Musk-Linked Corporate Law Rewrite Would Stymie Investor Scrutiny

Investors taking aim at corporate wrongdoing will face a steeper climb in Delaware court if lawmakers adopt changes aimed at placating Elon Musk and other business titans.

The overhaul proposed by Delaware Gov. Matt Meyer (D) follows news of potential relocations by several major companies, including Meta Platforms Inc. The “DExit” trend remains a trickle so far, with opposing camps divided about whether the new measures would stanch the bleeding by giving dealmakers more leeway—or worsen it by undercutting the state’s elite courts.

Most of the attention is going to sections of Senate Bill 21 that would override legal guardrails around controlling stockholders like Musk, who has spent a year on the attack after a Delaware judge voided his record $56 billion Tesla Inc. pay package.

But provisions that mostly cut investors off from board members’ texts and emails during the litigation planning stages could have just as far-reaching an impact.

Those parts of SB21 would combine with sections strengthening the presumption that directors are independent of controllers—and one another—to create a Catch-22, said Labaton Keller Sucharow LLP partner Mark Richardson. The bill would raise the bar for showing conflicts of interest while putting the evidence out of reach, he said.

“They’re gutting shareholders’ ability to identify problems,” Richardson said. “The circular logic is fully intentional.”

‘Discrete Rifle Shot’

The edits to the investor access law known as Section 220 reflect the ballooning toll of lawsuits seeking corporate “books and records,” often in a bid to drum up fiduciary breach claims. Although Delaware’s Chancery Court is staffing up, the rise in records litigation over the past 15 years has contributed to a workload crisis.

Those disputes “have gotten extremely burdensome to both companies and the court,” according to Widener University law professor Lawrence Hamermesh, a drafter of the legislation. “It has blown up way beyond what the statute was originally about, which was a discrete rifle shot to look at key documents.”

There are several culprits for the growing records docket. Judges started taking a more skeptical view of claims by investors who failed to use “the tools at hand"—Section 220—and conferring the right to lead high-stakes deal challenges on the shareholder with the most detailed complaint, not the first filer.

“That began a process of expanding what counts as a book or record,” according to Lawrence Cunningham, director of the University of Delaware’s Weinberg Center for Corporate Governance.

Until then, “nobody thought you could get text messages in a 220 request,” said Columbia University law professor Dorothy Lund.

Caremark

Those changes converged with the emerging Caremark doctrine, a famously hard-to-win oversight liability theory that requires proving corporate leaders turned a blind eye to red flags. Because the cases are such long shots—only about a third go anywhere, and none has ever reached trial—it’s all but impossible to bring one without getting company files.

The claims generally target the most serious scandals—corporate “traumas” inviting broader fallout over presidential elections, data privacy, the opioid crisis, workplace harassment, or aviation disasters.

Reducing records access would “cripple Caremark,” according to Southern Methodist University law professor Carliss Chatman.

The original text of SB21, unveiled last month, would have categorically limited shareholders to official board records. A fine-tuned version circulated March 3 by the Corporation Law Council—the influential state bar committee that ordinarily produces corporate law amendments—would make informal materials available, but only if a shareholder offers “clear and convincing evidence” of a “compelling need.”

The proposal would also limit investors to documents that specifically track the stated reason for their request, overturning a court decision that gave shareholders the right to any records within the scope of Section 220, regardless of their particular purpose.

Board Conflicts

The restrictions would work in synergy with safe harbor clauses in the same bill that largely block judges from deciding when director conflicts of interest justify elevated scrutiny, transferring that responsibility to boards themselves, said Tulane University law professor Ann Lipton. Those decisions could be made by boards with conflicts of their own, she said.

“That’s a loophole you could drive a truck through,” Lipton said.

Rebutting the presumption of board independence would usually call for texts and emails that would be off the table under SB21, according to Richardson. “The door would be closed from the beginning,” he said.

A large subset of corporate cases, moreover, are shareholder derivative lawsuits filed on a company’s behalf against its leaders. Because the claims technically belong to the business, investors filing them have to clear the threshold step of demanding board action or showing director conflicts would make it futile.

If the beefed-up presumption of independence extends to the derivative context—something that may have to be litigated—the cutback on informal materials could close the courthouse across the board, not just to deal challenges, according to Lipton.

“Texts and emails are where the real conversation happens,” she said.

Whack-a-Mole

The goal of SB21 is to minimize fishing expeditions “on the chance you might turn up something viable” while ensuring shareholders still get what they need to pursue meaningful litigation, according to Hamermesh. Erring in either direction has costs, but “that’s a legislative judgment,” he said.

“Tell me what you knew about Robyn Denholm and Elon Musk without digging into their emails,” Hamermesh said, referring to Tesla’s board chair. “My guess is it was a lot. If you can’t show lack of director independence without getting all the emails and texts, maybe that’s not a good case.”

But the bill could spur a game of whack-a-mole, prompting judges to revise the rules that make records litigation a central part of the corporate ecosystem in the first place, according to Chatman.

Relaxing the Caremark requirements or taking a less forgiving view of relationships among board members would be “fair game,” she said. “If I were a judge, that’s what I would do.”