Wachtell Has Its Fingerprints All Over Delaware Law Changes

Delaware recently changed its corporate laws to make them more favorable to companies being sued by their shareholders and the mega-firm Wachtell, Lipton, Rosen & Katz was deeply involved in that process.

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That’s raising some eyebrows because Wachtell is also a go-to firm for companies in Delaware, often called the corporate capital of the world. Lawyers from other prominent firms, like Wilson Sonsini and Richards, Layton & Finger, also helped shape the law.

On this episode of our podcast, On The Merits, Bloomberg Law’s Jennifer Kay and Roy Strom talk about what firms like Wachtell did in Delaware, what they stand to gain, and what all this has to do with Elon Musk’s so-called “DExit.”

Do you have feedback on this episode of On The Merits? Give us a call and leave a voicemail at 703-341-3690.

This transcript was produced by Bloomberg Law Automation.

Roy Strom:
Hello and welcome back to On the Merits, the news podcast from Bloomberg Law. I’m Roy Strom.

Delaware is the corporate law capital of America. More companies are registered in Delaware than any other state, and a big reason why is the state’s legal system. That system has been undergoing major changes ever since a judge struck down a massive compensation package for the world’s richest man, Elon Musk. The ruling led Musk to reincorporate his companies in Texas, and a handful of other companies threatened to do the same. You might have heard of DEXIT.

So the state legislature passed a bill that changes some of its laws and court processes. Today we’re going to tell the story of a big law firm that is playing a major role in the entire saga. It’s Wachtell, Lipton, Rosen, and Katz, which historically has been among the most profitable major law partnerships in the country.

Jennifer Kay is here to tell the story. Jennifer, thanks so much for your time.

Jennifer Kay:
Thank you for having me.

Roy Strom:
So let’s start with the law that the Delaware governor signed earlier this year. Could you just tell us what does the law do?

Jennifer Kay:
So the governor of Delaware is Matt Meyer. He is a Democrat. He just took office at the beginning of the year and basically had to start his administration facing threats from people like Mark Zuckerberg, companies like Dropbox and TripAdvisor, and other major companies and firms who want out of Delaware because they say that the courts are just unfair to companies of that stature.

The courts in Delaware, they say, have shifted too far in favor of shareholders and other states are offering better deals. So the governor really quickly pulled together some allies to get a bill into the legislature that would address that criticism and try to keep those companies and those corporate leaders happy enough to stay in Delaware where they’ve been for a long time.

The governor says that this law protects important state interests, and that would be about a quarter of the state budget that comes from the fees generated by the 2.1 million business entities that are incorporated in Delaware.

Roy Strom:
Delaware law is sort of like the state’s golden goose. And so the state and the lawyers there, I think, have been careful to take good care of that.

Making big changes can sort of upset this balance you’re talking about between protecting companies and protecting shareholders. Could you tell me a little bit about how Delaware has traditionally approached making any major changes to those corporate laws? And is that the same process they followed with this latest legislation?

Jennifer Kay:
So it’s no surprise that lawyers wrote the law here, right? That’s just how it works everywhere. Lawyers make laws. And it’s no surprise when you have corporate interests dictating the law writing process. Delaware is just like everybody else. That’s just lobbying.

What was different here is that the process for corporate law amendments in Delaware, typically that process starts with the State Bar Association’s Corporation Law Council. It’s a very influential committee. Usually that’s the origin for any changes that are brought before Delaware lawmakers.

But what happened here, Governor Meyer took office and pretty much immediately had to address all of these threats. So the drafting of this bill came together very quickly. And it started not with the Bar Association Corporation Law Council, but by a panel of lawyers who worked outside that committee process. And that panel included a law professor, a partner from a prominent Delaware firm that has ties to Tesla, which is Richards, Layton and Finger, and two former Chancery Court judges who now work, one at Wachtell Lipton and the other at Wilson Sonsini. And these are both very prominent law firms with ties to major companies that have come through Chancery Court.

It was very fast-tracked and it got through the legislature with not all that much pushback from lawmakers.

Roy Strom:
So you mentioned that a Wachtell partner was involved. It’s a firm you’ve done reporting on. They’re usually defending companies against plaintiffs firms in Delaware, those who represent shareholders. Tell me a little bit more about how Wachtell became involved in all of this, sort of what they’ve helped to do so far.

Jennifer Kay:
So one way that we noticed that Wachtell was involved was that on that panel that was drafting the bill in the first place, it included an attorney on Wachtell staff named Leo Strine. He is also a former chief justice of the Delaware Supreme Court, and he also served on the Chancery Court bench. He was a vice chancellor and then the chief judge, the chancellor for many years.

I did reach out to Leo Strine and to Governor Meyer’s office to talk about this issue, but they both declined to comment. And I spoke with one of his former clerks, and they told me that the changes in this bill that he helped to write are things that he’s been advocating for for a long time, that these are things that he’s long felt that Delaware corporate law needed to change.

And then Wachtell has just continued its association with the governor’s office here by being on a team that will defend the law before the Delaware Supreme Court. So now they’re working for the governor’s office.

Roy Strom:
So this law is being challenged in court?

Jennifer Kay:
Yes. So the law is being challenged as unconstitutional. And the Delaware Supreme Court has stepped in to say, you know, we want to look at this issue before it goes through any trial process and drawn out appeal. We know there’s a lot of attention. We know there’s a lot of questions about its constitutionality. We’re just going to take that right off the top.

Roy Strom:
So in terms of Wachtell’s involvement, any indication that plaintiff’s firms or the lawyers who they traditionally go up against are upset by that? Or do they view that as any sort of conflict of interest that a defense firm like Wachtell is playing such a prominent role in the process?

Jennifer Kay:
I mean, shareholder attorneys definitely oppose the legislation. They were joined by institutional investors and many legal scholars in arguing that, you know, this Dexit phenomenon, we’ve seen it in a handful of companies, maybe 10, 15 companies, but you’re not seeing it at a crisis level that would completely blow up the Delaware budget. And they are concerned that the limits that the law puts on shareholders seeking access into internal books and records, you know, they’re concerned that the law makes it harder for shareholders just to bring litigation to chancery court in the first place.

They haven’t weighed in so much on the conflict of interest question so much as the this just isn’t fair to shareholders and shareholders are losing their ability to bring claims to basically the premier court in the U.S. for handling these kinds of questions.

Roy Strom:
So to take a step back from this specific issue, you’re reporting sort of shows that law firms are now not just arguing the law, but also maybe getting more involved in crafting the law the way Wachtell did here. How has that become more common and do you have a sense of why firms are more eager to do that type of work?

Jennifer Kay:
So, right. Wachtell isn’t alone in doing the kind of work we’re seeing here in Delaware. It’s not a uniquely Wachtell action. There’s not a huge number of the big law firms doing this, but there’s kind of an emerging part of some law firms pitches to their corporate clients now, especially when those clients might be doing a lot of business in or they’re facing a lot of litigation in venues like California, New York and Delaware.

And basically it’s a way for Wachtell and these firms to say, we offer like even more for your money. We get way more bang for your buck because we’re not only advocating for you at the highest level with the top talent in the courtroom, but we’re also meeting with legislators. We’re also shaping the law in a way that potentially benefits you, our client. What are your interests? Are you concerned about this regulation? Are you concerned about how a court can rule on these corporate governance questions? We’re working on that for you.

So it’s a really high level of corporate advocacy. It’s lobbying. We’re used to seeing lobbying, but this is at a much higher and much more personal level.

Roy Strom:
Yeah. It seems like another example of the fact that the way the law is written, the way the rulings come down, ultimately lawyers have an incentive to sort of lobby for their clients in that way. And it also impacts their business one way or another.

Jennifer Kay:
And it gives these firms, whether you’re Wachtell or another firm doing this, particularly if you are a Washington facing law firm, it gives you a competitive edge when talking to big corporate clients, particularly in the tech world, in the energy sector, and in the health field, anywhere you have to deal with both corporate governance questions and regulatory issues, especially at a state level.

And what might be more important to think about is what comes next. Not just, is there another Wachtell coming down the line to rewrite your corporate laws or another firm from the Am Law 100, but what is going to come up in the next Delaware legislature next year? Or what is going to come up in Texas or Nevada? Because this is the second or third year in a row where we’ve had these major corporate law amendments tied to particularly unpopular chancery court rulings.

So there’s this thought in some quarters that the corporate lawmaking process is now becoming too rushed and too politicized. And there’s too much influence from the companies who want to do what they want at the board level, or there’s too much deference being shown to shareholders and shareholders need to be reined in. And these other states, Texas and Nevada, they’re stepping up to say, hey, we could be a better Delaware here. Come look at our liability protections and think about moving your companies here.

So I think maybe we might next year see more of the Wachtells of the big law world coming into Delaware or other state legislatures and seeing even faster legislative reactions to court rulings against any of the billionaires du jour. The conversation shows that there’s going to be an awful lot of work, an awful lot of big law firms involved across states in helping to figure out where all this goes and who the winners and losers are.

Roy Strom:
So Wachtell is a good example of what’s going on in Delaware. But I’m sure as you follow these corporate law changes across the state, you’ll be running into plenty of big law firms.

Jennifer Kay:
I guess it’s really all fun and games until you start seeing the big law firms building up a Nevada-based practice or a Texas-based office when you start seeing some lawyers move into or some new hires for those big firms in those other states.

Wyoming is another state that’s made a big play for business and corporations. They’ve set up their own kind of Chancery Court. So I think you see a lot of commuting between like New York and Delaware. That’s a pretty easy train ride. I guess if we start seeing more flights between New York and Nevada or New York and Wyoming, then that might signal an even bigger change to how the law firms are looking at those other states and how those other states are running corporate governance.

Roy Strom:
Wyoming, not just for big law vacations anymore.

Jennifer Kay:
Not a lot of people, but a whole lot of LLCs, apparently.

Roy Strom:
Well, Jennifer, thank you so much. I enjoyed it.

Jennifer Kay:
Yeah, thank you.

Roy Strom:
And that’ll do it for today’s episode of On the Merits. For more updates, visit our website at news.bloomberglaw.com. Once again, that’s news.bloomberglaw.com.

The podcast today was produced by myself, Roy Strom, and David Schultz. Our editors were Chris Opfer and Alessandra Rafferty. Our executive producer is Josh Block. Thanks everyone for listening and see you next time.