Delaware SB 21: Lessons for the EU Inc

Delaware Senate Bill 21 (SB 21) offers important lessons for the proposed EU Inc. The success of corporate law depends not only on statutory rules but also on whether courts can interpret those rules predictably and distinguish value-enhancing private ordering from opportunistic uses of legal rules. Delaware corporate law relies on expert courts to police opportunism, and SB 21 has not altered that basic feature. By contrast, because enforcement of the EU Inc would be left to the courts of the member state where it has its registered office, the European Commission’s proposed 28th regime does not provide a uniform, predictable, and non-gameable corporate law framework.

In a recent paper, I argue that SB 21 makes Delaware courts’ role in policing opportunism more predictable without reducing its credibility. The statute is controversial because it creates a safe harbour for controlling-shareholder transactions that involve conflicts of interest and may result in investor expropriation. Controlling shareholders can structure conflicted transactions without risking litigation or judicial review if the conflicts are cleansed through the procedures prescribed by the statute. Yet investors have not fled Delaware. The reason, I argue, is that Delaware courts remain responsible for determining whether the cleansing procedures have been manipulated.

Controlling shareholders, the dominant ownership structure in continental Europe, can create value but also generate conflicts of interest. Concentrated ownership improves monitoring of management and allows controllers to pursue a firm-specific vision that diversified investors or professional managers might abandon under stock-market pressure. Such vision often requires asset specificity in the form of firm-specific physical or human capital. These tailored inputs are frequently supplied by the controlling shareholder or related parties, increasing the likelihood of self-dealing.

Self-dealing poses a challenge because it may either support valuable asset specificity or enable minority-shareholder expropriation. A controlling shareholder may, for example, be on the other side of a transaction involving specialized inputs or excessive executive compensation. Corporate law must therefore distinguish efficient related-party transactions from transactions designed to expropriate minority shareholders.

This distinction is difficult because firm-specific investments are hard to value ex ante and are often judged with hindsight bias ex post. Delaware courts have responded with self-restraint. After conflicts have been cleansed through fair procedure (approval by independent directors or an informed majority of minority shareholders), courts generally defer to directors’ decisions under the business judgment rule. Before SB 21, however, controlling-shareholder transactions remained subject to entire-fairness review because controllers could influence director independence and therefore procedural fairness. Combined with strong incentives for US plaintiff lawyers to litigate, this approach increased the litigation risks associated with pursuing asset specificity and idiosyncratic vision.

A recent law and economics theory of equity helps explain how SB 21 rebalances Delaware corporate law and clarifies the role of courts more generally. According to this theory, courts of equity function as a safety valve against opportunism, which Oliver Williamson famously defined as ‘self-interest with guile’. Equity courts such as the Delaware Court of Chancery do more than apply legal rules to the facts of the case; they also police conduct that complies with the letter of the law but defeats its purpose. A controlling shareholder, for example, might formally satisfy procedural requirements through compliant but compromised independent directors while guilefully expropriating minority investors.

Such opportunistic behaviour reduces welfare because investors will demand compensation ex ante through a higher cost of capital or contractual protections if opportunism cannot be controlled ex post. Delaware remains attractive because its courts can fill gaps in incomplete laws and contracts and police ‘compliant noncompliance’. At the same time, equitable review must be constrained for controlling shareholders to know what is allowed. If courts review every conflicted transaction aggressively, minority shareholders and plaintiffs’ lawyers may themselves behave opportunistically by bringing claims primarily to extract settlements, thereby over-deterring controlling shareholders.

SB 21 seeks to strike this balance by limiting judicial review of controlling-shareholder transactions to cases of opportunistic compliance. Procedural cleansing is not conclusive. Section 144(d)(6)(a) of the amended Delaware General Corporation Law expressly preserves investors’ right to seek equitable relief when a transaction fails to comply with the statute, the charter, the bylaws, or other legal obligations. Moreover, directors responsible for cleansing conflicts must be ‘disinterested’, act in ‘good faith’, and avoid ‘gross negligence’. These open norms invite fact-intensive judicial scrutiny of opportunistic conduct. SB 21 therefore preserves the authority of Delaware’s equity courts, protected by the state constitution, to determine whether the safe harbour’s conditions have genuinely been satisfied. In February 2026, the Delaware Supreme Court confirmed SB 21’s constitutionality in Rutledge v Clearway Energy Group LLC on precisely these grounds.

Although there are no equity courts in the EU, a specialized EU business court could operate as a functional equivalent of Delaware courts if it limited its role to preventing opportunistic use of the options offered by the EU Inc. Delaware’s experience demonstrates that a corporate law regime becomes attractive when expert courts can interpret it in a predictable and non-gameable way. The absence of an EU-level court to enforce the EU Inc undermines its attractiveness.

The EU Inc proposal contains potentially innovative private-ordering mechanisms, but their enforcement is uncertain because it will depend on the courts of the member state in which the company is registered. Although the proposal encourages member states to establish specialized judicial chambers, even the emergence of national business courts would not solve the problem. National courts, whether specialized or not, are likely to interpret open norms such as ‘good faith’ and ‘the company’s best interest’ through the distinct meta-rules embedded in their own legal cultures rather than limiting review to opportunistic compliance with the EU Inc’s bright-line rules. As a result, the EU Inc’s rules would be interpreted differently across jurisdictions, offering little advantage over existing national corporate law regimes.

Some member states already balance judicial self-restraint with the policing of opportunism. Dutch courts, for example, have developed a jurisprudence of limited review of corporate decision-making that accommodates controller-friendly innovations such as loyalty shares while protecting minority shareholders through the open norm of reasonableness and fairness. This resembles Delaware’s approach of permitting all private ordering that complies with bright-line statutory rules while policing opportunistic compliance with their letter. The same approach enabled Delaware courts to validate poison pills in the 1980s while developing standards governing their redemption.

Yet such fine-tuned jurisprudence is unlikely to emerge from EU member states because legal cultures differ significantly among them. Dutch courts reflect traditions of consensus and mediation that may not easily translate outside the Netherlands, while judges in other jurisdictions rely on different underlying assumptions and meta-rules. Consequently, national courts will inevitably reach different conclusions about what the EU Inc permits, often reflecting the boundaries of their own national corporate law. A genuinely European corporate form therefore requires a genuinely European court. The EU Inc should be enforced exclusively by an EU-level tribunal empowered to allow everything the Regulation does not prohibit and to interpret its open norms solely to prevent opportunistic exploitation of the letter of the law.

The author’s full paper can be accessed here.

Alessio M Pacces is Professor of Law & Finance at the Amsterdam Law School and the Amsterdam Business School.

This post is part of the OBLB's series of posts on the EU Inc proposal.