Delaware’s Shifting Judicial Role in Business Governance

Randall S. Thomas is Professor of Law and John S. Beasley II Chair in Law and Business at Vanderbilt University School of Law, Robert B. Thompson is Peter P. Widenbruch, Jr. Professor of Business Law and Georgetown University Law Center, and Harwell Wells is I. Herman Stern Professor of Law and Temple University James E. Beasley School of Law. This post is based on their recent paper, forthcoming in The Business Lawyer, and is part of the Delaware law series; links to other posts in the series are available here.

What do Delaware judges do all day—and what does it mean for the governance of American businesses? In our new article, “Delaware’s Shifting Judicial Role in Business Governance,” we take a close look at the work of the country’s preeminent business court, Delaware’s Court of Chancery, in order to examine the changing nature of judicial review of governance of American businesses. Drawing on a detailed study of all cases filed in 2018 in Delaware, and comparing our findings to a previous survey of such litigation two of us performed almost twenty years ago, our new study reveals that the past two decades have seen fundamental changes both in the corporate and business law issues brought before the Chancery Court and in the kind of work that court is doing.

Once the bulk of the court’s work was straightforward: the Chancellors applied fiduciary duties to resolve governance disputes in publicly held corporations. The common law of fiduciary duties, as developed by the court, was (and remains) the backbone of corporation law in the United States. When for instance takeovers became the dominant corporate governance issues in the 1980s, the court issued a series of opinions applying fiduciary duties to the facts and developed a new jurisprudence for mergers and acquisitions in cases such as Unocal, Revlon, and Blasius. Our previous study, which looked at all cases filed in 1999 and 2000, found that the main work of the Court of Chancery during that period was to apply fiduciary duties to resolve disputes over the governance of publicly traded corporations, usually in an acquisition setting.

Our new study shows that’s no longer the case. Today the Chancery Court’s ambit is far broader, with new kinds of disputes and new business entities now constituting a notable part of the Court’s workload. Cases requiring the court to reach a decision by applying fiduciary duties are still important but no longer predominate. Alongside these cases appear a significant number of cases in which the court is called on to resolve a governance dispute either by applying provisions of the Delaware General Corporation Law or the state’s limited liability company (LLC) and limited partnership (LP) statutes, or by interpreting provisions of contracts the business’ participants have entered into, typically an LLC operating agreement. In 1999-2000, for instance, our study found that just over half (55.9%) of the court’s lead cases dealing with governance were fiduciary duty cases; in 2018 that was down to 32.5%, with corresponding increases in the cases that required the court to resolve a governance dispute by applying statute or interpreting a contractual provision.

Another, possibly related, change is in the type of business entities that appear in front of the court. The Chancery Court has traditionally been seen as venue for litigation over governance of publicly held corporations, and the 1999-2000 study revealed only a handful of cases involving the then-new business entity, the LLC. In 2018, in contrast, almost 30% of the governance cases involved LLCs. Finally, the court’s caseload is increasingly dominated by privately held firms—some corporations, some not. Out of 403 total lead cases in 2018, only 128 (31.8%) involved publicly held corporations. In sum, over the last twenty years the Chancery Court has been asked to resolve a broader array of disputes concerning a broader array of business entities.

The court’s workload apart from these cases has also changed. Its judges are hearing more of what we call in the Article “commercial non-governance cases.” These arise out of ordinary contractual disputes, often relating to mergers and other transfers of assets between arm’s-length parties with no fiduciary relationship. The number of such cases found in 1999-2000 was negligible, but in 2018 approximately 14% of the court’s caseload were such cases. In addition, the number of cases arising under the court’s traditional equity jurisdiction has also risen, though they remain the same as a percentage of the court’s overall caseload.

Apart from documenting major changes in business entity litigation over the past two decades, our Article makes two additional contributions. First, it proposes novel measures to determine the extent to which different kinds of cases heard in the Chancery Court take up different amounts of judges’ and litigants’ time and resources. We began with the intuition that some types of cases likely take more time and require different kinds of attention from both judges and lawyers than do others. We then sought to develop a series of measures that might capture this difference, calculating, for instance, the number of days each case was pending, the number of substantive motions a court was asked to decide in each case, and the number of docket entries for each case. Our results are suggestive rather than definitive, but they indicate that different kinds of cases indeed consume different amounts of resources. To take one example, our study indicates that cases requiring the court to interpret LLC and LP agreements tend to consume more judicial resources than do cases requiring it to apply statutory provisions. As two Delaware judges have written, it is often “head-hurting” work.

Finally, our study sheds new light on the long-debated question of state competition for business formation and litigation. We find that LLCs now provide Delaware almost thirty percent of the overall income the state earns from entity chartering, and that total revenue traced to incorporations and entity organization is approaching 40% of the state’s income. This strongly suggests that incentives for competing for LLC organizations have increased for Delaware. At the same time, our evidence tends to show this is “weak” competition, and that is the overall “package” Delaware offers, rather than any LLC-specific features of the law, that attract LLC organizers. Similarly, our data on commercial non-governance filings suggests Delaware is competing for litigation business, as distinct from chartering, more than it has in the past.

The complete paper is available for download here.

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