Kenneth Khoo is an Assistant Professor at the National University of Singapore Faculty of Law, and Roberto Tallarita is an Assistant Professor of Law at Harvard Law School. This post is based on their recent paper.
Early this year, within a matter of weeks, Delaware legislators proposed and enacted Senate Bill 21 (SB 21), a significant overhaul of the state’s corporate law code. This reform introduced more permissive rules for transactions involving conflicted controlling shareholders and imposed new constraints on shareholder‑plaintiffs, with the stated intent of curbing fiduciary litigation. It was the most significant rewriting of Delaware corporate law in more than half a century.
The bill sparked an intense debate among scholars and practitioners. Critics argued that the reform would facilitate excessive extraction of private benefits by controlling shareholders and other insiders at the expense of public investors; they also warned of laxer policing of controller transactions and criticized the speed and one‑sidedness of the legislative process. Supporters, on the other hand, contended that the new rules were a much‑needed correction to lower regulatory costs and reduce what they viewed as excessive litigation, ultimately benefiting all shareholders.
Both sides believed that their preferred framework would be better for investors. However, while there are plausible theoretical arguments in support of competing effects of the reform, there is no obvious reason why its overall effect on shareholder value should be positive or negative. The central question—Is this reform good or bad for the investors it is meant to serve? —is ultimately an empirical one.
In a new paper, “The Price of Delaware Corporate Law Reform,” we tackle this question by conducting a series of event studies. Our goal is to measure the stock market’s real‑time reaction to SB 21, to see how investors, with their capital on the line, valued this dramatic legal shift.
The High-Stakes Shift Away from “Double-Cleansing”
At the heart of SB 21 lies a fundamental shift in how Delaware law polices conflicts of interest involving controlling shareholders — the proverbial “800‑pound gorillas” of the corporate world. For years, Delaware courts protected minority investors through a “double‑cleansing” safeguard: controller transactions could escape the courts’ strict entire fairness review only if they won approval by both (1) a fully empowered special committee of independent directors and (2) a majority of the minority shareholders.
SB 21 overturns this legal regime. Except for squeeze‑outs, a single‑cleansing safe harbor now suffices: controller transactions avoid entire‑fairness review if either of the two mechanisms above is employed. The statute also supplies a bright‑line definition of a “controlling shareholder,” expressly excluding anyone who holds less than one‑third (33.3 percent) of the voting power. Furthermore, SB 21 adopts an enhanced presumption of director independence, making it more difficult for plaintiffs to challenge that status, and narrows the scope of shareholders’ right to inspect corporate books and records, a crucial information-gathering tool for derivative litigation. Collectively, these provisions push Delaware corporate law decisively toward a more controller‑friendly framework. READ MORE »
