Corporate law isn’t about fairness—it’s about creating value. Rational investors prefer owning a slightly smaller share of a substantially larger pie, especially when clear rules guarantee predictable returns.
Delaware is reaffirming this principle by considering Senate Bill 21, which would reshape how the state determines when shareholders exert “effective control.” The legislation, which passed the state Senate on March 13, is now with the state House of Representatives.
Effective control matters because Delaware courts apply a rigorous judicial standard known as the entire fairness doctrine to transactions involving controlling shareholders. If a shareholder is deemed controlling, courts scrutinize two elements of any related deal: fair dealing (procedural fairness) and fair price (economic fairness).
This type of litigation is fact-intensive, drawn-out, and costly. But historically, determining when a shareholder had effective control has been uncertain and subjective—often hinging on vague factors such as boardroom influence, historical deference, or social relationships.
For instance, the Court of Chancery of Delaware in 2018 ruled Elon Musk was a controlling shareholder of Tesla Motors Inc. due to his board influence and personal relationships, even though he owned only 22% of the company’s stock. This subjected a board-approved deal to entire fairness review, creating litigation risk that SB21 would help avoid.
Cases like this demonstrate how subjective factors, rather than clear ownership thresholds, can trigger expensive legal battles—injecting uncertainty into a system meant to provide stability. SB21 would replace this ambiguity with a clear rule: Shareholders owning less than 33% of corporate stock are presumed not to have effective control.
Courts may still apply the entire fairness doctrine if plaintiffs offer particular evidence proving actual control. Nevertheless, the bill would minimize legal uncertainty by providing a measurable standard, shifting Delaware corporate law toward greater predictability.
This statutory change seems at first glance to benefit controlling shareholders while putting minority shareholders at a disadvantage. But that perspective assumes a zero-sum game. In reality, SB21’s bright-line rule would benefit corporations and all shareholders by reducing costly and unpredictable litigation.
Critics claim that SB21 would weaken minority protections,but they overlook that predictable corporate governance rules enhance corporate value, attract investment, and benefit even minority shareholders more than uncertain protections ever could.
Uncertainty raises the cost of capital, making it harder for companies to invest, grow, and return value to all shareholders. While minority investors may lose some litigation leverage, they would gain from more stable corporate governance, higher investor confidence, and improved stock price performance. On top of reducing lawsuits, SB21 would make Delaware companies a safer bet for all investors.
This bill isn’t the state’s first attempt to replace vague judicial standards with legislative clarity. The state faced a similar crisis in 1985 when the Delaware Supreme Court’s decision in Smith v. Van Gorkom dramatically increased director liability, triggering panic in boardrooms nationwide.
Delaware responded swiftly by enacting DGCL Section 102(b)(7), allowing corporations to limit director liability for breaches of the duty of care. Critics at the time called it a giveaway to corporate insiders, but its real impact was greater stability and predictability.
SB21 follows the same logic: It would reduce ambiguity-driven litigation costs, reinforcing Delaware’s reputation for responsive, business-friendly corporate governance.
Yet controversy persists because SB21 would disrupt powerful vested interests—particularly the plaintiffs’ bar. Shareholder litigation thrives on uncertainty. When no one can confidently predict a lawsuit’s outcome, parties settle, often at great cost. The bill would remove that leverage, undermining a business model built on legal ambiguity.
Critics who accuse Delaware of engaging in a race to the bottom mistake litigation opportunities for shareholder protection. Genuine shareholder interests align with clear, reliable governance rules that increase overall corporate value.
Some opponents to SB21, such as Delaware State Rep. Sean Lynn (D), claim the bill is unnecessary because Delaware was never at real risk of losing businesses to states such as Texas or Nevada, despite recent relocations by high-profile companies—but that argument misses the point. Delaware’s dominance in corporate law isn’t just about current market conditions—it’s about legislative agility and judicial expertise.
Texas markets itself as pro-business but lacks Delaware’s depth of corporate jurisprudence and legislative responsiveness. Nevada can’t match Delaware’s track record of consistent, reliable corporate governance. Even North Dakota, which tried attracting firms with shareholder-friendly corporate laws, failed to gain traction because corporate leaders value stability over novel governance experiments.
Delaware’s ongoing legislative clarity solidifies its own preeminence and sets a national benchmark. Other states seeking corporate investment will increasingly follow Delaware’s example, replacing unpredictable judicial standards with clear legislative frameworks.
SB21 thus would reshape corporate governance beyond Delaware’s borders, proving that predictability is the foundation of modern corporate law.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Seth Oranburg is professor at University of New Hampshire School of Law and director of the Program on Organizations, Business, and Markets at New York University’s Classical Liberal Institute.
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