Early this year, within a matter of weeks, Delaware legislators proposed and enacted Senate Bill 21 (SB 21), a significant overhaul of the state’s corporate law code. This reform introduced more permissive rules for transactions involving conflicted controlling shareholders and imposed new constraints on shareholder‑plaintiffs, with the stated intent of curbing fiduciary litigation. It was the most significant rewriting of Delaware corporate law in more than half a century.

The bill sparked an intense debate among scholars and practitioners. Critics argued that the reform would facilitate excessive extraction of private benefits by controlling shareholders and other insiders at the expense of public investors; they also warned of laxer policing of controller transactions and criticized the speed and one‑sidedness of the legislative process. Supporters, on the other hand, contended that the new rules were a much‑needed correction to lower regulatory costs and reduce what they viewed as excessive litigation, ultimately benefiting all shareholders.

Both sides believed that their preferred framework would be better for investors. However, while there are plausible theoretical arguments in support of competing effects of the reform, there is no obvious reason why its overall effect on shareholder value should be positive or negative. The central question—Is this reform good or bad for the investors it is meant to serve? —is ultimately an empirical one.

In a new paper, “The Price of Delaware Corporate Law Reform,” we tackle this question by conducting a series of event studies. Our goal is to measure the stock market’s real‑time reaction to SB 21, to see how investors, with their capital on the line, valued this dramatic legal shift.

The High-Stakes Shift Away from “Double-Cleansing”

At the heart of SB 21 lies a fundamental shift in how Delaware law polices conflicts of interest involving controlling shareholders — the proverbial “800‑pound gorillas” of the corporate world. For years, Delaware courts protected minority investors through a “double‑cleansing” safeguard: controller transactions could escape the courts’ strict entire fairness review only if they won approval by both (1) a fully empowered special committee of independent directors and (2) a majority of the minority shareholders.

SB 21 overturns this legal regime. Except for squeeze‑outs, a single‑cleansing safe harbor now suffices: controller transactions avoid entire‑fairness review if either of the two mechanisms above is employed. The statute also supplies a bright‑line definition of a “controlling shareholder,” expressly excluding anyone who holds less than one‑third (33.3 percent) of the voting power. Furthermore, SB 21 adopts an enhanced presumption of director independence, making it more difficult for plaintiffs to challenge that status, and narrows the scope of shareholders’ right to inspect corporate books and records, a crucial information-gathering tool for derivative litigation. Collectively, these provisions push Delaware corporate law decisively toward a more controller‑friendly framework.

Measuring the Market’s Verdict

To assess the impact of SB 21, we conducted a series of event studies—a standard tool in financial economics that assumes markets swiftly embed new information into prices, causing stock returns to reflect an event’s effect on firm value within a short period of time. Our goal was to measure “abnormal returns,” the difference between actual stock returns and expected returns estimated from widely used statistical models.

The idea behind event studies is that a significant difference between actual returns and expected returns around the date of a certain event supports the hypothesis that the event affected the value of the company. We treated February 18, 2025—the first trading day after SB 21 was publicly announced—as the key event date, and examined the abnormal returns of the 1,000 largest Delaware‑incorporated firms, comparing them with a control group of the 1,000 largest U.S. companies chartered elsewhere.

Our results lend support to the critics’ concerns: SB 21 appears to have eroded shareholder value, with the losses concentrated among controlled and dual‑class firms. We summarize our findings below.

First, Delaware companies as a whole lost significant value. After the announcement of SB 21, Delaware firms recorded abnormal negative returns relative to non‑Delaware peers. On average, this under‑performance was 1.4% over our main event window—even after controlling for firm size, profitability, leverage, and other characteristics. In dollar terms, that fall represents roughly $700 billion in lost market capitalization for the Delaware companies in our sample.

Second, the damage was concentrated in firms most exposed to insider conflicts. Companies with more powerful shareholders were disproportionately impacted by SB 21. We study the relation between abnormal stock returns and two variables of corporate control.

The first variable is the percentage of votes that may be exercised by the shareholder(s) with the greatest voting power (voting block). We find that companies with a voting block greater than 15% (which we hypothesize are those affected by the new rules on controller transactions) suffered a 1.5% decline in stock returns relative to other Delaware companies. More generally, we find that abnormal negative returns are associated with the size of the voting block. Every 10%-point increase in a controller’s voting block is associated with a 0.25% reduction in abnormal returns.

The second variable is the presence of a dual-class structure, which gives founders and other insiders disproportionate voting power relative to their equity stake. Consistent with the critics’ concerns, the negative effect was more pronounced in dual‑class companies: their abnormal returns fell 2.3% more when compared to single‑class companies. Taken together, the evidence suggests that the market feared that the new, laxer rules on controlling shareholders’ conflicts are bad for minority investors.

Third, the market reacted very differently to earlier precedent. A few months before SB 21, in the Match case, the Delaware Supreme Court had reaffirmed the stricter double‑cleansing standard for all kinds of controller transactions. Although the court argued that its decision did not alter the existing law, the supporters of SB 21 thought that Match was problematic. However, when we examined the stock market reaction to Match, we found little or no response. The market seemed to agree with the court that nothing significant—and certainly nothing detrimental—had occurred.

Overall, these findings suggest that investors seemed comfortable with the existing “double cleansing” protections; the pronounced negative reaction to SB 21 likely reflects concern over seeing those safeguards dismantled.

The Price of Reform

Scholars have long argued that Delaware’s genius lies in allowing judges to fine‑tune corporate rules on a case‑by‑case basis. SB 21 flips that narrative on its head, codifying bright‑line safe harbors that courts can no longer temper with equity. Our research indicates that SB 21 may have compromised this value proposition, at least from the perspective of public investors. Although the reform may have satisfied corporate constituencies seeking lighter regulatory oversight, it carried a substantial cost to shareholder value. The data suggests that investors reacted as though the law were decidedly value‑destructive. These findings are consistent with what the critics of SB 21 feared—that the reform weakened critical governance protections and disproportionately favored controlling shareholders at the expense of minority investors.

The full paper is available here.