Delaware’s Supreme Court now turns to the fallout of a trial judge’s rejection of Elon Musk’s pay package, in a case that could determine the state’s future as the country’s preeminent corporate enclave.
The high court must decide the constitutionality of safe harbors (S.B. 21) drafted as Musk,
The law that took effect in March narrowed the definition of “controlling stockholder” and made it easier to avoid scrutiny of potentially conflicted transactions. It reinforced the presumption that directors are capable of independent oversight, and it restricted shareholder access to internal corporate records.
The challenge comes from a Delaware Chancery Court lawsuit involving
Delaware Gov. Matt Meyer (D) leads the law’s defense against a shareholder who claims it curtails the Chancery Court’s ability to hear allegations of fiduciary breach by directors or officers.
Wednesday’s oral arguments follow bitter debates over unpopular Chancery Court rulings focused on controllers, which are blamed for driving the “DExit” phenomenon championed by Musk and others.
The constitutional questions are a hurdle Delaware must clear before its courts and corporate bar can interpret the rest of S.B. 21, such as how it impacts books-and-records demands, said Columbia Law School professor Dorothy Lund.
“Is this giving other states an opening or not? Is it shutting off competition?,” she said. “These are big, important questions, but we’ve got to get past the constitutionality thing before we’re going to get into the nitty-gritty on a lot of this.”
Historically, Delaware regarded controlling shareholders skeptically. That’s “come up against this new view which is that controlling shareholders are great” and now the state’s corporate law is experiencing “growing pains,” she said.
“It’s not just Musk,” Lund said. “How do we reassure investors while also being aware of this new market reality that we have a lot of companies that by virtue of dual class structuring have a controlling shareholder, or just one really rich, idiosyncratic shareholder?”
Constitutional Question
A Clearway Energy Inc. shareholder argues S.B. 21 violates Delaware’s constitution by limiting the Chancery Court’s ability to provide remedies for breaches of fiduciary duty. It also violates protections against retroactive laws affecting vested rights with provisions that apply to transactions that occurred before the law took effect, he said.
The company and Meyer say the legislation maintains authority lawmakers hold to define corporate duties and standards of review—and if necessary apply changes retroactively. S.B. 21 establishes a framework for reviewing fiduciary duty claims involving interested transactions without stripping the Chancery Court’s jurisdiction, they said.
Meyer further argues S.B. 21 serves a legitimate purpose in addressing changes in Delaware corporate law, and this purpose justifies its retroactive application. “Addressing judicial developments is a legitimate reason for enacting retroactive legislation,” the governor said.
One issue the high court isn’t expected to address: the precedent set by S.B. 21’s development. The Delaware bar association’s Corporation Law Council usually initiates amendments for legislators to introduce, but drafting of S.B. 21 started with an outside panel that included two former chief judges of the Chancery Court. It’s also the second major corporate law overhaul to follow an unpopular Chancery ruling, without waiting for an appeal.
“Once you can end-run a court, you can basically end-run the genius of the Delaware system,” said Charles Elson, founding director of the University of Delaware’s Weinberg Center for Corporate Governance. “It tarnishes the reputation of the state’s greatest asset.”
Monte Mann of Armstrong Teasdale LLP said it was “disconcerting” to see such a quick legislative “knee-jerk reaction” in response to criticism of certain Chancery Court decisions, when “the hallmark of Delaware law has been these well-reasoned, well-crafted, long, smart, deliberate, reasoned opinions of judicial doctrines that really shape the law.”
However, with S.B. 21, it’s easier to advise clients because “a clear direction is always a little bit easier to follow than different cases saying different things.” It would be worrisome, he said, if the justices declared S.B. 21 unconstitutional and removed those clear rules.
Stable Expectations
Lund thinks it’s unlikely the court will declare S.B. 21 unconstitutional. It’s stuck with the expectation that it’s got to issue some kind of reassurance that Delaware courts still decide cases in a balanced way, she said.
“If I had to guess, this would be a moment where the Supreme Court justices are going to throw cold water on this idea that the legislature couldn’t constitutionally enact these amendments,” she said.
Attorneys say the justices shouldn’t worry that S.B. 21 is keeping companies in Delaware—it’s just very expensive to move elsewhere.
Jonathan Lazarow of Ambrose Lazarow PLLC says many private equity funds and clients on the buyer’s side of M&A deals would like to be in Texas or Nevada. “They’re following Elon, and they think it’s a business-friendly environment,” he said.
But they’re sticking with Delaware for now because they don’t want to pay additional legal fees for someone to figure out how business courts might rule in Texas or Nevada when their corporate law is still developing, he said.
“People just see Delaware as stable,” he said. Clients think, “We know how they’re going to rule. We know what they think, and that’s more important to us than anything else.”
Rutledge is represented by Bernstein Litowitz Berger & Grossmann LLP, Equity Litigation Group LLP, and Morris Kandinov LLP. Meyer is represented by Potter Anderson & Corroon LLP and Wachtell, Lipton, Rosen & Katz. Clearway is represented by Young Conaway Stargatt & Taylor LLP, Gibson, Dunn & Crutcher LLP, and Richards, Layton & Finger PA.
The case is Rutledge v. Clearway Energy Grp. LLC, Del., No. 248,2025, oral arguments 11/5/25.
—With assistance from Bloomberg Law Automation.
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