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E-MailThe following post comes to us from John Armour, Professor of Law and Finance at the University of Oxford; Bernard Black, Professor of Finance and Law at Northwestern University and Professor of Finance and Law at the University of Texas at Austin; and Brian Cheffins, Professor of Corporate Law at the University of Cambridge. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
In the paper Delaware’s Balancing Act, which was recently made publicly available on SSRN, we examine the decline in Delaware’s popularity as a venue for corporate litigation. The Delaware court system has functioned to a significant degree as a de facto “national” court for U.S. corporate law. Corporate disputes arising in Delaware courts frequently generate extensive press coverage. Delaware law is a central part of the business law curriculum in U.S. law schools and law students learning corporate law are exposed to a steady diet of Delaware case law. Official comments accompanying the Model Business Corporations Act (M.B.C.A.), a model set of laws prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association followed by 24 states, frequently refer to Delaware cases to provide examples or as a source of further explanation. Courts in M.B.C.A. states often rely on Delaware case law to clarify gaps in the M.B.C.A. and sometimes even cite Delaware jurisprudence in preference to M.B.C.A. court decisions.
Given the pre-eminent status of Delaware courts in the corporate law field and given Delaware’s dominance of the state-versus-state competition for incorporations of publicly traded companies, one would anticipate that Delaware would incontestably be the leading venue for corporate law litigation. According to conventional wisdom, this is exactly the position. The conventional wisdom may well have been correct a decade ago. The ground rules, however, have changed. A dataset we have compiled of judicial opinions arising from cases where directors of public companies were named as defendants in a lawsuit arising under corporate law indicates that Delaware judges are handing down a declining minority of published judgments involving Delaware corporations. Datasets we have compiled for large M&A transactions, leveraged buyouts and instances of options backdating demonstrate similarly that plaintiffs’ attorneys are increasingly steering clear of Delaware courts and filing elsewhere.
Our findings suggest that a delicate balancing act engaged in by Delaware and its courts could be going seriously awry. In the competition for incorporation business states engage in, Delaware relies on its courts as a major selling point and Delaware courts need case flow to generate precedents on which “users” of Delaware corporate law depend. Lawsuits, however, will only be filed in Delaware courts if plaintiffs’ attorneys, aware of opportunities for forum shopping, anticipate it is worth their while to use the Delaware court system. It appears increasingly they do not, and with some justification. Not only have Delaware judges started to resolve disputes involving the selection of lead counsel in a manner likely to discourage filing by law firms seeking to take advantage of promptness and begun to scrutinize with increasing rigor attorneys’ fees agreed upon in settlements, pronouncements in recent cases suggest the Delaware judiciary is deeply suspicious of the business model many plaintiffs’ attorneys adopt. It should therefore not be surprising that Delaware is losing its cases.
It must be tempting for Delaware courts to take steps to recapture market share. A counter-reaction, however, is highly risky. The out-of-Delaware trend we have documented can be attributed partly to changes in federal securities law, meaning that even if Delaware courts had never changed course multi-jurisdictional corporate litigation would have become more common. Moreover, if Delaware courts do reverse stances they have adopted concerning attorneys’ fees, the selection of lead counsel and the business model of plaintiffs’ attorneys, the valuable technocratic and apolitical image Delaware courts have cultivated could be greatly tarnished. In addition, hints of a pro-litigation bias on the part of Delaware courts could alienate Delaware’s “customer base,” namely corporations contemplating shopping for a jurisdiction in which to incorporate. A balancing act that is currently a key feature of U.S. corporate law thus soon might come to a messy end.
The full paper is available for download here .
