*

Delaware proposes safe harbors for controlling shareholder

transactions

*

Texas bill would limit shareholder lawsuits

*

Open corporate law competition between states

unprecedented in

recent years

By Tom Hals

WILMINGTON, Delaware, March 12 (Reuters) - A year after

Elon Musk urged U.S. companies to abandon Delaware as their

legal home and follow Tesla to Texas, legislators in the two

states on Wednesday considered bills in an unusual battle over

corporate law that critics say benefits powerful shareholders.

Until recently, Delaware was the undisputed home to

Corporate America, even though few companies have significant

operations in the state. Most large public companies charter

their business in Delaware to take advantage of its corporate

law governing relations between boards of directors and

shareholders. More than 20% of state budget revenue comes from

corporate fees.

Last year, after a Delaware judge rescinded Musk's $56

billion pay package as CEO of electric car maker Tesla,

a trickle of companies departed the state. Delaware leaders fear

that could turn into a stampede -- dubbed "DExit." In February,

state lawmakers proposed major changes to the corporate law.

On Wednesday, witnesses told the Delaware Senate Judiciary

Committee the bill was not driven by Musk but by recent court

decisions that created uncertainty about the corporate law.

"His commentary had a megaphone effect, but the legislation

expressly doesn't help him, and we're addressing the deeper

concerns from many companies and investors beyond just one

person," Amy Simmerman, a corporate attorney in Delaware, told

the committee.

The Delaware bill creates "safe harbors" from litigation for

transactions involving controlling shareholders, such as buying

a controlling shareholder's business or restructuring a class of

stock, although it will not impact a takeover of the company by

the controlling shareholder.

If a deal is approved by a board committee that has a

majority of independent directors or by a vote by unconflicted

shareholders, the deal cannot be reviewed by a court. Currently,

litigation can only be avoided if both steps are used and the

committee must be entirely made up of independent directors.

The bill also makes it harder to challenge whether a

director is independent. It defines "controlling shareholder"

and limits records available to shareholders who want to

investigate a deal for conflicts.

The bill aims to give Wall Street dealmakers confidence that

they can structure deals involving controlling shareholders to

avoid lengthy legal challenges by investors. Sponsors said it

also protects shareholders.

Opponents call it a "billionaires' bill," that favors

powerful controlling shareholders like Meta Platforms ( META )

CEO Mark Zuckerberg and makes it harder for public shareholders

to monitor conflicts. Meta is reportedly considering leaving

Delaware.

Christopher Foulds, a Delaware attorney who represents

shareholders, told the senate committee that investors holding

trillions of dollars of capital oppose the bill, which he said

prevents stockholders from challenging conflicted transactions.

"The controlling stockholder could put their best friend on

a committee and negotiate against them, and that's fine,

according to their bill," he said.

State Senator Bryan Townsend has said the bill was drafted

with support from Governor Matt Meyer and is sponsored by the

legislative leadership of both parties.

The committee ended the hearing without taking action.

On Wednesday morning in Austin, Texas, state legislators

discussed Texas House Bill 15, which would enshrine in the code

the so-called business judgment rule. This protects boardroom

decisions, even if they turn out poorly, as long as they were

taken in good faith by independent directors.

The bill also allows companies to bar derivative lawsuits

unless they are brought by an investor with at least 3% of the

company's stock. Derivative lawsuits are cases brought by

investors against the directors for the benefit of the company.

Musk's pay case was a derivative lawsuit, which was brought

by an investor with nine Tesla shares.

Governor Greg Abbott has said he would sign the bill. Its

sponsor, Representative Morgan Meyer, told a state House of

Representatives committee the bill would "make Texas the best

state to incorporate in," although only a few large companies

have. The committee heard testimony without taking action.

Brian Quinn, a professor of corporate law at Boston College

Law School, said there is no recent precedent for states to

compete so openly over corporate law. "That's like an old topic

from the 1930s," he said. "That's over, because Delaware won the

race."