United StatesHiding something in plain sight is a trope that mystery writers never tire of. It also can work in public policy, often when a major policymaking institution undergoes a dramatic change.
At the moment, the world’s attention is fixed on tariffs, fiscal deficits and market sentiment. Beyond these flashing headlines, though, there is a quiet move toward the diminution of the rights of minority shareholders in the US, which, if it grows, could threaten long-term corporate value.
Shareholder rights have financial value
Shareholder rights have value on financial markets, which is reason enough for caution on the part of policymakers. Delaware has long been known as the leader in establishing a legal infrastructure that carefully balances corporate governance and accountability to shareholders. The value of that careful balance is reflected in financial markets.
Institutional shareholders incorporate many factors into their investment choices, and one of them is the extent to which a corporation’s governance protects their interests.1 Academic research shows that the recommendations of sell-side analysts are more likely to have a favorable recommendation for companies with stronger shareholder rights.2 There is also a robust, positive correlation between stronger shareholder rights and positive abnormal returns, and that relationship is longstanding.3 In addition, one of the most useful valuation metrics many investors use is the alignment of managers’ incentives with firm value, and here too, shareholder rights are crucial. According to one academic paper, managers’ ownership of firms’ shares – often seen as a key mechanism for alignment of incentives with shareholder interest – enhances firm value when shareholder rights are strong, but reduces value when those rights are weak.4
Threats to minority shareholders’ rights: SB21
In March 2025, the Delaware legislature passed a new law, SB21, and the governor signed it into law. The details of what SB21 did to shareholder rights are arcane, but the bottom line is that the changes made Delaware corporate law much friendlier to controlling shareholders, and significantly less protective of the rights of minority shareholders.5,6 These changes “would overturn at least 34 Delaware Court decisions made by different judges over more than a 40-year period,” according to the Council of Institutional Investors (CII).7
The bill was rushed into passage, in a way that the CII called “reactive and unduly hasty,” following the departure of a few high-profile companies from incorporation in Delaware.8 That departure, often dubbed DExit, is described by some as a “flood” of corporations incorporating elsewhere.9
So why would anyone want to compromise shareholder rights? While it is possible to endow shareholders with too much power, there is very little evidence that Delaware corporate law does so. What provoked the action was the reincorporation of a few highly visible companies (including Tesla, SpaceX and Dropbox) in other states in reaction to some recent actions of the Delaware Chancery. But there is little to suggest that companies were rushing to the exits; one paper notes that in 2024, the number of registered corporations in Delaware had a net gain of 85 publicly traded companies, and over 80% of newly public US companies were incorporated there.10 There have been several episodes in the past when fears regarding a corporate exodus from Delaware were ignited, and thus far, none of them have put much of a dent in corporate decisions to incorporate there.11
Threats to minority shareholders’ rights: SEC guidance
In February 2025, the Securities and Exchange Commission (SEC) issued two new pieces of guidance, one on shareholder proposals and one that affects shareholder engagements. While these are both guidance, and not official changes in rules, they do signal a change of course that diminishes shareholder rights.
The SEC’s guidance on shareholder proposals introduces a stricter standard for judging whether proposals are significantly related to a shareholder’s business or address a significant policy issue, making it easier to obtain no-action relief that permits companies to exclude shareholder proposals from their proxy ballots. In addition, the new guidance permits companies to request no-action relief without providing a rationale for their position, again making no-action relief easier to apply for, and probably easier to get.
The result is that a record-high number of shareholder proposals have been withdrawn. While withdrawal usually is a signal that the company and the shareholder reached a mutually acceptable resolution of the issue in question, ISS, a corporate governance adviser, notes that the trend this year likely reflects something different: shareholders withdrawing proposals because they anticipate exclusion under the new guidance.12
The SEC’s guidance on Section 13(d) reporting addresses shareholder engagement with companies, which is a much more extensive enterprise than filing shareholder proposals. This primarily affects passive investors and those that own 5% or more of the stock of a company they wish to engage. The noteworthy part of this guidance is its specification of the types of engagements that might result in the investor being obliged to report under Schedule 13(d), which is far more time-consuming and onerous than reporting under the Schedule 13(g) standard which would normally apply. The guidance states that certain issues, including engagements that discuss “specific actions on social, environmental, or political policy” might trigger the requirement to report under the more onerous Schedule 13(d) standard.
Neither of these pieces of guidance will create a mushroom cloud on its own. But they do signal a change in direction toward the restriction of existing shareholder rights to engage with boards – who are, after all, there to represent the shareholders – on issues that shareholders see as important to performance. By singling out “environmental, social and political” matters, the SEC has created a marked effect on engagement, in which the interpretation of what is judged to be “environmental” could vary between investors, companies and SEC staff that enforce the rules.
Restrictions on shareholder rights, whether accomplished by a single pen stroke or many small ones, could have the same effect: likely increasing the distance and difficulty of shareholders making their priorities known to management. If a company believes that climate change is a “political” issue that might discourage dialogue over the issue, even if the shareholder sees climate risks as material, which many already do. That, in turn, could affect financial value: if shareholders have diminishing voices, they may choose to head for the exit instead.
Threats to shareholders’ rights: legislative and executive challenges
For several years, there have been many pieces of legislation introduced in both state and federal legislatures aimed at curtailing the use of sustainability information in investment decision making. Similarly, there have been many executive actions on the part of states that effectively implement curbs on using portfolio exclusions or sustainability factors in investment decision making for state pension funds.
To date, most of the action has been at the state level, where hundreds of so-called anti-ESG bills have been introduced. Most do not survive the legislative process, but a few have. For example, at least 35 states have considered or are considering measures to exclude investment managers that exclude certain industries such as firearms, tobacco, fossil fuels, mining and others, often deeming such exclusions to be “boycotts.” Others state that investment firms must make investment decisions and vote proxies solely on the basis of financial or “pecuniary” information, with the presumption that most sustainability-related factors are non-pecuniary or immaterial.13 While the federal government has not made any laws considered anti-ESG, there is now significant likelihood that that could happen following the 2024 election.14
In April 2025, there was federal legislation introduced that would codify that investment managers in ERISA plans would be held to a “pecuniary-only” standard that would prioritize financial returns over non-pecuniary factors. The presumption is that consideration of things like climate risk, environmental compliance and workplace practices are political issues with no materiality. While there is abundant literature showing that sustainability factors like these do in fact have correlations to financial value, the current crop of anti-ESG legislation simply presumes that they are not relevant to financial performance.15 And all of them would in some fashion limit shareholder rights, either by eliminating or curtailing consideration of material sustainability information in investment decision-making and proxy voting, or by excluding shareholders’ ability to file non-binding proposals for action on sustainability fronts that other shareholders may vote for or against on proxy ballots.
The importance of independence
Financial markets need to be shaped by the power of independent judgment based on empirical evidence, and not public policy guided by political persuasion. At the moment there is no agency that plays that role, which often means that court judgements are left to play the role of arbiter in making decisions that are important to financial markets. But as we have seen throughout our history, courts can have political leanings too.
1 Mahoney, J., Council of Institutional Investors, 12 March 2025: Letter on Delaware Senate Bill 21. Harvard Law School Forum on Corporate Governance
2 Social Science Research Network, July 2008: Do Analyst Recommendations Reflect Shareholder Rights?
3 Social Science Research Network, December 2012: Thirty Years of Shareholder Rights and Stock Returns.
4 Social Science Research Network, December 2014: Shareholder Rights, Managerial Incentives, and Firm Value.
5 This term applies to shareholders that own more than 50% of the voting power, or exercises control over the company without owning a majority of the shares.
6 See, for example: The D&O Diary, February 2025: Critics Launch Campaign Opposing Delaware SB 21; Business Law Prof Blog, February 2025: Delaware Decides Delaware Law Has No Value; Delaware Business Times, February 2025: Corporate law amendments propose major shift in shareholder rights.
7 Mahoney, J., Council of Institutional Investors, 12 March 2025: Letter on Delaware Senate Bill 21. Harvard Law School Forum on Corporate Governance
8 Mahoney, J., Council of Institutional Investors, 12 March 2025: Letter on Delaware Senate Bill 21. Harvard Law School Forum on Corporate Governance
9 Newsmax, April 2025: Elon Musk Applauds Latin Company Leaving Delaware.
10 Delaware Business Times, 4 March 2025: Viewpoint: Delaware’s manufactured corporate crisis.
11 CLS Blue Sky Blog, April 2025: SPACs, Multiplan and the DExit That Wasn’t; The CLS Blue Sky Blog, March 2025: What the Past Can Teach Us About SB 21 and the Threat of Corporate Exodus.
12 ISS Corporate, March 2025: The New Reality of U.S. Environmental & Social Shareholder Proposals.
13 See, for example: Morrison Foerster: Anti-ESG Legislation; Pleiades Strategy, 2021-2025: Live Anti-ESG State Legislation Tracker; S&P Global, January 2025: Dozens of new state anti-ESG bills introduced; federal legislation expected; Ropes & Gray, January 2025: ESG in 2025 for Legal and Compliance Professionals: 25 Predictions for ’25; Ropes & Gray, January 2025: ESG in 2025 for Legal and Compliance Professionals: U.S. Federal Anti-ESG Legislation to Watch For.
14 See both Ropes & Gray articles, Ibid.
15 See, for example, a comment letter to the Department of Labor on its proposed rule in 2020 that would have limited the use of sustainability factors in making investment decisions for ERISA platforms, Regulations.gov.
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