The "Section 122 Revolution" in Delaware Corporate Law and What To Do About IT

Abstract

Recently, the Delaware General Assembly amended Delaware’s corporate code to allow boards to delegate their decision-making powers to stockholders via contract. These amendments are significant because they effectively overturn a recent Delaware Chancery opinion. They’re also problematic, for two reasons: (1) because they are out of step with the best reading of Delaware corporate law—what I have referred to elsewhere as “the perpetual entity model” of the corporation and (2) because they are inconsistent with Delaware law’s tendency to eschew monetary penalties in favor of a system built on informal reputation-based sanctions and norm internalization, all of which assumes that the board is at the helm. These problems could be largely addressed by limiting the amendments’ application to contracts with stockholders that either exercise control or are themselves members of the board. Otherwise, the law as written threatens to destabilize what we know about what corporations are and how corporate law works.

Keywords: corporate law, fiduciary duty law, Delaware law