DealLawyers.com Blog

I recently blogged about the possibility of constitutional challenges to Delaware’s SB 21.  That possibility became a reality last week with the filing of a complaint in a case captioned Plumbers & Fitters Local 295 Pension Fund v. DropBox. The case has been assigned to Chancellor McCormick, but the complaint was filed under seal, so we don’t yet know the details of its allegations.  If the challenge is along the lines of what was suggested in that blog, a finding that SB 21 is unconstitutional could create the potential for some pretty significant collateral damage.

Here’s why – as noted in that blog, the argument that SB 21 is unconstitutional is premised on the idea that the Delaware General Assembly doesn’t have the authority under the state’s constitution to restrict the Chancery Court’s equitable jurisdiction to less than what it was in 1792.  If that’s right, then at least one other significant statutory provision of Delaware law may be at risk. According to this 2011 law review article by Prof. Lyman Johnson – which Prof. Eric Talley cited in suggesting that SB 21 may be unconstitutional – the ability of LLCs to avoid judicial review of provisions in their operating agreements purporting to waive fiduciary duties also may run afoul of Delaware’s constitution.

While a conclusion that contractual fiduciary duty waivers weren’t bulletproof wouldn’t matter to public companies, it would be a very big deal to thousands of Delaware LLCs, and as the article points out, would make Delaware’s LLC statute much more indeterminant than those of many other states. So, in a worst-case scenario, a challenge to Delaware’s legislative efforts to address uncertainty regarding transactions with controlling stockholders could conceivably result not just in a judicial decision that invalidates key parts of those efforts, but one that creates significant uncertainty for alternative entities organized under Delaware law.

– John Jenkins