorneys, and defense attorneys and all sorts of people and it's heavy but it's the group is it's a mixed group right? And normally drop these things sort of process together. And they just skip that and well there's a good chance that they were a surprise like is the rest of the world. Oh, that's my understanding that the CLC was Very surprised by the changes as well. Like I mean, it's just came out of nowhere. Although, for the most part, most of the defense side firms have fallen and line behind right? Well, because I mean, as we're gonna talk about this is this is favored companies pretty well. It was inside and managers whether it's companies is fine. Okay, great. Um, so um, and this just for reference, this is senate for people who are keeping score at home, this is Senate. Bill 21. Yeah, it's called in the Deloitte in the Delaware. Legislature the upper. All right, cool. Um, and so, what's our understanding about, why not necessarily why, or maybe, why they the the state both did it this way? And why they wanted the changes that I mean, because they're all the company because Tesla left and Medicine thinking about it and so forth. This is so this is definitely about these threats to leave. So we know Elon Musk has been complaining about Delaware, ever since Chancellor Morgan did his pay before, right? That's on a field goes. Back to like that, goes back to Solar City. I mean one that one, but it was very upset about Twitter but he started threatening to leave. Um, when Chancellor McCormick rescinded, his pay package basically a little over a year ago, right? And that's on appeal currently. And now, some of the pay package one, the leaving is it, leaving is done that happened, he left Incorporated Tesla reincorporated to Texas and now some of musk's Associates of threatened to also leave. So Mark Zuckerberg threatened to take meta out of Delaware, Blackman for him to take Pershing Square out of Delaware, Drew Houston and Dropbox Houston is also on medis board, so it's like, one little click. And there are these rumors that a lot of companies are all so warning that they plan to put reincorporation to a vote this proxy season and that's as you know, coming up in the next couple months. So okay, yeah. So Delaware is feeling that. Like if they don't make changes right away, then they're going to be reincorporation proposals all up and down the ballot in the next few months. So I should say that there are a lot of people professors and plaintiff's attorneys, who have a masked, a lot of data suggesting that Delaware is doing just fine. In terms of retaining incorporations, that these are just a couple of different outliers that they don't really represent them the, you know, everybody. But they, you know, the people collecting that data, they have obviously can't see what's They can't see whether right threats to reincorporate in the future real. They can't tell whether VCS will start organizing outside of Delaware. They start their startups outside of Delaware in the future so we'll just leave it at there's a dispute about whether these threats are serious but there is no question that the Delaware legislature thinks they're serious. Oh yeah, they're concerned. They're they're worried that and again whether or not those worries are well-founded is for a different podcast. But but okay. So and it's worth noting that of all the companies we've talked about only one The musk companies and I think it was Tesla and maybe one other reincorporated so far, all the rest are just kind of a couple there have been a couple of reincorporation Tesla. Obviously the big one, but a couple, but most of those incidentally were ones with controlled companies. Right? So where it's really not other than Tesla. So it's hard to say, whether you could get a shareholder vote in support when it's not a controlled company but alright. Well interesting. All right, so the startup ecosystem and it doesn't matter what's so it's it's a mess in Delaware's, obviously vary. So you know, go going Beyond, you know, Matt's, you know, Tantrums about this. It's this isn't just about, you know, what, what's the source of the of the of the aggravation here. What's Essentially they think that Delaware law is too strict when it comes to evaluating conflicted, transactions situations where members of the board or corporate officers are controlling stockholders may have a financial interest in a contract. So there's a risk of self-dealing like a board that consists of Elon musk's friends deciding to give him 56 billion dollars. Yes, that was like or deciding to buy netsuite, which is a company that Larry Ellison oracle's founder, had a large stake in that kind of thing. So it's this is about these conflicted transactions, and we've talked before about how Delaware deals with conflict transactions. We said this before, you know, the standards for these kinds of transactions, normally have a shareholders who is saying you paid too much because you wanted to please Larry Ellison, or if a Target or shoulder retarget Sue saying you paid too little because you were interested in the acquirer a court normally will examine that deal for entire fairness which is very searching of evaluation of what the deal used to Fair process and achieved at a fair price, right? Okay. And so there's a trial, there's Discovery, there's depositions, there's hearings and there's a potential for a large damage award and that's, you know, it's a pain, it's a pain. Even if the defendants win in the end, that's still very it's very, very processed, as good as the Delaware courts. Are they only bother with a rush if there's like a deal? That's Ending at the deals over. They'll take, it is still faster than like a federal court will be, but it'll take that and one and one aspect of their being good, is its really thorough. Yeah. So the board and this is pre-existing law, this is the law, that's essentially would change. The board can cleanse a deal which essentially means that an independent decision maker approves it. And if they do that correctly, then the court will not evaluate the deal at all. If a shareholder files a lawsuit, it's going to get dismissed out of the gate. So the issue is how do you cleanse it? So you can avoid judicial review most of the time. If it's just a conflict with the board of directors or complex with the corporate officer, you can either cleanse at the board level or to shareholder level which means if an independent board votes in favor of it. After receiving all material information, we're done or committee independent committee votes in favor, after receiving all material information. It's cleansed, you can't sue. Alternatively, if the disinterested shareholders vote in favour after receiving all material information, we're done. You can't sue. Now the standard and that makes and that makes sense. Yeah, right. It's the idea being that, that's right. I mean, if shareholders want this to happen and they're Informed, which is, you know, one of the problems with Tesla's composite and Tesla's, wanna, you know who's who's Chancellor, you know, McCormick her, Vice chancellors. I just said, okay. You generally, you know, we're not trying to like tell you what to do. We're just trying to make you. Okay, you're right. But it's different for a controlling shareholder within the, when it's a controlling shareholder, you need both mechanisms, you both needed a committee of independent directors and you need the disinterest, share. The boat is a good enough because it in the comedian isn't enough. Because the theater essentially, the theory is the controlling shareholders, sort of have a lurking threat that they could like coerce. So, under existing law, you need both mechanisms to cleanse deals that involve a controlling stockholder. But I want to make clear though, I'm making it sound easier to challenge these controlling stockholder deals than it actually is because for many transactions, the claim would have to be brought derivatively rather than directly. And if it's brought derivatively and the company has an independent And board that claim is going to be dismissed. Anyway, we don't need to get into it unless you really want to but just leave it at you. so um, so even Cleansing. So for the smaller transactions as a practical matter, those are going to be insulated from challenge most a lot of the time. Okay? Um, but for the bigger transactions, the shareholders will get to this entire fairness review. If the controller doesn't use both cleansing mechanisms, independent bored and disinterested shareholder Vote or independent committee and is interested in Current law. That's SB. 21 is changing some of that, I think, right? Okay, what what's going on? Okay, well first, I want to make a note that we are recording this on the morning of Monday, March 3rd. And the reason I want to make a note of this is because I don't know if something is going to change. Tomorrow or later today. So this is how the changes were introduced as they exist at coming out of the legislature, right? So first, the first thing, the bill tackles is Independence. What is it mean for a board member to be independent so that they can engage in this cleansing process under Delaware law. It means no financial interest in the transaction and they don't have close ties to someone who does have an interest. So for a director to be independent, the director can't be a party to the transaction. And the directors, mother can't be a party and its transaction, okay? But in recent, Years for that. Second question. Is the director too close to someone who is a financial interest? Delaware has gotten very strict courts, will look to long-standing business ties, long-standing social relationships, they'll really dig down into the texture of this relationship. Like, I think we mentioned on a different podcast, my favorite one, where the court, highlighted that the director vacation on the ranch, right? Yes party. And they cast her to calves together, and that was. And that was, and that was deemed to be compromising of their independence from each other, or we can look at, you know, the case is that I'm in more involved in which involved, sorry to say it Tesla where, like, you know, musk's former divorce lawyer. Yeah. Was it right? Was, was the general counsel for the company and then, and then, you know, people, he, you know, been in deals with and so forth. So there was no, there was no, you know, they were independent. You know, because they, you know, there was no business relationship, you know, between the company and that like between muscles and there's a developing enrich, you know, set a case law, really nothing in statute. I don't think that's about sort of what we mean when we refer to, someone who's being in a pennant in, for purposes of Delaware. Okay, exactly. And I don't mean like Delaware still requires fairly robust connections and I mean like when I explained to my students what counts as independent, how close you can be and still be independent, my students are always shocked. I mean it is very counterintuitive. So Delaware won't say you're not independent just because you like travel in the same circles or anything. But there really has been this appetite for saying thick social networks can compromise Independence but that happens to be the case. This is relatively new, it's all in the last 10 years or so. So the bill changes that the bill says if you're a publicly traded company, if you've designated certain directors as independent Under The Exchange rules like the New York Stock Exchange rules, that person is presumed Independents have to make its Fair have to meet this extreme now to show that they're not they can rebut it. So Delaware is basically adopting a nice sea and NASDAQ definition of your reaction was oh come on. Why was your reaction? Oh, come on because those those standards are pretty weak. They're very weak. There's no way that ISS In class Lewis, they won't even use them. They like, you know, they have their own measure of Independence because they're extremely weak. So okay, so that's one change. The next change has to do with the procedures for cleansing. Let's say we're not talking about a controlling stockholder, this is not a controlling stockholder situation. It's a conflict with one director or several directors, even Under current standards. If you want to cleanse that at the board level, you need the body. That makes the decision to be majority independent meaning. If the whole board votes, the board has to have a majority of unconstructed directors, or if you delegate the decision to a committee, the committee has to be a majority of unconvicted directors, but that's not what the new standards say. The new standards say, if it's decided by the full board or committee, all you need is for a majority of the unconvicted directors to vote in favor. Now that sounds like a minor change but it's really dramatic and I'm going to explain why let's say you have a board of five directors. Okay. And four of them are conflicted in some way on this transaction but one of them is nominally independent. And this is under under under under this new definition of independence too. So, that's okay already. There's the newer definition. Okay, let's take existing law five direct. If there's a board of five directors under existing law and four of them are conflicted in some way, and one of them is nominally independent under current law. If everyone on that board votes in favor of a transaction. That's not good enough. Because the board itself was majority conflicted. But under the new standards, we would ignore the conflicted members entirely. We would only look at the votes of the unconvicted directors. The one guy and asked you to the majority of the unconvicted directors vote in favor and a majority of one is one. So, therefore, yes. Well, so, I mean, I mean could that oh, if that and you're stylized example here, if that one person voted against, then it would not be cleansed. So what you have. So the only way you imagine this working was, you would have. So if you what the What you would have to imagine a world and which aboard that's majority conflicted. Maybe one unconvicted director and everyone's looking at him and they're all deliberating together and they're staring at him and they're going. So are you in favor? And you have to imagine, I've been I've been that person you know Absolutely, but it just like, you know, he doesn't have to form a separate committee, he doesn't have to have his own advisors, nothing. So, this is a huge change from a five-member board. That is four people who are interested or dependent, right? Cannot cleanse all but without forming a committee they can't cleanse under existing law and they'd be able to do it this way because one guy I mean think about this gets litigated if like you know all of these board votes though. It's like a unanimous anyway, right? You imagine a litigation situation, the board just shows. Something's cleansed. All they have to do is literally just identify one member, right? Turns out to be. On conflicted and that's it. The case is over. So, um, so I mean, so that's so that's what happens if you don't have a controling shareholder, right? If you do have a controlling shareholder who's conflicted, then then the deal, then the statue draws a distinction between take privates and everything else. If it's not a take private, if it's not a take private, then under the new standards, you can cleanse either with a committee that's majority independent or with a vote of the disinterested. Oh, not both, not both. So that's already currently is what's the current Law requires. But that would require both and current law. Would record would say that they're board committee. Can't even be a majority independent has to be completely independent, right? That's what we talked about with Tesla's. Right outside, the take private context. You only need one and the committee and the board committee can be majority and not completely independent. And then under the bill for take private then you need both mechanisms a committee. That's majority independent, not completely independent and it is interested. You're holding her vote. There's even more right? And there's not that many I mean take private aren't I mean there's so many problems. So many other affiliate of the controller is taking the company product, but there's right now, go ahead. There's more the bill goes even further by limiting who even counts as a controlling shareholders so that their subject to this slightly higher bar, okay? Right now, the controlling shareholder rule is first of all, if you have more than 50% of the vote, you're controlling Charlotte. Yeah, just automatically. Automatically, that's easy and that's still going to be true under the new page. But on under existing law, you might still be considered a controlling shareholder if you have less than 50% like Elon Musk with 20% discount, right? Right. If under 20% at the time at about 22. If the plaintiff can show that you as a practical matter exercise control over the board. So under existing law, it's either 50% of the vote or you show or the plane of shows that there was control exercised over the board. But based on the facts and say something like all facts and circumstances. Exactly. But under this bill there's a hard rule. No one can be a controlling shareholder at all unless they, at least have one third of the votes. Oh, so there's a bright line kind of like standard. Now, that is a whole, you can drive a truck through and the reason Agreements. It's companies to adopt shareholder agreements that can allow individual shareholders to contractually exercise control over the boards. They can reject mergers, they can reject poison pills, they can prove budgets, all that kind of thing, only. And that's all in statute. Know, that's all right, and that's in the statute. So, under the new definition of a controlling shareholder, no matter how much power you exercise by contract. We don't care if you have less than a third of the formal voting power, you're not a controlling shareholder and your deals aren't subject to the higher cleansing standards. You can be cleansed with just straight up one director out of 20 happens to be interested in independent. And did they vote in favor? We're done. Okay, so this there's there's three or four different very significant Of this. Okay, go keep going and we'll take a break. No books are records. That's not even controlled. Let's talk about books and records for a second. Yeah. Okay. Right. I can get access to internal corporate records. If they have a proper purpose board, materials board minutes, that kind of thing under existing law. If a shareholder has a need, which is usually because they're investigating some kind of malfeasance. If you are there, kind of plating, kind of plating, some sort of a proxy or complaining action annual meeting. I mean, that's another good proper purpose, I know. Share that kind of thing, but in particular, when shareholders are trying to investigate now fees and they get they can get informal materials. They don't, they aren't limited to formal board materials. They can get emails, you know, all texts, you know, whatever else, if they make a show communication stuff, but other other internal books and records that aren't entered into the minutes of these formal mortgages. Usually they have to show that they exist and they're going to be relevant that kind of thing. So, in the past, Year was a really gotten. Full Walmart's involvement and illegally Distributing opioids, Facebook violating an FTC consent, decree about user privacy, all that kind of stuff. And this bill would change that to shareholders would be limited only to formal board, materials, and nothing else. And I'm leaving out a lot of details. By the way, like even with all that we'll have to we'll have to talk about this in another short. Yeah, exactly. But I want to be clear that every detail I'm Giving out goes in one direction, making it harder for shareholders to challenge management. The whole statute. I mean, it like a checklist of a wish of a wish list of what defense attorneys will. They just snuck in every possible change. They could big and small to make it impossible, really? For sure. You, Sherry claims. All right. All right. So there's the two parts of this. There's this whole I can't remember. This is section, 144. I looked it up at some point. Yeah, it's amending. Section 144 which right now has virtually no role in litigation but now they're right dramatically expanded all around what we mean by a controller and the process companies have to go through and then amendments and it sounds like the change is the books and Records. I mean, they're strictly I suppose, we could say bad for activists but or whatever, but it sounds like the 220 stuff's little simpler that and the 220 stuff, basically, just Narrows statutorily. The list of of things that shareholder can demand and just says you. Sorry. I mean, if the bar for what you have to show, you know, and All right, um so one quick question and then we'll take a break. Does this what's the expected impact? On the proximate cause of this, which was the tornado case. Which was currently on appeal to the Delaware Supreme Court. And I don't know if this bill affects it. So here's the thing. Delaware has a sort of default statute, that says, any new law that it passes on these kinds of things isn't retroactive. It shouldn't apply depending cases. So you think it wouldn't apply to appeal but every other time Delaware has amended its law. The legislature included, a little note that explicitly said, the law would only apply to new cases and not old ones this time. There's no note and defense attorneys have already been publicly arguing that the new law which hasn't even been passed yet. Should be deemed to apply depending cases. So if this new statute applies to Elon musk's appeal at his Paypal package, oh my gosh, he is a much better shot at winning. Not a slam dunk, but he has a better shot. And of course, the new statute would apply to all those cases that were filed against him. Just before Tesla reincorporated, like a dozen dozen cases that it would, if it applies currently and Again, like the usually these laws, they say will not apply to any cases ever pending, but it doesn't say that this time plus, there's also a question of what, what even counts as a retroactive application. So for example, Paramount, Paramount has dual-class stock and it has this controlling shareholder, Shari Redstone and the company signed. This merger agreement, they're going to be bought out by skydance. Redstone gets cash for her shares, but all the public shareholders. They get kind of a mix of cash and stock. Now, this merger hasn't happened yet, there's only the agreement and the public shareholders, followed a lawsuit. They said there's a conflict here. Shari, Redstone is, hoovering up excess payments for herself and the public shareholders aren't getting a fair price. And they also complain because they think that she iced out another bidder who would have been paid more. So, under existing law. This is absolutely a deal. That would be examined for entire fairness because Shari Redstone signed a deal that gives her excess consideration over the minority, but if the new standards apply, she's very possibly immune from suit that's because it's Ought to take private and all transactions involving a conflicted controller other than take privates only need approval by an independent committee at the board level here. There was board committee approval. So if that committee was majority independent, the whole deal is cleansed and if the merger doesn't even occur until after the statute passes, then for sure it's not retroactive. So even though there's a complaint that's currently pending and there's no question that the Delaware legislature understands this because they keep getting asked to interviews whether the statute applies retroactively and but sometimes they say, no it doesn't and sometimes their kids here. Well, it applies, as soon as the governor signs the bill, but they still have an added that language about it. Not that little disclaimer that little. Yeah. So they know that this is an issue. So it feels like they're, you know, they're passing the buck and they know, their passing the buck and they're still passing the buck anyway. All right. Well let's let's pass the bucket. Because we've, we've really, this is great. I mean, there's there's so much to talk about here but will We'll do that. And then come back to talk about how this affects various players here and then maybe discuss a little bit about the broader implications in terms of that power Dynamic that we've, we kind of hinted at that. So, um, so let's do that. And and we'll be back shortly here at shareholder Primacy. Shareholder Primacy is brought to you by free flow analytics.com. The only free database of corporate directors, their influence and their performance Fiona Stocker, retirement, plan go to freeflow analytics.com. And look up, which of your elected directors are performing well and which aren't use your vote in the alternative democracy and get your data at free flow. Analytics.com. Now, back to the show, Privacy. I'm analytic here with Mike Levin. So Mike, you are an activist will these changes? How will these changes affect you? That's a big interesting question. And I'm going to answer that in a moment. After I talk through a couple of other kind of open questions which is which kind of gets to the thing, we start talking about a little while ago, which was The number of Corporations and the data on this problem. You know. It's it's pretty clear that you know, a handful of companies leaving. Delaware is enough to worry the legislature but it's probably not going to You know decrease franchise fee income just more than I mean I think they're afraid that this trickle will become, you know ultimately like a torrent. Yeah well so you know I looked at some data at some point you know Delaware incorporates tens of thousands of entities in a year and and even more You know, here we're talking about entities, then we can talk about. And most of the entities that it can incorporate her like LLCs and LPS and so forth. They're not corporations. Yep. Okay. And even smaller percentage of those are public corporations. So so we're talking about a you know even though Delaware dominates the public corporate in a relative to other states where we're still talking about. Yeah we're still talking about a, a somewhat smaller, you know, percentage of of the Of like, of a portfolio in a sense. Because and that sort of, you know, reminds us that this might be a little bit of an overblown reaction to sort of like, you know, what they, what they sense. And again, we talked about this data at some point. Yeah, actually, we're seeing it UCLA. Just came out with a study and I think he's finding that the fastest growing States for in court, new incorporations aren't Delaware like in these are private companies are, they're actually California and Florida. Yeah, surprise me, I mean, I get the tech sector's there but they're Corporation laws, not what people want it. And the one thing I want to mention though is that in any given portfolio, there is a very small percentage of controlled public corporations Okay. I mean, right? It's sort of overall. Yeah, and that's actually worth noting. Is that any smart active us? That's, you know, planning or looking or constructing a portfolio? Tends to avoid Control old. Corporations. Okay. And again, I understand the definition of control was starting to shift. All right, based on this. But overall you know, most shrewd Act of us are not going to be putting at least a big allocation. Into a company, there's got to be some really good reason, okay. You know, and there's, you know, plenty of people that, you know, kind of like Tesla and so forth and that's kind of control. But again, that was, you know, that wasn't controlled under the, you know, it's not 50% owned by mosque. But so overall we tend to try to find companies where, like the entire Insider ownership is going to be like comfortably under 10%. Okay. You know, even in the, you know, very big companies, that's under five, you know, there's some small caps, we look at and so forth, we get inside our ownership, that's, you know, under 20, you know, that starts to get to 20, but even then You know, we're not, we're not, you know, getting too much of a control position or, you know, worrying much about about control here, okay? So the the idea that the definition of control is going to change is is enough to be concerning and especially connected to the redefinition of what Independence means. Okay, because you know, both those together. Um, would concern me and concern others? I've talked to Though again, there's not enough quite known. You know, about how that's, you know, how it will affect like, you know, specific companies specific transactions and so forth. Yet again it's only been a couple of weeks but those two Aspects of this kind of together. You know, overlaid on the idea that you know, most I mean the idea that the definition of Independence is going to sort of revert back to the or go to the exchange definition which is basically useless. But that's something that activists are kind of used to anywhere. Okay. We did we just sort of accept that most? It was so called. Independent directors are are not really going to be practically into independent so maybe we're just cynical that way. Yeah, no I think that the company designated ones. I mean that's why I assist in cluster use it. Although one thing that you would been saying actually, before we start recording, but I think it's interesting is the way the statute is worded. It's so broad that. Like, normally if a company adopts, a takeover defense like and I like an adult that kind of that might get a sort of higher scrutiny and get enjoyed. But I wonder if these cleansing standards could even translate to challenges to buy loss because to all sorts of other others and it is That. So, I don't know whether this statue could be read to even make it harder to challenge, take over to defenses by treating the industry. Because that's the interesting thing is that most most active You know, frequently will have in mind some sort of emanate deal and there's all this, you know about m&a activism increasing and so forth. But you know, go step by step, one of the first things is we need to get some sort of influence, maybe, get a board seat or two or 10 and then get through the advancement. So there's a lot of intermediate steps before we get to a deal. Okay? And, and I think some of the perception and this is probably wrong. So, in the perception is that SB 21 is sort of trying to focus on protecting deals from litigation. That's true. Like so by the time you got to the deal stage, you would be a much more influence you would. You would be much more safe from litigation. Exactly. And so, But if the if the and I think there's I when I was looking at the Statue, which I don't know what exactly what I'm reading there was something about transactions and Acts or something, that's why I'm like the app, it the cleansing standards so that you essentially, they can't be the subject of judicial action. Apply to Acts Actions. And that's why I'm wondering whether act and actually a lot of the more routine stuff. Yeah, that, that active is kind of work on and think about You know, short of like, some sort of a, of a final transaction, take over tender offer or whatever. That would be much more concerning I would say. So. Yeah. So there's it's, it's still You know, because of the way, the active is kind of, you know, think about and structure making Investments. It's, it's not as concerning at the moment. As to a portfolio managers, that might be to like a plaintiff's attorney. There's there's there's clearly. Intention to possibly extend it that direction, and then and then it would be. I'd be really, really worried. Let's let's talk a little bit about then about. The books and Records part of this. Oh yeah, which is which is the other the other kind of half. And you know, I I do them all the time and so on and so forth. It's Worth kind of mentioning that there's sort of two kinds of books and Records demands. I suppose. There's the stuff that Litigation anticipates. Where I it's mostly kind of expected that you're going to do some sort of books and Records demand in order to prepare for like a Cheryl derivative suit or something like that. Sort of like predis, I guess you could and this and the limitations in the SB 21 are clearly squarely aimed to try to prevent that trying to really clamp down on that, okay? The other half the other kind of books and Records stuff is the stuff that I do a lot more routine like which is first looking for shareholder information, shelter lists and that's really routine. And fortunately based on my look at SB 21, that's probably not going to be limited here. But then there's an intermediate, there's all such of other stuff that I'm kind of looking for. If I do a books and Records demand. Okay. You know I'm looking for board materials which I think are still going to be, they're still um allowed again, that's not stuff that's that's public. So it's worth trying to get that are like formally part of the media and it could be not just like minutes, which are tend to be pretty nothing but like board presentations. You know, compensation consultant reports and all that kind of stuff, okay? But then there's other things, there's like, you know, analysis of of a merger that was done or other. There's a other things that get discussed, or don't actually make it to the board that we can try to request. Okay, and then we get into this really big battle or me. Essentially, as I didn't make it to the board they would be large, right? Yeah that's that's that's, that's the problem. Is that? And so and you got a really craft a proper purpose around that and so forth. And that that becomes hard. And my sense is that that stuff has become a little harder. Yeah, and it's for potentially a lot harder. This would make us largely off limits as far as I can tell, I mean it's not formal board if it didn't go to the board if it's not a formal material right? And and the other words, privately an email, if it wasn't part of the formal board meeting exactly and the other worry is that board materials will become even less useful. Yeah. They know they're completely safe if you if you don't if you don't direct any of the board if there's if I don't know how you can make you know, decisions or whatever. But so it'll be and again when I'm doing this in an activist situation, if I'm trying to like nominate directors or something, I'm not going to litigate. There's no Discovery process, it's going to follow this. This is my one shot to maybe learn some information as a shareholder. So 220 is also someone here for this reason because there's a lot of other really interesting information that I'll try to look for that that somehow is, is probably not going to be available to us, you know, in the communications and stuff. And I mean, that's all nice. That's all great. We love it. But, you know, we're so used to activists are used to just get and pushed around and not get some of this and just relying on public records or that, you know, that's what we go. Talk to retired executive or competitors. When we're trying to build a case. So, so yeah, there's there's there's there's one reaction and again, we can delve into this and to into more, there's other parties, you know, this isn't going to really affect, you know, shareholders really routinely. Yes she Activists probably aren't going to notice this. This is really, you know, it gets to some fundamental You know, disputes and rights and we talked about, you know, the power dynamic between companies in their in their investors and minority investors majority investors. And so that that's actually that's the other thing I was gonna ask you about it. Let's let's talk a little bit. Yeah. About some of the larger implications here. And that's, you know, that's part of your job is only the nuances of law, but the broad Strokes. So it's so what are you? What have you said? I have some of my own but I curious what yours are. Well, I mean, well, the first thing, this isn't even the biggest picture. But there's one obvious implication which is that the bill encourages moving corporate governance away from the board and it just shareholder agreements because your holder agreements don't count as control for the purpose of this standard. So if you're a founder and you're going public and you want to maintain control and you have a choice, you can do give yourself a majority vote with dual Clash shares or give yourself or do a question shares and like, okay, you can give yourself a solid. Block with a dual class shares that keeps you just under one third and then exercise control through a bunch of shareholder agreements. You're totally going to do that because that way, you avoid the higher scrutiny. So this really really encourages people encourages people to use shareholder agreements over High vote shares which really challenges, what the corporate form even means. I mean an academic speak, we'd say a defining characteristic of the corporate form. As opposed to a partnership or an LLC is they're managed by a central board of directors chosen by the equity holders. So this statue really encourages a move away from that model, a move away from centering the board. So that's like, well, that's that's worth. Just repeating for a second. Yeah, that that there's At least for new newly public companies and there's probably gonna be some companies controlled company. I mean probably need to be controlled or controlled enough where you see back, you know those kinds of startups. Sure have a choice and they're very likely to want Insider control and now they know they can avoid the controller labor entirely as long as they exercise that controls. So this could so you could, you could, you could exert that control through a well-crafted shareholder agreement and dispense with a dual class shares and a staggered board. Yeah. And you're encouraged to do. You're encouraged to do that because if you don't have the Dual clutch or if you only keep your do you could even have do a class shares, you just have to keep the vote under 1/3. You are categorically not a controlling shareholder and categorically any of your conflicted transactions are not subject to the higher standards. Wow. I get, I can't. There's going to be shareholders are going to, well, I guess they will. I guess there's a hot enough stock that they really want. They'll yeah, so yeah, but I mean, but from the bigger, the biggest picture thing, I think these amendments are really going to devastate shareholder litigation or at least litigation over conflicted transactions, okay? I'm telling you Sherry lost, so taking collectively, they're going to kill a lot. You know, almost all merger, litigation all these compensation litigation. All those kinds of, you know, buying your own company, buying your related company, all that kind of thing. They're gonna kill. They're probably going to kill most Caremark litigation the claims that the board about board negligence and so sorry leaving their duty to the duty to comply with the law. The so those, those are the claims where you alleged the board intentionally violated the loss, something like that, because between the independent standards and the lack of books and records show not going to be able to make the case. We might still see claims overtake over defenses. Maybe we'll see, maybe because I'm not sure how the statute plus does. Maybe we'll see some contractual claims like the scope of the shareholder agreement and you might have a really egregious scan delivery now. And then like Wall Street Journal had gives you the information needed about what went on in the board. But for the most part I don't see if it is Sherry litigation having much of this is This interesting. So so that Delaware is trying to protect its franchise fees. I mean, there's one that's one way of looking at it. Yeah, yes. Yes, there's franchise franchise tax or franchise fee income and they're going to be relinquishing this whole all the economics of of the litigation exactly. Because I, I think Delaware depends on more than just a franchise fees to maintain its status. It needs the case law, and I think it's going to kill the case. But I mean, to be fair, the statute has a lot of Defenders who would dispute my characterization. They all say these, I mean, they're proposed Bill, the proposed Bill. Yes. Okay. All the Defenders are going. They say it's a these are balanced amendments. They balance all the interest they restore the balance, it's a balanced approach, very much. The kind of Brave is what I mean. Like they just keep using that word balance, it's very obvious that the memo went out. That is the word to describe these events. And I really cannot express how true that is not there. Really, and I, and I want to explain why in a sort of big like broader picture. So until now Delaware was defined by the idea that it was all based on judicial decisions. That's Where their corporate law was right. That's statue, not stop right there because This, this the legislature righting. The statutes was fairly Not present and pretty passive when they like they would put like these ground rules. Fiduciary duties and the obligations that boards all that was all common law. That was all the case law, right? So almost all of the corporate law, the bread and butter of corporate law was all developed Case by case on the particular facts, before the court, in a particular case. And I gotta tell you like Decades of Articles have been written about how this is definitional for Delaware. Corporate law is made by judges considering specific facts, a particular transactions and this statute gets rid of all that as far as it possibly can, it replaces judicial law making with a statutory set of Standards. Now, I personally don't have a very strong opinion about whether it's better and so I'm absolute sense to create corporate law by Statute or by case law. But until now Delaware, had a very strong opinion is better and this legislation is just this astonishing rejection of that theory. It's not, it's a direct rebuke to the Delaware courts, but it also abandoned everything that Delaware previously claimed was special about Delaware. So, that's one big thing but the other That's really striking is one Hallmark of Delaware. Law was, I mean If a state can have an attitude. Right attitude and the attitude was arrogant. Delaware was arrogant about its corporate law expertise. You could see this in the judicial opinions, there's this General disdain for the idea that any other jurisdiction. Is anything else about corporate lie? I always thought this was really funny that you'd read these opinions and they take offense at the mirror idea that another state would have the temerity to enact, right? Corporate everybody, everybody adopts, our refer to ours. Anyway, so we might as well just leave it to tell her. But this statute explicitly incorporates by reference the federal Stock Exchange standard. It even borrows language from the model business Corporation act, which is this, generic off the rack corporate code that the ABA drafted. And I don't know what word to use to describe this except it's embarrassing. It's Delaware, right? Wishing the idea that it has some special claim to develop corporate law. I mean, I I can't convey what a revolution in attitude that is so and I keep, and when I think about it, I keep coming back to these new standards for Independence where you're presumed independent. If you're designated as such by the stock exchange, so that right, we know that I'm gonna repeat, that's bad. Yes, no one likes that, nobody likes that but here's what grabs me. It's not just that the exchange rules are lacks fine there lacks but that's not actually what kills me about it. The X until now until this bill, I would have told my students that in, Delaware Independence means something different than what the exchange is mean like definitionally. It means something different because the exchange act standards of Independence, they're based on like a general, flea voting free floating kind of concept of independence from the company. That's what being is being assessed is the director independent from the company in general. But in Delaware previously you can't examine Independence in the abstract under Delaware, standards, the old Delaware standards. You didn't ask, are they independent in some general sense. The question was are they independent for the purpose of approving? One particular deal and maybe they were for one deal and maybe they were not for another deal. In one case, the Delaware Supreme Court said that a board member might be independent for the purpose of a proving a contract and not for the purpose of deciding whether to bring a lawsuit. So Delaware's concerts concept of Independence is always been very contextual and that matters because when it comes up in litigation, And we're asking, are you independent for this particular purpose? Okay. Litigation is about the facts of a case, exactly. But when you, Import their, not just, they're not the question before the court, you're required the court, to answer this completely different question than the one that's actually in the case, which is not Independence in some broad Strokes way independent for this purpose. So by relying on these exchange extenders, they actually make the law incoherent because now judges have to consider the sideways issue that just isn't what the cases asking. So what does that tell me? Well with the statute is saying, is, if the statue could speak, you say the bill Delaware law has no value, right? Yeah. There's kind of, they're kind of giving up. I mean, based on what I'm saying is that there's there's this kind of there's this kind of vague threat being level that the legislature and that's basically saying okay, well sure, you know, we're going to sort of 100 years 100 plus years of of carefully crafted process and standards here exactly just because that's how to say, And there's just not a whole lot of value in all of this stuff. Exactly. As you say as the judges of it and there's not even a whole lot of value in the law itself. As a coherent project, it's a rejection of the value of any law in this space to put. This is what I was thinking about when I said wonder what a law professor thinks. It's just like that incoherent of the exchange activator, it's really just encapsulate this idea that it doesn't even matter if the laws coherent because the law doesn't matter. So why would the statue do that? Well one reason, if we if you anthropomorphize the statute, I'm sorry I can vibes from the statue. If you ever more if you anthropomorphize the statute, the statute doesn't just see a whole lot of benefit to having shareholders impose procedural, safeguards on conflicted. Transactions, the subtext is Corporate. Insiders. Do not need to be constrained by formal procedures for formal procedures. Do not really protect shareholders in any meaningful way. They just impose some kind of tax on the company. It's just transaction costs that we need to Accurate. Okay, I don't, I really want to be clear. That's actually not crazy. It's not even out the main street. I mean, it's a very common attitude that shareholder litigation doesn't really benefit shareholders a million times. It's all just nuisance, trying to like, just trying to line the pockets of plaintiff's, lawyers. Exactly. It's an About, you hear all the time that shareholder litigation doesn't accomplish anything, but that wasn't Delaware's view until now. Apparently, and there's another message though and that's the law has no value in this space because corporate managers will not be constrained. They will not be limited by legal rules. If you try to constrain them, they're going to pick up and move their companies elsewhere. They can't be limited by law. So therefore there's no value in Delaware. Even making the attempt. And that idea, that procedures have no value that they only stand in the way of what a singular leader, wants to accomplish that people who hold positions of great power can't and shouldn't be constrained by law. I look around and I think that's symbolically very, very kind of the movie concerning, right? It's the broader theme of the time, we're living in that. We should just clear space for strong leaders, to take action and legal, technicalities and formal procedures are kind of useless impediments. So, I feel like what's happening in Delaware is this microcosm of what we're seeing play out on the national stage. I mean, even the way the bill was proposed by passing the usual process. Right. And evidently, evidently one of the drafters was affirm a big firm that has done a lot of business with Tesla. There's a lot. Yeah, I mean, like, You know, Tesla has like a zillion, like throw a stick and you'll hit 10 Tesla attorneys and all. That's a really big Delaware firm but the Optics of it are not great, right? Yes. So wow, there's a lot of themes here about the shift and power and just like the miniature of what we're seeing more broad. It's very, very illustrative of some some broader themes like I guess in Civic life, which is, you know, you know, concerning and interesting but then also you know, you have to reflect back onto how it's going to affect well. Again. There's and I was like to think about it this way, you know, who were the parties to this and you know, there's a bunch of plain of storms bunch of Defense firms and Delaware that are, you know, clearly interested in this my understanding is I guess. There's some units are finally getting involved. Yeah litigation in that legislation. You just a really interesting and I'll just say why? For two reasons. So one they might say, it's because we're Stuck like our Pension funds are invested and we think that this takes away procedures that protect shareholders, that's what they're going to say. However, In general unions, tend to like corporate governance procedures that put, I call it friction in the boardroom that they like laying procedures that control. How managers conduct business? And I always got the sense that in part that's because as unions they're sort of suspicious of unfettered Insider control, even apart from their interests, I think, that's right. So, I think they like, so, they dislike this bill. I mean, they're going to say they dislike it because it doesn't protect my narrative shareholders. But I think part of the mood is they just like it? Because they don't like seeing corporate managers just be able to act completely without any constraints at all. Well, so this is we have to start. We've we've got to wrap up take in so much time, and I want to, but we need to spend more time on this, and we will do that. We commit to the followers. Here, we will do that, but Senate Bill 21 is now pending. Yeah. The, my understanding is that they're probably there's possibly some sort of expedited treatment of next week. And right. Yeah, I mean they want to get it passed before proxy season so right and so yeah, they're not going to wait like, you know, till end of summer, which would be normal. They're not doing normal. Yeah, right. So they're not doing normal here. So yeah, there's there's lots to delve in and we should we should probably do that. We should probably respond a whole show. Talking about some of the controler. Aspect of this, some more talking about 220 and so forth and and probably just a follow-up after it. After this develops in the legislature changes which I don't see that, I don't know that that's likely but could I don't know, we'll see, you know, the union Delaware is a very strong, union state and and there's a there's a there's a non-zero chance that the Union. Interest might might exert a little bit influence but who knows. Anyway, all right we got it right? Like I said, we gotta wrap this up. We've taken way too much time here though. Not not bad time so it's it's great. Talking about all this and we will continue with this subject, I'm sure. So there's more on the way. This is your holder Primacy hosted by Anne Lipton and me Mike Levin. I'm an independent activist investor and advisor to investors about their active situations, and is the Michael M Fleischmann professor in business, law, and Entrepreneurship and Tulane law school. And if two lanes Murphy, you can find me Mike at the activist investor.com and at law Dash tulane.edu. Our podcast is produced and distributed by free float media. Thanks for listening and we will cover all this again sometime soon.