Corporate Protection vs Shareholder Rights: Delaware Senate Bill 21

On March 25, 2025, the Delaware legislature enacted Senate Substitution 1 for Senate Bill 21 (“SB21”) into law. (Delaware General Assembly). SB21 limits the scope of the State’s Court of Chancery jurisdiction to hear certain complaints from shareholders regarding transactions between corporations and their directors. Id.

Delaware is a popular domicile for many corporations around the United States with more than 2.1 million legally incorporated entities. (Delaware Division of Corporations, Delaware.gov). Notably, Delaware is the domicile for nearly 66% of Fortune 500 Companies, and over 80% of all U.S. based initial public offerings (“IPOs”), passed the bill to ensure that large corporations incorporated in the state did not reincorporate in states which may provide better protections against lawsuits from minority shareholders. (Lauren Hisch & Michael de la Merced, New York Times). The state and the 1.06 million Delawareans who live there heavily rely on corporate revenue. Id.

Critics of SB21 argue that it unfairly weakens the rights of minority shareholders. Id. Proponents argued the bill was necessary to prevent a flood of corporations from leaving the Delaware domicile. (Lora Kolodny, CNBC). The Delaware Supreme Court recently upheld the bill following a challenge to its constitutionality. (Rutledge v. Clearway Energy Grp. LLC, No. 248, 2025, 2026 WL 548504 (Del. Feb. 27, 2026)). This post examines the events and debates leading to SB21’s passage within the context of Delaware’s unique approach to business litigation.

The legislature passed SB21 primarily to restrict Delaware’s Court of Chancery. (Delaware General Assembly). As an equity court, the Court of Chancery specializes in corporate law and commercial transactions. (Delaware Court of Chancery). One Chancellor and six Vice Chancellors serve on the court as arbiters in corporate litigation, empowering them to quickly and inexpensively resolve cases, attracting companies to incorporate and operate in the state. Id. Prior to SB21, shareholders could bring a wide range of claims before the court. Id. However, litigation involving Elon Musk combined with concerns that the court favored minority shareholders led the Delaware legislature to draft SB21. (Lauren Hisch & Michael de la Merced, New York Times).

In 2018, Tesla and Elon Musk agreed to a new compensation package in which he would receive stock options for 304 million shares, worth $7 billion at the time. (Jack Ewing & Peter Eavis, New York Times). Greg Varallo, after gathering interested Tesla shareholders objecting to this compensation package, filed suit in in Delaware’s Court of Chancery, arguing that Musk’s role in shaping his own compensation package violated board independence and sought cancellation of the stock options. Id. In 2024, Chancellor Kathaleen McCormick, agreeing with plaintiffs’ argument, cancelled the compensation agreement. (Lauren Hisch, New York Times). At the time of her ruling, the valuation of Musk’s stock options had risen to $51 billion. (Jack Ewing & Peter Eavis, New York Times). Upset by this result, Musk took to X, formerly Twitter, urging others to “never incorporate your company in the state of Delaware.” (Elon Musk, X). In the years since Musk began his fight against Delaware, some prominent companies including Dropbox and Coinbase have reincorporated in other states, particularly Nevada and Texas, while others, most notably Meta, have seriously considered reincorporation out of Delaware. (Mike Isaac & Eli Tan, New York Times).

The economic threat posed by the perceived risk of losing large corporations like Meta motivated the passage of SB21. (Lauren Hisch & Michael de la Merced, New York Times). In the 2026 budget, Matt Meyer, the governor of Delaware, projected incorporation revenue and related taxes at approximately $2 billion, representing 27.2% of Delaware’s total budgeted income, notably an increase of 17% over the past five years. (Delaware Office of Management and Budget). At the March 12, 2025, Senate Judiciary Committee on the bill, local corporate litigator Amy Simmerman, testified that fifteen of her clients were considering reincorporation out of state but delaying due to possible passage of SB21. (Delaware Senate Judiciary Committee). Simmerman emphasized the need for government intervention to prevent corporations from leaving the state, a result which would greatly damage Delaware’s economy. Id.

Lawrence Hamermesh, a law professor at Widener University Delaware Law School, who helped draft the bill, appeared before the Senate Judiciary Committee’s hearing to clarify SB21’s purpose and address committee concerns. (Delaware Senate Judiciary Committee). According to Professor Hamermesh, SB21 codified and clarified common law principles including the definition of a controlling shareholder and which suits may be brought before the court. Id. The bill protects Delaware corporations from lawsuits against transactions, like Musk’s compensation package, in which interested parties were involved in negotiations as long as the agreement was “approved or ratified by a majority of disinterested directors . . . or stockholders.” (Delaware General Assembly). Although supporters argue SB21 protects corporations from unnecessary lawsuits while protecting Delaware’s economy, many critics, argued that the bill does not contain enough provisions to protect plaintiffs. Id.

Critics of SB21 argue it weakens the voices of minority shareholders. (Lauren Hisch & Michael de la Merced, New York Times). One critic, James An, a law professor at Stanford Law School, called the bill a “shakedown” which simply enriches oligarchs. (Delaware Senate Judiciary Committee). Other critics challenged the necessity of the bill, pointing to data showing incorporation in Delaware has increased since Musk’s tweet. (Lauren Edmonds, Business Insider). During the Senate public comment period, corporate litigator Joel Friedlander expressed concern that SB21 was merely an attempt by the judiciary to overturn rulings on behalf of businesses displeased with the results. (Delaware Senate Judiciary Committee). However, Professor Hamermesh testified that no cases would be overturned by the bill. (Delaware House Judiciary Committee). In response to concerns raised by Representative Sophie Philips, Simmerman, cited Yale Law Professor Roberta Romano’s scholarship supported the proposition that legislative correction of common law is both common and appropriate. Id. Despite concerns, SB21 was signed into law on March 25, 2025. (Delaware General Assembly).

A month later, in April 2025, Thomas Rutledge filed suit challenging the constitutionality of SB21. (Rutledge v. Clearway Energy Grp. LLC, No. 248, 2025, 2026 WL 548504 (Del. Feb. 27, 2026)). Rutledge, a Clearway Energy stockholder, objected to the company’s purchase of “an asset related to a wind project in Idaho,” contending the transaction was not approved by a majority of shareholders. Id. at *1. Rutledge argued that SB21’s elimination of “the Court of Chancery’s ability to award equitable relief” violated the Delaware Constitution. Id. at *2. He further argued that applying SB21 to events predating its passage—including those underlying his claims—was unconstitutional, as it “eliminate[d] causes of action that had [already] accrued or vested . . . .” Id. at *1. The Delaware Supreme Court unanimously upheld SB21 as constitutional and confirmed the law would not apply retroactively. Id. at *13-14.
The story of SB21’s passing began and now ends with Musk. In a recent appellate order, Musk’s original compensation package was restored and was valued at $139 billion at the end of 2025. (Tom Hals, Jan Wolfe, & Abhirup Roy, Reuters). Despite the unanimous decision upholding the law and Musk’s victory, he continues to fight McCormick and Delaware’s Court of Chancery. (Mike Leonard, Bloomberg Law). The Court of Chancery, more clearly bound to SB21’s rules following the Rutledge ruling, will see its power and jurisdiction limited.