Delaware law is known to be friendly to management and to boards of directors.  Company founders and investors long have favored Delaware corporate law as being best for establishing good governance, predictability of result, and freedom from strike suits by disgruntled minorities.  Recent criticism of some seemingly contrary Delaware court cases, criticism by Elon Musk (whose ox was gored by a recent decision striking down his multi-billion dollar employment agreement) and the movement of some corporations out of Delaware, has for the first time created concern that pro-management corporate governance is under attack.

A couple of weeks ago Delaware’s legislature adopted a new statute, which the Governor has indicated he will sign, that further alleviates this concern that Delaware no longer will enforce board control with rigor.  Effective August 1, Delaware will make expressly legal a contract between investors and a company which will contractually compel boards of directors to undertake or refrain from specified corporate actions.  Last February, one such agreement was struck down by one Delaware Chancery Court member, although such contracts are not unusual as between corporations and major shareholders (typically PE or VC funds).  The new statute would make such typical agreements expressly permissible.

Frankly, the outcry against this new law, alleging that it restricts board action that should be absolute, while perhaps “correct’ in some abstract sense, seems foolish.  That horse ran out of the barn long ago.

First, general use of such agreements has long been an important element of capital formation and is reflective of established market logic, none of which previously  has in fact been judged to limit board primacy.  The new law merely reinstitutes the market status quo.  Second, it is clearly proper to place restrictions on what a corporation can do if contained within the charter (Certificate of Incorporation) of a Delaware corporation, and such charter provisions by their nature restrict  board action; thus, a contract is simply a different route to a fundamentally acceptable end.

The passage of this new statute is not bad news for Delaware governance, it is just a correction of a judicial blip.