Delaware Shareholders’ Move Could Change Startup Regulations

In a landmark decision for the startup ecosystem, Delaware Gov. John Carney has passed a law that redefines shareholder rights in venture-backed startups. The move comes at a critical time when corporate governance dynamics are rapidly evolving, requiring a fresh perspective on shareholder protections.

IN Tornetta vs MuskIn a significant legal decision in the Delaware Court of Chancery, Chancellor Kathaleen McCormick invalidated Elon Musk’s $55.8 billion compensation package awarded by Tesla, Inc. Musk quickly advised companies to avoid incorporating in Delaware, suggesting Nevada or Texas as alternatives. In June, Tesla shareholders approved the reinstatement of Elon Musk’s compensation package and decided to reincorporate the company in Texas.

Musk is not the only one challenging Delaware’s dominance. Moelis February’s decision to invalidate the shareholders’ agreement at Moelis & Co. drew considerable criticism and led to changes to the Delaware General Corporation Law. The changes, adopted last month, reverse Moelis decisions and authorization to introduce broad provisions into shareholder agreements.

The new law calls for a future of transparency and accountability, and may even prompt lawyers to consider requiring startups to provide more detailed disclosures to shareholders. The move would foster a culture of openness and trust. The change is especially important in the fast-paced, high-risk environment of venture-backed startups, where snap decisions often have long-term consequences.

The passage of this bill reexamines Delaware’s commitment to its corporate law dominance while adapting to the needs of modern business. While other states watch closely, Delaware’s proactive stance sets a new benchmark for corporate governance that could shape the future of startup regulation nationwide.

But hasty legislative changes could undermine Delaware’s stability and competitive advantage. Proponents argue that fiduciary duties will always trump contracts, but they overlook potential pitfalls. If shareholders don’t enjoy transparency and can’t challenge breaches of fiduciary duties through secret agreements, their power is meaningless.

Opponents, including many corporate law professors, say the bill was a hasty reaction and that the state’s highest court should address these legal issues. They worry that the bill allows companies to change management and board powers without shareholder approval or control and that it creates a separate set of internal corporate claims that could be litigated under law other than Delaware law.

In an era where the balance of power within corporations is constantly being recalibrated, Delaware’s latest legislation is a bold step for the startup ecosystem. As lawyers, it is our responsibility to understand and navigate these changes, ensuring that we continue to support the growth and success of innovative businesses.

The cases are: Tornetta v. Musk, Del. Ch., No. 2018-0408, decided June 7, 2024; and West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, Del. Ch., No. 2023-0309, heard July 18, 2024.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anat Alon-Beck is a professor of law at Case Western Reserve University School of Law.

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