Controlling Shareholders: Battle Over the Delaware Court’s Interpretation of Control Rights
By Arthur Kohn, Skytop Contributor / March 18, 2025
Arthur Kohn has practiced law since 1986, focusing on compensation and benefits matters, including executive compensation, pension compliance and investment, employment law, corporate governance and related matters. In 2012, he was named by the National Association of Corporate Directors’ Directorship magazine to the Directorship 100 list, which seeks to identify “the most influential people in the boardroom community, including directors, corporate governance experts, journalists, regulators, academics and counselors.” In 2021, he was appointed as a fellow to the American College of Governance Counselors.
Arthur is an adjunct professor at New York University School of Law, which he has taught the Taxation of Executive Compensation since 2009. He frequently speaks and writes about executive compensation, taxation and corporate governance matters. He repeatedly has been recognized for his work by the business and legal press, including Best Lawyers, Chambers USA, The Legal 500, Super Lawyers of New York and others.
Arthur received a B.A. from Columbia University and a J.D. from Columbia Law School, where he was admitted into the Accelerated Interdisciplinary Legal Education program, was appointed a Harlan Fiske Stone Scholar and received Phi Beta Kappa honors.
The Current Controversy Over Delaware Law
The State of Delaware will soon change its corporate law in response to criticisms about the way that law deals with controlling shareholder transactions.
Under longstanding Delaware law doctrine, transactions that impact the rights of corporate controllers receive special scrutiny when challenged in the Delaware courts. These issues have traditionally typically come up in take-private contexts, when a controlling shareholder negotiates with the board of a public company to buy out the public shareholders, but the conflict of interest issue can arise in any situation in which a controlling shareholder negotiates with the board of the controlled company. The current controversy largely arose in the context of a Delaware court’s rulings against Musk in connection with his incentive bonus arrangement, now valued at about $100 billion.
This is not the first time, nor will it be the last, in which a law is changed in response to business interests. There is of course a whole industry, the corporate lobbying industry, devoted to just that exercise. See The Business Of America is Lobbying: Explaining the Growth of Corporate Political Activity in Washington, DC, by Lee Drutman (2015, hereinafter “Lobbying”). As Mr. Drutman states, “as with advertising and R&D (or any strategy), companies will engage in political activity to the extent that the perceived benefits outweigh the perceived costs.”
Delaware Court’s Expanding View of “Corporate Control”
For those not familiar with the details of recent events in Delaware, the Delaware courts have been criticized for what is alleged to be an expanding view of what constitutes corporate control: “Delaware courts increasingly exhibit a reflexive suspicion of transactions involving a controlling shareholder. The court has operationalized that skepticism by notably broadening the definition of who qualifies as a controlling shareholder.” “A Course Correction for Controlling Shareholder Transactions, by Stephen M. Bainbridge (2025, hereinafter “Course Correction”).
This being a legal issue, there is disagreement about whether the definition of “corporate controller” has recently changed: “Rather than a dramatic or unexpected shift in the law of controllers, the decisions represent a conservative and common-sense application of longstanding equitable principles. The result is a clear and approachable framework that appropriately accounts for the ways control rights are allocated in modern corporations. That makes for both good law and good policy and best facilitates wealth creation.” “Delaware Corporate Law Myth-Busting: The ‘Expanding Definition’ of Controlling Stockholder”, by Ben Potts, Andrew Blumberg, and Tom James, of the plaintiff-side law firm Bernstein Litowitz Berger & Grossmann LLP (2025).
Course Correction further summarizes the events giving rise to the debate as follows:
Recent trends in Delaware caselaw have severely vexed many controlling shareholders and those who advise them. The most prominent example, of course, is Tesla CEO Elon Musk. After his $50 billion-plus compensation plan was struck down by the Delaware Chancery Court, Musk fired off a now notorious social media post recommending that one should “[n]ever incorporate your company in the state of Delaware.” Tesla subsequently reincorporated in Texas.
A less well known but even more vociferous example is Phil Shawe, the CEO of TransPerfect. Shawe has been a frequent critic of what he calls “Delaware’s legal cabal.” In 2018, Shawe successfully pushed to relocate TransPerfect from Delaware to Nevada. He continues his anti-Delaware campaign, however. In 2024, for example, Shawe financed a $2 million attack ad campaign criticizing the Delaware judiciary and bar.
Greater Leverage of Billionaires at the Expense of Other Shareholders
The controversy has been substantial. See “Controversial Delaware corporate law overhaul passed by Senate, heads to state House”, Delaware News Journal (March 13, 2025):
Proponents, including Gov. Matt Meyer, say the legislation is merely a "course correction" aimed at giving corporations' most powerful managers more predictability and consistency as they consider mergers, compensation plans and other business transactions that may involve a conflict of interest. . . . [The recent evolution in the law] has caused uncertainty within boardrooms by managers evaluating potential company transactions. This uncertainty has caused frustration and caused influential companies to question their future with Delaware as their company's legal home.
The Delaware News Journal goes on to report that on the other side:
Critics of the legislation say reports of companies considering leaving amount to a scare campaign to justify legislation that would give billionaires greater leverage to unfairly loot companies' value at the expense of other shareholders. They point to public data showing Delaware's incorporation industry has remained strong in recent years. They argue that the rule changes would curtail the ability of Chancery Court to serve as a check on abusive management and set a bad precedent: that disgruntled litigants and their legal representatives can end-run the court by simply going to the General Assembly to change the law.
Qualifying the Argument
There are three things that make this episode interesting.
The context. Coming during a period of remarkable change in governance at the start of the second Trump administration, the change in corporate law fits into the general storyline of the need for a change in the whole approach to government. That is, as illustrated by the quotations above, proponents of the change argue that the Delaware system is irremediably infected by some sort of wokeness (“reflexive suspicion of transactions involving a controlling shareholder”) born of the predations a crooked elite (“Delaware’s legal cabal”).
The situation also models the administration’s innate sense of the ability of power pushing around weakness. Delaware’s economy depends on income from corporations that choose to incorporate there, a situation that controlling shareholders can readily influence (as confirmed by recent Delaware caselaw: “In a much-anticipated decision, Maffei v. Palkon (Feb. 4, 2025), the Delaware Supreme Court held that the Tripadvisor, Inc. board’s decision to reincorporate the company from Delaware to Nevada is subject to the deferential business judgment rule standard of review—and not the significantly more onerous entire fairness standard.” here).
In sum, the context is consistent with the sentiment that we really do need to get around to killing all the lawyers, especially the cabalistic ones.
Expectations. In Lobbying, Mr. Drutman lays out two theories about why corporations engage in political lobbying. The analysis, which is focused on traditional lobbying efforts by corporate entities directed at the U.S. federal government, and not to billionaires strongarming small State government, nevertheless provides insights into how we should understand the Delaware law episode and what it says about the future. Under the first theory, corporations lobby, largely reactively, in response to specific situations, events or issues. Under the second theory, corporations lobby, largely proactively as time goes by, because they learn how to be effective at generating benefits from it.
In the circumstances, one could reasonably ascribe Musk’s anger at Delaware as a reaction to his being denied easy access to his bonus. Tesla and it’s shareholders seem ready, willing and able to pay the bonus. Nevermind that the impediment actually seems not to be the Delaware lawyers, but rather the accountants, who would require Tesla to book an expense that it didn’t expect to have to book.
Regarding the second theory, Mr. Drutman argues that there are three types of learning paths:
The behavioral theory of the firm suggests that routines are important, that once a company gets on the routine of doing politics, it is likely to keep on that routine. The resource-based view suggests that firms develop strategic assets, and that once firms develop the strategic asset of political engagement, they are likely to want to continue to pursue political engagement because they view it as a strategic asset. The agent-based view puts the focus on individuals, suggesting that once hired, lobbyists should be expected to make a compelling case for the company continuing to lobby.
The second theory seems to be the better explanation, even though there is a Pavlovian sense of learning that seems to be missing from the theories. In any case, the success of the effort to change Delaware law is likely to encourage further such efforts, both before and after the political pendulum swings.
Style. As also suggested by the quotes above (“Musk fired off a now notorious social media post”), the effort to change Delaware’s corporate law was not your typical K Street government lobbying approach (although there was some of that too). The interesting question is whether corporate lobbying will follow suit in the future. That seems unlikely, as there may continue to be corporate advantages to discretion, as illustrated by the apparent, but uncertain, market blowback regarding Tesla of the more in-your-face approach.
The Lawyers’ Last Word
In conclusion, the bottom line question is whether this episode really matters. In this note, if perhaps not in the business world, the lawyers get to have the last word:
At the heart of economic activity lies the need for certainty and predictability. The rule of law ensures that legal frameworks are transparent, consistent, and enforced impartially. In societies where the rule of law prevails, businesses can operate with confidence, knowing that contracts will be upheld, property rights protected, and disputes resolved fairly. This certainty reduces risks for investors and encourages entrepreneurship, leading to vibrant business ecosystems and higher levels of innovation.