delaware’s balancing act
TRANSCRIPT
Delaware’s Balancing Act
John Armour, Faculty of Law and Oxford-Man Institute for Quantitative Finance, Oxford University
Bernard Black, Northwestern University Law School and Kellogg School of Management
Brian Cheffins, Cambridge University Faculty of Law
(October 2010 draft)
European Corporate Governance Institute Law Working Paper No. xx/2010
Northwestern University Law School Law and Economics Research Paper No. 10-04
University of Oxford Legal Studies Research Paper No. xx
This paper can be downloaded from the Social Science Research Network at:
http://ssrn.com/abstract=1677400
Delaware’s Balancing Act
John Armour, Bernard Black and Brian Cheffins*
Abstract
Delaware’s courts and well-developed case law are widely seen as integral elements of Delaware’s success in the competition among states for incorporations. Today, however, Delaware’s popularity as a venue for corporate litigation is under threat. Increasingly, as the empirical evidence summarized in this paper shows, corporate cases involving Delaware-incorporated companies are being brought and decided elsewhere. This paper examines the implications of this “out-of-Delaware” trend, emphasizing in so doing a difficult balancing act that the Delaware courts face. If Delaware accommodates litigation too readily, plaintiffs’ attorneys will file a plethora of “weak” cases and companies, fearful of lawsuits, may begin to incorporate elsewhere. On the other hand, if plaintiffs’ attorneys believe the Delaware judiciary is unwelcoming, they will tend to file cases in other courts. Delaware could then lose its status as the de facto national corporate law court and may no longer offer the rich body of up-to-date case law precedent upon which “users” of Delaware corporate law depend. Delaware’s overall corporate law “brand” could in turn become less valuable, thus jeopardizing its pre-eminence in the competition for incorporations.
JEL classification: K22, K41
* Armour is Lovells Professor of Law and Finance, Faculty of Law and Oxford-Man Institute for Quantitative Finance, University of Oxford, email: [email protected]. Black is Chabraja Professor atNorthwestern University, Law School and Kellogg School of Management, email: [email protected]. Cheffins is S.J. Berwin Professor of Corporate Law, Faculty of Law, Cambridge University. e-mail: [email protected]. We thank Mitch Fagen, Jose Miguel Mendoza [ ] for excellent research assistance, and Columbia Law School [] for financial support. We are grateful for feedback received at seminars organized by Stanford Law Faculty and the University of San Diego Law School and at a USD Law Center on Corporate and Securities Law Panel. We have also benefitted from discussions with various lawyers, including Randall Baron, Peter Carter, Travis Downs, William Lafferty, Roger Magnuson, Ted Mirvis, Stephen Radin and Bryn Valler.
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I’m a litigator—and there’s only one rule in litigation: Three things matter—location,
location, location.1
I. Introduction
A defining feature of U.S. corporate law is regulatory competition. Companies are
free to choose which state’s corporate law will govern their affairs and states vie – to some
extent -- to attract companies to incorporate.2 There has been intense scholarly debate as to
whether this competition for incorporations, which Delaware dominates, is deleterious or
salutary -- a “race to the bottom” or a “race to the top”.3 In this paper we focus on a different
aspect of corporate federalism that has received little academic attention but has important
implications for the operation of corporate law. Our concern is the venue for litigation, and
more particularly the “market share” of the pre-eminent corporate court in the U.S., the
Delaware Court of Chancery, which resolves at first instance corporate law cases filed in
Delaware.
The Delaware court system has been referred to as “the Mother Court of corporate
law”4 and the Delaware Chancery Court’s key role in shaping key corporate law doctrines has
led some to suggest Delaware corporate law has become the nation’s corporate law.5 Yet
1 Anywhere But Chancery: Ted Mirvis Sounds an Alarm and Suggests Some Solution, M&A JOURNAL, May 2007, 17, 18 (quoting Ted Mirvis, a partner at Wachtell, Lipton). 2 Lucian Ayre Bebchuk and Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering the Competition Over Corporate Charters, 112 YALE L.J. 553, 553 (2002). 3 The “race to the bottom” terminology was first coined by William L. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663, 666 (1974) (actually using the phrase “race for the bottom”). Ralph Winter was the first to refer to a “race to the top”: Ralph Winter, Private Goals and Competition Among State Legal Systems, 6 HARV. J.L. & PUB. POL'Y. 127, 128 (1982). On the nature and intensity of the debate, see Jill E. Fisch, The Peculiar Role of the De1aware Courts in the Competition for Corporate Charters, 68 U. CINCINNATI L. REV. 1061, 1064-66 (2000); Lawrence A. Hamermesh, “The Policy Foundations of Delaware Corporate Law”, 106 COLUM. L. REV. 1749, 1762-65 (2006).
4 Kamen v. Kemper Fin. Services, 908 F. 2d 1338, 1343 (7th Cir. 1990), rev’d on other grounds 500 U.S. 90 (1991), quoted in Jerue v. Millett, 66 P.3d 736, 745, n. 26; Stephen A. Radin, The New Stage of Corporate Governance Litigation: Section 220 Demands – Reprise, 28 CARDOZO L. REV. 1287, 1288 (2006).
5 Gregory A. Mark, The Corporate Economy: Ideologies of Regulation and Antitrust, 1920-2000 in Michael Grossberg and Christopher L. Tomlins (eds.), THE CAMBRIDGE HISTORY OF LAW IN AMERICA:
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empirical evidence we have collected shows that Delaware’s popularity as a venue for
litigation in corporate law cases is waning. The “out-of-Delaware” litigation trend we
document in turn highlights a difficult balancing act the Delaware’s judiciary faces. If
Delaware accommodates litigation too readily, plaintiffs’ attorneys will file a plethora of
“weak” cases and companies, fearful of lawsuits, may begin to incorporate in other states.
On the other hand, if plaintiffs’ attorneys believe Delaware courts are unwelcoming, plaintiffs
will tend to launch their actions elsewhere. Recent efforts by the Delaware courts to
discourage the filing of “weak” cases illustrate the point, as these have likely contributed to
the out-of-Delaware trend we document. Moreover, it appears that Delaware has not merely
been losing “weak” cases to other courts but also various “good” cases as well. This implies
that if the out-of-Delaware trend we document persists the value of a rich body of case law
widely credited with enhancing Delaware’s standing among U.S. corporations could be
compromised. As a final twist, a brazen effort to recapture litigation “market share” could
discredit the widely-respected Delaware judiciary and potentially jeopardize corporate
perceptions of Delaware, thus undermining Delaware’s dominance of the race for
incorporation business.
While views differ on whether the state competition for incorporations of publicly
traded companies is beneficial, there is little doubt that Delaware is the big winner. More
than 80% of public companies that opt to be incorporated under the laws of a state other than
their headquarters state select Delaware, and about 60% of all U.S. public companies are
incorporated there.6 Hence, while Delaware faces a threat of federal incursion,7 among the
VOLUME III – THE TWENTIETH CENTURY AND AFTER (1920-) 613, 627 (2008) (“Delaware law had become the nation’s corporate law); Douglas M. Branson, Indeterminacy: The Final Ingredient in an Interest Group Analysis of Corporate Law, 43 VAND. L. REV. 85, 115 (1990) (“Delaware law is becoming our national corporate law especially on technical and finer points of law”). 6 Bebchuk and Hamdani, supra note xx 567 (tbl. 2), 578 (tbl. 5). 7 Mark J. Roe, Delaware’s Competition, 117 HARV. L. REV. 588 (2003); Marcel Kahan and Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 VAND. L. REV. 1573 (2005).
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states Delaware is first among equals. Law professor Mark Roe has even speculated that
Delaware corporate law could be “too big to fail”8 and Delaware Chancery Court judge Leo
Strine has acknowledged that the state could be perceived as “a bit of a fat and happy
monopolist.”9
Various explanations have been given for Delaware’s dominance. The state’s small
size and heavy reliance on revenues from incorporation taxes reputedly combine to yield a
credible commitment to be responsive to corporate need.10 There are network externalities
associated with choosing Delaware law, in the form of a well-developed infrastructure of
professionals supplying incorporation and legal services.11 Finally, and crucially for our
purposes, the court system is an oft-cited strength of the Delaware “brand”.12 While there has
been intense scholarly debate about whether the regulatory competition among states for
incorporation business is a “good” or “bad” thing, there is general agreement that the
judiciary is a key ingredient of Delaware’s success. From the race to the bottom angle,
Delaware judges have been complicit in watering down protections offered to stockholders so
as to ensure that the state offers “manager-friendly” corporate law.13 From the race to the top
perspective, Delaware-incorporated firms benefit ex ante from the guidance offered by the
extensive precedents generated by prior cases, and ex post from the decision-making
8 Mark J. Roe, Is Delaware’s Corporate Law Too Big to Fail?, 74 BROOKLYN L. REV. 1 (2008). 9 Leo E. Strine, Delaware’s Corporate-Law System: Is Corporate America Buying an Exquisite Jewel or a Diamond in the Rough? A Response to Kahan & Kamar’s “Price Discrimination in the Market for Corporate Law”, 86 CORNELL L. REV. 1257, 1265 (2001). 10 Hamermesh, “Policy”, supra note xx, 1755-59; ROBERTA ROMANO, THE GENIUS OF AMERICAN
CORPORATE LAW 38, 44 (1993). 11 Michael Klausner, Corporations, Corporate Law, and Networks of Contracts, 81 VA. L. REV. 757, 846 (1995). 12 On the idea that Delaware’s legal regime is a “brand”, with the judiciary as a key element, see Omari Scott Simmons, Branding the Small Wonder: Delaware’s Dominance and the Market for Corporate Law, 42 U. RICH. L. REV. 1129 (2008). 13 See, for example, Cary, supra note xx, 670, 672 (“Delaware corporate decisions lean...to minimal standards of director responsibility”; “judicial decisions can best be reconciled on the basis of a desire to foster incorporation in Delaware”).
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expertise of the Delaware Chancery Court judges, who typically have experience as corporate
lawyers before moving to the bench and who focus primarily on corporate law cases once
there.14
Delaware’s corporate law delegates regulatory power liberally to its judges, often
eschewing sharp legislative rules in favour of ex post judicial standards. Hence, much of
what matters in Delaware corporate law is a judicial construct, including the fiduciary duties
of directors, officers and controlling shareholders and the prerequisites for bringing a
derivative suit.15 Because judges can only decide cases that come before them, the depth and
clarity of Delaware’s corpus of case law could be compromised if the flow of cases were to
dry up. A key element of the state’s success would thereby be jeopardized.16 Delaware
judges are aware of this, with Vice Chancellor Strine saying in a 2007 case that “The
important coherence-generating benefits created by our judiciary’s handling of corporate
disputes are endangered if our state’s compelling public policy interest in deciding these
disputes is not recognized.”17
One might assume there would be little risk of the Delaware courts losing their case
flow.18 After all, who would not want to litigate in the state that in 2009 the U.S. Chamber of
Commerce’s Institute for Legal Reform ranked first among the fifty states for the quality and
fairness of its litigation environment for the seventh year in a row?19 There are factors,
14 Bernard Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 NW. U.L. REV. 542, 589-91 (1990); William H. Rehnquist, The Prominence of the Delaware Court of Chancery in the State-Federal Joint Venture of Providing Justice, 48 BUS. LAWYER 351, 354 (1992); Robert Daines, Does Delaware Law Improve Firm Value?, 62 J. FIN. ECON. 525, 540 (2001). 15 Kahan and Rock, “Symbiotic”, supra note xx, 1591-92; Hamermesh, “Policy”, supra note xx, 1778. 16 Faith Stevelman, “Regulatory Competition, Choice of Forum, and Delaware’s Stake in Corporate Law”, 34 Del. J. Corp. L. 57, 122 (2009). 17 In re Topps Shareholders Litigation 924 A. 2d 951, 959 (Del. Ch., 2007). 18 Friedrich K. Juenger, Forum Shopping, Domestic and International, 63 TUL. L. REV. 553, 554 (1989). 19 Delaware Courts Ranked No. 1 by U.S. Chamber of Commerce, http://www.delawareemploymentlawblog.com/2008/04/delaware_courts_ranked_1st_by.html (last visited Jan.
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however, that could tilt the balance away from Delaware. For instance, plaintiffs’ attorneys
might avoid Delaware because they believe its judges tend to favor corporate defendants.
Delaware’s high rank from the Chamber of Commerce may be exactly what they don’t want!
Plaintiffs’ attorneys could also react to what the Delaware judiciary think of them. Delaware
judges have over the past decade been adopting something of a “get tough” policy when they
think plaintiffs’ attorneys have brought weak cases. By-products of this campaign have
included criticism of the business model plaintiffs’ attorneys typically adopt, efforts to deter
the hasty filing of cases that can amount to a “lead counsel Olympics race”20 and close
scrutiny of attorneys’ fees agreed upon in settlements. It should not be surprising, given
these trends, that the plaintiffs’ bar has begun to look beyond Delaware when deciding where
to launch corporate litigation.
Observers have noted that to limit federal encroachment, the Delaware courts and
legislature need to engage in what is perceived to be “principled” lawmaking and to avoid
being seen as too friendly to corporate defendants.21 The audience for the balancing act we
stress here is different. Our concern is not with the federal government but with plaintiffs’
attorneys and, more broadly, “users” of Delaware corporate law, these being corporations and
their directors and legal advisers.
Decisions plaintiffs’ attorneys make about litigation strategy do much to dictate the
venue of lawsuits, and if they perceive Delaware’s litigation climate to be too “chilly”, they
might well opt to steer clear of Delaware when filing actions arising under corporate law.
The cases Delaware loses could well be not only “weak” cases but also “good” cases the
19, 2010); Delaware is #1 (June 3, 2009), http://blog.delawareinc.com/tag/us-chamber-of-commerce/ (last visited Jan. 19, 2010). 20 King v. VeriFone Holdings Inc., 2010 WL 1904972 * 6 (Del. Ch., 2010). 21 Simmons, “Branding”, supra note xx, 1182-83; E. Norman Veasey and Christine T. DeGugliemlo, What Happened in Delaware Corporate Law and Governance From 1992-2004? A Retrospective on Some Key Developments, 153 U. PA. L. REV. 1399, 1501-2 (2005) (making the point generally about Delaware lawmaking rather than referring specifically to judges).
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state’s courts need to foster the evolution of Delaware case law and to ensure Delaware
remains the de facto national corporate law court. The experience with litigation where
directors allegedly breached duties they owed by engaging in the practice of options
backdating illustrates the point. As we discuss in more detail in the main body of the paper,
cases involving Delaware companies that were meritorious enough to generate a settlement of
$10 million or more were only very rarely filed in Delaware courts. To the extent a
pronounced out-of-Delaware litigation trend erodes the value of Delaware case law, the
appeal of Delaware incorporation relative to other options will be diminished. Delaware
lawyers correspondingly would lose legal business, and Wilmington, the state business
center, would become a sleepier and somewhat less affluent town. The balancing act of the
Delaware courts therefore could go badly wrong.
Our empirical research, reported in detail elsewhere22 and summarized here, shows
that an out-of-Delaware trend could indeed pose a serious risk to Delaware courts and to the
Delaware brand more generally. Evidence we have collected encompassing judicial opinions
and cases filed indicates that until the beginning of the 2000s the Delaware courts held a
dominant market share in corporate litigation involving Delaware companies. Today, they do
not. Over the past decade, it has become increasingly common for lawsuits involving
Delaware companies to be filed in federal court or another state and for judges from federal
court and state courts other than Delaware to write decisions – sometimes important ones --
on corporate law issues.
Our finding that the proportion of corporate law cases being filed and ruled upon in
the Delaware courts is dropping prompts a series of follow up questions. What has caused
the erosion of Delaware’s market share? To the extent that Delaware-incorporated firms
22 John Armour, Bernard Black and Brian Cheffins, Is Delaware Losing its Cases?, unpublished working paper, available on request.
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want to have corporate law disputes litigated in Delaware, what steps can they take to channel
lawsuits back towards Delaware? Might the migration away from Delaware courts cause
public companies to reconsider incorporation under Delaware law? How might the Delaware
judges take corrective action to reverse the out-of-Delaware trend? What steps could the
Delaware legislature take to restore Delaware’s litigation market share? And is the out-of-
Delaware trend one to be welcomed?
We address each of these questions in our paper. In so doing, we provide a novel
twist on a much-debated topic. There is a large literature on competition between U.S. states
for corporate charters.23 However, subject to a few exceptions,24 academics have by-passed
the topic of corporate law forum shopping. Given that the out-of-Delaware trend we
document seems to be reorienting the litigation landscape for U.S. public companies and
could significantly alter the race for incorporation business that has captured so much
scholarly attention, matters seem destined to change going forward. This paper provides an
intellectual platform for the debates that are likely to ensue.
The paper proceeds as follows. Part II outlines the nature and extent of the out-of-
Delaware trend by providing an overview of the jurisdictional terrain and by summarizing
our empirical data on point. Part III identifies various reasons why Delaware has been losing
its cases. Part IV focuses on the delicate and perhaps untenable balancing act the out-of-
Delaware trend poses for Delaware’s judges. Part V canvasses potential extra-judicial
responses to the migration of cases away from Delaware. Part VI puts the case for reform
23 See Kagan Kocaoglu, A Comparative Bibliography: Regulatory Competition on Corporate Law, Georgetown Law Working Paper, March 2008, available at http://ssrn.com/abstract=1103644. 24 Stevelman, “Regulatory”, supra note xx; Sara Lewis, Transforming the ‘Anywhere But Chancery’ Problem Into the ‘Nowhere but Chancery’ Solution, 14 Stan. J.L. BUS. & FIN. 199 (2008); Jessica Erickson, Corporate Governance in the Courtroom: An Empirical Analysis, 51 WILLIAM & MARY L. REV. 1749, 1761-62 (2010) (indicating derivative lawsuits were commonly filed in federal court).
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into context by spelling out positive and negative features of the out-of-Delaware trend. Part
VII concludes.
II. The Nature and Extent of the Out-of-Delaware Trend
A. The Jurisdictional Terrain
The conventional wisdom is that Delaware enjoys considerable success as a forum for
litigation, in the sense its courts address a constant flow of corporate lawsuits and do much to
set the tone for U.S. corporate law by opining on key corporate law issues.25 Even those who
criticize and those who praise Delaware generally agree on the popularity of the state’s
courts. William Cary, when he famously characterized Delaware in a 1974 law review article
as the winner in a race to the bottom for incorporation business, remarked on “the relative
ease of entry into Delaware courts for suits against corporate directors.”26 Law professor
Roberta Romano, a strong advocate of the “race to the top” interpretation of Delaware’s
success, indicated in a 1993 book on Delaware corporate law that “most Delaware firms are
in fact sued in Delaware.”27 The pre-eminent status of Delaware courts has strong historical
roots. Norman Veasey, a former chief justice of the Delaware Supreme Court, Delaware’s
appellate court, observed in a 2004 law review article that that there had been over the
previous 90 years “a constant stream of litigation” in Delaware courts and said that when he
worked in the 1950s as a summer clerk at Sullivan & Cromwell, a Wall Street law firm,
“almost all cases I worked on were in Delaware.”28
25 Branson, “Indeterminacy”, supra note xx, 91 (“the never ending flow of lawsuits to Delaware Chancery Court and appeals to the Delaware Supreme Court”); Jonathan R. Macey and Geoffrey P. Miller, Toward an Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469, 496 (1987); Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 COLUMBIA L. REV. 1908, 1926 (1998). 26 Cary, supra note xx, 686. 27 Romano, Genius, supra note xx, 41. 28 E. Norman Veasey, Musings from the Center of the Corporate Universe, 7 DEL. L. REV. 163, 164, 167 (2004).
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Despite the widely recognized pre-eminence of Delaware courts in the corporate
sphere it cannot be taken for granted that corporate law litigation involving Delaware-
incorporated firms will take place in Delaware courts. Due to the internal affairs doctrine, the
corporate law of the state of where a corporation is incorporated governs disputes between a
corporation, its managers and its shareholders, even if the corporation does not have any
operations or other meaningful presence in that state.29 Correspondingly, Delaware law will
govern corporate law litigation involving Delaware-incorporated companies headquartered
elsewhere. The internal affairs doctrine does not similarly guarantee, however, that Delaware
courts will be the choice of forum.
When a corporation is incorporated under the laws of one state the courts of another
state may assert personal jurisdiction over defendants who have the requisite minimum
contacts with that state and can assert general jurisdiction over a defendant with extensive
local contacts.30 Correspondingly, a plaintiff shareholder launching corporate law
proceedings in relation to a Delaware-incorporated company should at least have a choice of
forum between Delaware and the state where the company has its headquarters.31 Moreover,
a claim based on state corporate law can potentially be filed in federal court on the basis of
diversity-of-citizenship jurisdiction, such as where a corporation is incorporated under
Delaware law and has its principal place of business in another state.32 Another option a
plaintiff shareholder may have will be to lodge a state law claim for breach of fiduciary duty
29 Larry E. Ribstein and Erin Ann O’Hara, Corporations and the Market for Law [2008] U. ILL. L. REV. 661, 662; Jack B. Jacobs, The Reach of State Corporate Law Beyond State Borders: Reflections Upon Federalism, 84 N.Y.U. L. REV. 1149, 1159-60 (2009). 30 Ribstein and O’Hara, supra note xx, 669-70. 31 Personal jurisdiction will be available against the corporation and its directors in Delaware, as a condition of incorporation. On circumstances where a court in a third state might take jurisdiction, see Rabkin v. Philip A. Hunt Chem. Corp., 547 A. 2d 963, 966 (Del. Ch., 1986) (holding that there was sufficient “minimum contact” for Delaware courts to take jurisdiction over a Virginia corporation with its principal place of business in Connecticut because the corporation had established a Delaware subsidiary to carry out the merger attacked in the litigation). 32 Judicial Code, 28 U.S.C.A. 1332(c).
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against a corporation’s directors in a federal court as a “pendent” claim to a lawsuit arising
under federal securities legislation on the basis there is “a common nucleus of operative
fact”.33 Diversity jurisdiction will often suffice for a derivative suit but rarely for a class
action, which means the viability of the claim arising under corporate law will usually hinge
on the viability of securities lawsuit with which it is associated.
Due to concerns about brazen litigation tactics adopted by class action lawyers and
doubts about the ability of state courts to exercise sufficient control over the plaintiffs’ bar,
Congress has introduced various reforms designed to expand federal court jurisdiction over
class actions.34 Correspondingly, it is now much harder for a plaintiff to sustain most types
of class action lawsuits in state court than was formerly the case. Matters are different,
however, with cases arising under corporate law, which means class action reform left
Delaware’s pre-eminent status unaffected.
Congress preserved the status quo in the corporate law context by including what are
known as Delaware “carve outs” in legislative measures intended to ensure most class actions
were litigated in federal court.35 Hence, while the Securities Litigation Uniform Standards
Act of 1998 (SLUSA)36 stipulates securities class actions are readily removable to federal
court, actions for misdisclosure based on the corporate law of a company’s state of
incorporation are excluded from the regime.37 Similarly, while the Class Action Fairness Act
of 2005 dramatically expanded federal subject matter jurisdiction over state law class actions
33 Stanley A. Kaplan, Fiduciary Responsibility in the Management of the Corporation, 31 BUS. LAW. 883, 890 (1976); United Mine Workers v. Gibbs 383 U.S. 715 (1966) (setting down the test for when there will be pendent jurisdiction). 34 Howard M. Erichson, CAFA’s Impact on Class Action Lawyers, 156 U. PA. L. REV. 1593, 1597, 1601 (2008). 35 Kahan and Rock, “Symbiotic”, supra note xx, 1588-89; Lawrence Hamermesh, Reputation of Delaware Courts Wins Carve-Out in U.S. House Bill Regulating Class Actions, DEL. L. WEEKLY, Oct. 5, 1999, 7. 36 Pub. L. No. 105-353, 112 Stat. 3227 (1998), codified in scattered sections of 15 U.S.C. 37 15 U.S.C. § 77p(d)(1).
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and thereby ensured nearly all large-scale class actions not filed federally could be readily
removed to federal court,38 corporate law class actions arising under the law of a
corporation’s state of incorporation were specifically excluded from the Act’s purview.39
Hence, the lawyer for a plaintiff shareholder contemplating where to sue will not have to
settle for federal court but will have in addition have at least a choice between suing in the
state where the corporation is incorporated and the state where the corporation is
headquartered, assuming these are different.40
There is some scope for defendants associated with a Delaware-incorporated company
to challenge the litigation venue choices plaintiffs make. If a plaintiff files a lawsuit under
Delaware corporate law in a non-Delaware court, defense lawyers might consider bringing a
motion in the non-Delaware court arguing it lacks jurisdiction to hear the case. If there is
little doubt about jurisdiction and if proceedings have also been brought in Delaware, the
defense lawyers could alternatively seek a stay or dismissal of the non-Delaware proceedings
on forum non conveniens grounds.41 There is case law indicating that federal courts will, in
the interests of comity and the promotion of judicial efficiency, dismiss or stay a derivative
lawsuit where a single consolidated action in a state court – in this instance Delaware --
would serve the best interests of the corporation and the stockholders.42 Success on such a
motion is by no means guaranteed, however. Federal courts have denied applications for a
stay of a derivative action in favor of a state court when the claims brought in state court have
not been significantly litigated and when the federal complaint was not a “mirror image” of
38 Pub. L. No. 109-2, 119 Stat. 4 (2005) (codified at 28 U.S.C. § 1453). For an overview of the nature of the legislation, see Erichson, “CAFA’s”, supra note xx, 1598. 39 28 U.S.C. § 1453(d)(2)-(3). 40 Supra note xx and related discussion. 41 Note, “Forum Shopping”, supra note xx, 1679; Debra Lyn Bassett, The Forum Game, 84 N.C. L. REV. 333, 344, 353, 389 (2006). 42 See, for example, Weiss v. Doyle, 178 F. Supp. 566 (1959, Dist. Ct., N.Y.). On the factors that can motivate a federal court to order a stay, see Jean F. Rydstrom, Stay of Action in Federal Court Until Determination of Similar Action Pending in State Court, 5 A.L.R. Fed. 10, §§ 5[a], 6[a] (1970).
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state court complaint.43 Likewise, a state court entitled to exercise jurisdiction is unlikely to
grant a forum non conveniens application designed to channel a corporate case to Delaware if
the case was filed first in that state court and the state court has already issued preliminary
rulings on the merits or there has otherwise been significant progress in the conduct of the
litigation.44
B. Empirical Evidence
While the consensus is that Delaware courts are a popular destination for corporate
litigation involving Delaware companies, over the past few years, various commentators have
remarked upon an erosion of Delaware’s litigation dominance.45 For instance, in a 2007
conference presentation Ted Mirvis, a litigation partner in the well-known Wall Street firm of
Wachtell, Lipton, drew attention to the “Anywhere But Chancery” phenomenon, by which he
meant there was a growing tendency for lawsuits involving Delaware corporations to be
brought in courts other than the Delaware Court of Chancery.46 Likewise, the Association of
the Bar of the City of New York’s Committee on Securities Litigation indicated in a 2010
policy paper that it had become “common” for virtually identical claims for breach of
fiduciary duty to be filed in relation to M&A transactions in multiple jurisdictions rather than
in a single jurisdiction,47 such as Delaware.
43 Tabas v. Mullane, 608 F.Supp. 759, 763 (D.C.N.J., 1985) (application for stay dismissed on the basis there was “no previously filed, significantly litigated, or more advanced state action”; Loeb v. Whittaker, 333 F. Supp. 484, 489 (S.D.N.Y., 1971) (“mirror image”). 44 Geoffrey P. Miller, Overlapping Class Actions, 71 N.Y.U. L. REV. 514, 522 (1996). 45 On academic commentators who have remarked on the growing popularity of lawsuits outside Delaware see, supra note xx and accompanying text. On the press, see, for example, Renee Deger, State of Alert, RECORDER (San Francisco), Aug. 9, 2001, 1; David Marcus, Did Chancery Fee Rulings Chase Away Plaintiffs Lawyers?, DEL. L. WEEKLY, November 29, 2006, 1; Delaware Ruling Alters M&A Landscape, INVESTMENT DEALERS DIGEST, April 16, 2007. On the judiciary, see Elizabeth Bennett, Delaware Keeps Its Pre-Eminence in Business Litigation”, DEL. L. WEEKLY, May, 2, 2007, 1 (citing views expressed by Chief Justice Myron Steele of the Delaware Supreme Court). 46 “Anywhere But Chancery”, supra note xx. 47 Association of the Bar of the City of New York’s Committee on Securities Litigation, Coordinating Related Securities Litigation: A Position Paper 3 (2010)
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While there is growing awareness that the pre-eminence of Delaware courts in the
corporate law area could be under threat, empirical research on point is lacking. We are
aware of only one published study that provides data on venue choice in corporate law cases
involving corporations incorporated under Delaware law, this being Roberta Romano’s
analysis of 139 shareholder suits brought between the late 1960s and 1987 in relation to a
sample of 535 public corporations.48 Her study revealed that Delaware courts and federal
courts were both popular venues for lawsuits involving Delaware corporations and that it was
rare for lawsuits involving such firms to be brought in a state court other than Delaware’s.49
Research we have been conducting addresses the evidentiary gap which exists and
provides empirical proof that Delaware courts are losing “market share”. We use various
approaches to seek to document the nature and extent of the out-of-Delaware trend. One is to
focus on cases where judges have written publicly available judgments, whether on a
preliminary motion or after a trial. We have built up a dataset of cases occurring between
1995 and 2009 that generated a publicly disseminated judicial opinion arising from lawsuits
where directors of public corporations were named as defendants in claims brought under
corporate law. Given that a rich body of case law precedent is an oft-cited beneficial feature
of Delaware corporate law, this dataset provides direct evidence on the extent to which this
aspect of the Delaware brand is under threat.
To construct our dataset we searched for suits arising under corporate law in which
one or more directors was named as a defendant, which produced at least one publicly
48 Wachtell Lipton, the Wall Street law firm, has does some private, undisclosed research on point for M&A transactions. See “Anywhere But Chancery”, supra note xx, 17. 49 See Romano, Genius, supra note xx, 41 reporting that of the 35 lawsuits that involved Delaware corporations that were not filed exclusively in federal court, 29 were filed in Delaware courts (24 exclusively). Of the 139 suits, 68 were brought exclusively in federal court, with the high number likely being due to Romano treating cases that would have arisen under federal securities law – primarily those involving misstatements or omissions in financial statements -- as shareholder suits. On the sample, and the type of lawsuits encompassed by it, see Roberta Romano, The Shareholder Suit: Litigation Without Foundation?, 7 J.L. ECON. & ORG. 55, 59-60 (1991).
14
available judicial decision between 1995 and 2009 and which involved a public company.
We relied on two electronic databases for our search for judicial opinions, Westlaw Allcases
and Lexis Mega, and also searched the Delaware Court of Chancery website, which contains
all written judicial opinions Chancery Court judges have issued from 2000 onwards.50 If a
case generated more than one decision, we assigned the case to a year based on the first
decision, and excluded from the dataset all cases with initial decisions in 1994 or earlier.
Our dataset encompasses 729 cases occurring over 15 years, 554 (76%) of which
involved Delaware-incorporated companies. In our dataset the number of cases where
Delaware courts handed down opinions involving Delaware-incorporated companies
remained fairly constant year-by-year throughout the 1995-2009 period but there was a
dramatic growth in the number of cases involving Delaware companies that were not decided
in Delaware courts (Fig. 1). The result was that the proportion of purely Delaware cases in
our dataset declined substantially over time, falling from over 80% in 1995 to 65% in 2002 to
a low of 21% in 2008 (Fig. 2). Concomitantly, the percentage of cases written by judges
other than those affiliated with Delaware state courts increased substantially. The growth in
federal court rulings as a proportion of all cases was particularly striking.
Figure 1: The Number of Corporate Cases Generating Judicial Opinions Annually in
Delaware Courts, Other State Courts and Federal Courts, 1995-2009 -- Delaware-
Incorporated Public Corporations
50 For a more description of our search methodology, see Armour, Black and Cheffins, “Is Delaware”, supra note xx.
15
Figure 2: The Proportion of Corporate Cases Generating Judicial Opinions Annually in
Delaware Courts, Other State Courts and Federal Courts, 1995-2009 -- Delaware-
Incorporated Public Corporations
Our judicial opinions dataset provides prima facie evidence that Delaware courts have
suffered a major drop in market share in the production of corporate law jurisprudence. Still,
focusing on publicly available judicial opinions provides a necessarily partial view of
underlying trends. Academics labelled “docketologists” who advocate researching litigation
by studying case records from start to finish point out that research based on readily
0
10
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30
40
50
60
70
80
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Delaware company,decided in otherstates
Delaware company,
decided in Fed
Delaware company,
decided in Delaware
0%
20%
40%
60%
80%
100%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Delaware company,decided in other s tatesDelaware company,
decided in FedDelaware company,
16
accessible judicial opinions suffers from potentially debilitating selection bias.51 Many
actions filed produce no opinion at all, as the matter never goes to court, and when lawsuits
do reach the courts, a judge can resolve issues that arise by forgoing writing a formal, fully
reasoned judgment in favor of issuing to the parties a judgment order or a confidential non-
precedential or memorandum opinion.52 Moreover, the extent to which publicly accessible
judicial opinions constitute a reliable “tip of the iceberg” with respect to cases filed is very
much open to question. Instead, the tip (publicly available opinions) likely differs in major
ways from the part hidden below the waterline (cases filed that do not generate a judgment
that is published or is available on Westlaw or Lexis).53 Cases accompanied by judicial
opinions differ from run-of-the-mill actions filed because the matter must be serious enough
for a judge to take the time to draft a reasoned written judgment suitable for publication and
because a Lexis or Westlaw official must deem the opinion to be sufficiently important or
interesting to merit publication or electronic dissemination.54 Sample bias thus could be a
serious risk.55
Being aware of the hazards associated with drawing inferences solely from data
compiled from judicial opinions, we have carried out research on claims filed. A
comprehensive nationwide search of corporate law cases filed is impractical, because finding,
let alone examining, every corporate law complaint in all 50 states plus federal courts would
be a daunting task. Correspondingly, we have compiled discrete datasets of cases filed in
three litigation-prone contexts, namely large M&A deals, transactions where publicly traded
51 Erickson, “Corporate”, supra note xx, 1753-54; Hoffman, Izenman and Lidicker, supra note xx, 684, 688-89; Kim et al., supra note xx, 96-97. 52 RUGGERO D. ALDISERT, OPINION WRITING 23-26 (2nd ed., 2009) (focusing on appellate courts). 53 Hoffman, Izenman and Lidicker, supra note xx, 688; Kim et al., supra note xx, 97; Levin, “Making”, supra note xx, 988. 54 Hoffman, Izenman and Lidicker, supra note xx, 688. 55 We explore the possible nature of the sample bias in Armour, Black and Cheffins, “Is Delaware”, supra note xx.
17
companies are taken private by way of a leveraged buyout (LBO) and instances where
corporate executives allegedly benefitted from options backdating. The evidence we have
complied generally confirms the emergence of an out-of-Delaware trend in corporate
litigation that gathered momentum through the 2000s.
M&A transactions account for a large majority of the corporate law litigation
involving Delaware public companies.56 Correspondingly, we sought to find out the extent to
which Delaware was losing “market share” with cases filed in the largest deals carried out
between 1994 and 2009. We relied on SDC Platinum to find the 25 largest M&A
transactions for each year, measured by transaction value, where the corporation acquired
was U.S.-based and publicly traded. For each transaction we searched EDGAR, the SEC’s
database of filings by public companies, to find out about lawsuits filed under corporate or
securities law. Of the 395 targets where there were EDGAR filings, 260 were incorporated
under Delaware law. EDGAR searches revealed corporate litigation filed in 128 of these 261
instances (49%).
According to data available on EDGAR, between 1994 and 2009 an average of 24
corporate lawsuits arose annually from acquisitions of Delaware incorporated companies
falling into the “mega-deal” category, with the number exceeding 45 in 1995, 2008 and 2009
(Fig. 3). For each year between 1994 to 2001, a clear majority of corporate law cases arising
from acquisitions of Delaware companies large enough to fall in the top 25 bracket was filed
in Delaware courts (Fig. 4).
From 2002 onwards, lawsuits filed in states other than Delaware moved to the
forefront, with the “market share” of Delaware’s courts falling below 50% in every year, save
one (2005) (Fig. 4). A by-product of the trend was that while it was commonplace up to 2002
56 Thompson and Thomas, “New”, supra note xx, 169, tbl. 2 (during 1999 and 2000 a total of 952 fiduciary suits were brought where a public company was involved, and 796 involved acquisitions).
18
for corporate law cases arising from “mega-deals” to be filed exclusively in Delaware courts
this became a rarity thereafter. Only 2% of acquisitions of Delaware corporations that were
among the 25 largest M&A deals in 2006, 2007, 2008 and 2009 respectively were “Delaware
only” from a corporate litigation perspective (Fig. 5).
Figure 3: The Number of Corporate Law Cases Filed in Relation to the 25 Largest M&A
Transactions, Measured Annually, in Delaware Courts, Other State Courts and Federal
Courts, 1994-2009: Delaware Incorporated Companies
Figure 4: The Proportion of Corporate Law Cases Filed in Relation to the 25 Largest M&A
Transactions, Measured Annually, in Delaware Courts, Other State Courts and Federal
Courts, 1994-2009: Delaware Incorporated Companies
0
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60
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Federal
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Delaware
19
Figure 5: 25 Largest M&A Transactions, Measured Annually, that Generated Corporate
Litigation in Delaware Courts Exclusively and in Other Courts Exclusively, 1994-2009:
Delaware Incorporated Companies
Due to the size of the deals involved, data focusing only on the very largest M&A
transactions may well be unrepresentative of trends affecting the full range of acquisitions of
publicly traded companies. Correspondingly, as a cross-check for our findings concerning
mega-deals, we investigated litigation trends for all acquisition transactions of a specific type.
We opted to focus on leveraged “public-to-private” buyouts because, among various types of
M&A transactions, these are particularly litigation prone. As Vice Chancellor Strine
observed in In re Topps Shareholders Litigation, “Few contexts are more important to
0%
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60%
70%
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90%
100%
1994199519961997199819992000200120022003200420052006200720082009
Federal
Other State
Delaware
0%
10%
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Non Del only
Del and other
Del only
20
stockholders than the pendency of a transaction in which they exchange their shares for cash
and the company is taken private.”57 The situation is especially delicate when the incumbent
management team is scheduled to manage the corporation after a buyout by a private equity
firm. Shareholder plaintiffs (and their lawyers) understandably will wonder if managers, in
the midst of negotiating a deal in which they would keep their jobs after helping to take the
corporation private, will be diligent enough in trying to maximize shareholder value by
finding other bidders.58 This potential conflict is a ready hook for plaintiff lawsuits,
especially where the incumbent managers can plausibly be said to control the target company
before the buyout.
To find out where corporate litigation involving LBOs had occurred, we searched the
Thompson ONE Banker database, which generated a list of 511 LBO transactions taking
place between 1995 and 2009. Of these 511, in 477 instances the target companies made
regular filings with the Securities and Exchange Commission. For these 477 LBO
transactions we searched EDGAR, the SEC’s database of filings by public companies, to find
out about lawsuits filed under corporate or securities law. Of the 477, 300 (63%) were
incorporated in Delaware. As we anticipated, the transactions involved were considerably
smaller than those in our large M&A dataset, with the average value of LBO transactions
involving Delaware-incorporated targets being $1.54 billion and the average value of the
transactions involving Delaware corporations in our mega-deal dataset being $17.17 billion.
There was evidence of corporate litigation for 139 of the 300 Delaware targets in our
LBO dataset. The number of instances where LBO transactions involving Delaware
corporations fostered corporate litigation corresponded closely with a private equity-driven
57 In re Topps Shareholders Litigation, 924 A. 2d 951, 963 (Del. Ch., 2007). 58 Randall Chase, Delaware Judges Want Say in Private Equity Liability Cases, May 22, 2007, available at http://www.insurancejournal.com/news/east/2007/05/22/79917.html (last visited Jan. 22, 2010).
21
buyout “boom” that occurred in the mid-2000s and ended as a result of the “credit crunch”
associated with the financial crisis (Fig. 6).59
Figure 6: The Number of Cases Filed in Leveraged Buyout Transactions in Delaware Courts,
Other State Courts and Federal Courts, 1997-2009: Delaware Incorporated Companies
While Delaware courts were busiest with LBO transaction litigation during the mid-
2000s, the proportion of cases filed in Delaware courts was in steady decline. During the
1990s, 80% (16 of 20) of the LBO corporate lawsuits in our dataset were brought in
Delaware courts.60 The equivalent figure fell to 59% (23 of 39) between 2002 and 2004 and
from 2006 onwards a majority of actions were brought outside Delaware, almost exclusively
in other state courts (Fig. 7). Hence, our LBO data confirms the emergence of a robust anti-
Delaware trend through much of the 2000s.
59 On the “boom”, see Brian Cheffins and John Armour, The Eclipse of Private Equity, 33 DEL. J. CORP. L. 1, 20 (fig. 1), 22-24 (2008). On its demise, see Brian R. Cheffins, Did Corporate Governance “Fail” During the 2008 Stock Market Meltdown? The Case of the S&P 500, 65 BUS. LAWYER 1, 45 (2009). 60 There were no LBO transactions involving Delaware companies that generated corporate litigation in 1995 and 1996.
0
5
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15
20
25
30
35
40
45
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Federal
Other State
Delaware
22
Figure 7: The Proportion of Cases Filed in Leveraged Buyout Transactions in Delaware
Courts, Other State Courts and Federal Courts, 1997-2009: Delaware Incorporated
Companies
Thompson and Thomas, in a study of corporate law complaints filed in the Delaware
Court of Chancery in 1999 and 2000, show that different types of representative litigation – a
derivative action filed on behalf of the corporation or a class action brought on behalf of other
shareholders61 -- do different things.62 They found that while lawsuits filed in an acquisition
setting were typically class actions, a sizeable majority of actions arising in a non-acquisition
setting were framed as derivative suits.63 In order to capture trends with derivative litigation
as opposed to shareholder class actions, we turned to cases filed alleging breaches of duty by
directors based on accusations arising from options backdating.
With a typical options backdating scenario, a company assigned to grants of stock
options a strike price based on the price at which the shares were trading at a date prior to that
61 On derivative actions and shareholder class actions qualifying as representative litigation, see Amy M. Koopman, A Necessary Gatekeeper: The Fiduciary Duties of the Lead Plaintiff in Shareholder Derivative Litigation, 34 J. CORP. L. 895, 899 (2009). 62 Thompson and Thomas, “New Look”, supra note xx, 168. 63 Ibid., 168-69.
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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Federal
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Delaware
23
when the options were actually granted. The objective typically was to side-step the robust
regulatory treatment “in-the-money” stock options attracted under tax law and federal
securities regulation.64 Federal regulators, prompted by academic research indicating a
pattern of options being granted when stock prices reached low points and rising quickly
thereafter, began investigating backdating in 2005.65 A burst of civil litigation soon followed.
Where there have been allegations of options backdating, a shareholder can seek
recourse by launching a derivative action under corporate law alleging that the directors
benefitting from or authorizing options backdating breached their fiduciary duties.66 We
found by cross-referencing EDGAR searches with a list of instances of alleged options
backdating compiled by Glass Lewis, a proxy advice service, a list of options backdating
cases filed compiled by Coughlin Stoia Geller Rudman & Robbins, a law firm, and a similar
list compiled by Kevin La Croix, an attorney and partner in a D&O insurer who operates a
website known as D&O Diary, 169 companies where derivative lawsuits were brought
alleging breaches of duty based on options backdating. 67 Of these 169, 133 (79%) were
incorporated under Delaware law. With these 133 companies, EDGAR searches revealed
244 options backdating derivative lawsuits filed, only 25 (10%) of which were filed in
Delaware. Nearly half of the cases (119) were filed in federal court and the remaining 100
cases were filed in a different state court. Moreover, even with the 25 instances where a
derivative suit involving options backdating was filed in a Delaware court, there were only
four occasions where a case was not additionally filed elsewhere. The dearth of Delaware-
64 Christy L. Abbott, The Shareholder Derivative Suit as a Response to Stock Option Backdating, 53 ST. LOUIS U. L.J. 593, 597-98 (2009). 65 Abbott, ibid., 599. 66 Abbott, ibid. 595. 67 We consider various aspects of our options backdating dataset in greater detail in Armour, Black and Cheffins, “Is Delaware”, supra note xx.
24
based lawsuits confirms that with respect to cases filed, the out-of-Delaware trend is not
confined to M&A litigation or class actions.
III. What Has Prompted the Out-of-Delaware Trend?
The combination of evidence arising from publicly available judicial opinions issued
in cases where directors have been sued and arising from cases filed involving large M&A
deals, leveraged buyout transactions and allegations of options backdating indicate that over
the past decade the proportion of corporate litigation involving Delaware corporations that
has occurred in Delaware courts has declined markedly. This trend raises questions
concerning causes, potential cures, the viability of Delaware’s Court of Chancery’s current
status as “the Mother Court of corporate law” and Delaware’s ability to retain its vice-like
grip on incorporation business.68 The remainder of the paper address these topics, beginning
here with an analysis of potential causes of the out-of-Delaware trend.
A. Who Decides Where Lawsuits are Brought?
To identify the reasons why an out-of-Delaware trend has occurred, a preliminary
issue needs to be addressed, namely identifying who dictates the venue where litigation takes
place. Often, when a plaintiff shareholder is bringing representative litigation under
corporate law that shareholder will have a claim of insufficient value to ensure the matter is a
high priority for him. Due to the attendant free rider effects and collective action problems,
plaintiffs’ attorneys in derivative litigation and shareholder class actions have traditionally
not been mere agents of the client but instead have controlled the conduct of the litigation
free from client second-guessing.69 Correspondingly, as between a plaintiff stockholder in a
68 Supra note xx and related discussion. 69 Jonathan R. Macey and Geoffrey P. Miller, The Plaintiff’s Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. CHI. L. REV. 1, 19-20 (1991); John C. Coffee, Understanding the Plaintiff’s Attorney: The Implications for Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 COLUM. L. REV. 669, 679-84 (1986);
25
public company and his lawyers, it will be the latter who will decide on the venue in which to
launch a derivative suit or class action brought under corporate law.70
A lawyer acting on behalf of a plaintiff bringing a derivative suit and/or a class action
under corporate law does not have carte blanche to dictate where litigation occurs.71 Instead,
plaintiffs’ lawyers need to be mindful of the jurisdictional terrain described in Part II.A, given
that the defendants can potentially get a lawsuit struck out if the court in which the lawsuit
has been brought lacks jurisdiction or get a lawsuit shifted to a different venue if the
plaintiff’s chosen court opts to defer to another court in the interests of judicial comity.
Nevertheless, plaintiffs’ attorneys do have a powerful first mover advantage, in that lawyers
for the defendants have to react to displace the initial choice made. Correspondingly, as
between plaintiffs, their lawyers, defendants and their lawyers, coming to terms with the
factors influencing plaintiffs’ attorneys is the key to understanding venue choice with
derivative lawsuits and class actions arising under corporate law. Hence, explanations why
representative litigation brought by stockholders of publicly traded companies has
increasingly been occurring outside Delaware necessarily focus on the plaintiffs’ bar.
B. The Time Dimension
Our judicial opinion, M&A mega-deal and LBO transaction datasets indicate that
dominance Delaware enjoyed as a venue for litigation in the 1990s eroded in the 2000s. This
time trend casts doubt on two otherwise plausible explanations for the out-of-Delaware trend
Randall S. Thomas and Robert G. Hansen, Auctioning Class Action and Derivative Lawsuits: A Critical Analysis, 87 NW. UNIV. L. REV. 423, 433 (1993). 70 Lawyers filing and litigating claims arising from corporate law need to be mindful of restrictions on multijurisdictional practice but Delaware courts have lawyers from throughout the United States appearing before them daily and prominent out-of-state counsel will frequently be on a first-name basis with Delaware judges. See Report of the Multijurisdicational Practice Special Committee to Dennis L. Schrader, Esquire, President, Delaware State Bar Association, April 23, 2001, 21, available at http://www.dsba.org/pdfs/MJPReport.pdf . 71 Stevelman, “Regulatory”, supra note xx, 100.
26
we document. The first concerns the relationship between predictable outcomes and
settlement value.
Ted Mirvis, the Wachtell Lipton litigation partner, has suggested that plaintiffs’
attorneys might steer clear of Delaware because they believe that corporate lawsuits have
greater settlement value outside Delaware due to a greater variation in possible outcomes.72
He points out that the end result in cases brought in Delaware usually is reasonably
predictable due to the rich body of Delaware case law and the judiciary’s thorough familiarity
with the relevant jurisprudence. Plaintiffs’ attorneys therefore have little scope to use the
possibility of a disastrous trial outcome to spook counsel for the defendants and press for a
generous settlement. In contrast, the leverage plaintiffs’ lawyers have reputedly increases
when there is a risk of a non-Delaware judge (and jury) getting muddled and granting relief
substantially greater than that which a Delaware court would provide. As Mirvis puts it,
“trying to argue Delaware fiduciary duty cases outside of Delaware is like taking Gallatoire’s
secret recipes and giving them to a Jack-In-The-Box short order cook. It doesn’t always
work so well.”73
Mirvis’ conjectures are plausible but do not explain the out-of-Delaware trend we
document. If the settlement value of cases is higher outside Delaware due to greater
uncertainty concerning the outcome, plaintiffs’ attorneys should have been steering clear of
Delaware courts for a considerable period of time. It seems, however, that Delaware courts
were a highly popular destination for lawsuits through at least to the beginning of the 2000s.
Correspondingly, predictability, or lack thereof, apparently was not a catalyst for the
migration of cases out of Delaware.
72 “Anywhere But Chancery”, supra note xx, 17. 73 Ibid.
27
The same difficulty arises with a second plausible explanation for the out-of-
Delaware trend we document, this being that Delaware judges unduly favor corporate
defendants. There has long been speculation that that Delaware judges are “manager-
friendly”,74 which could encourage plaintiffs’ attorneys to steer clear of Delaware courts.75
Empirical research on factors that dictate the choice of forum reveals that attorney
perceptions of judicial predispositions to rule for one side or another strongly influence where
cases are filed.76 Nevertheless, as with Ted Mirvis’ conjectures concerning settlement value,
timing indicates concerns about pro-managerial bias among Delaware judges do little to
explain the out-of-Delaware trend we document.
William Cary, in his famous 1974 “race to the bottom” article, argued that Delaware
courts were complicit in watering down “the rights of shareholders vis-à-vis management
down to a thin gruel” due to their “laissez-faire attitude.”77 To the extent Cary’s
characterization of the Delaware judiciary was correct, plaintiffs should have been shunning
Delaware for decades. However, with Delaware courts apparently being pre-eminent through
at least the beginning of the 2000s, a manager-friendly bias could only plausibly account for
the out-of-Delaware trend we document if the concerns of the plaintiff bar are much greater
now than they were a few years ago. It seems unlikely this is the case. As Norman Veasey,
the former Chief Justice of the Delaware Supreme Court, observed in a 2005 survey of recent
74 Cary, “Federalism”, supra note xx, 666, 690, 696; William M. Lafferty and W. Leighton Lord III, Towards a Relaxed Summary Judgment Standard for the Delaware Court of Chancery, 15 DEL. J. CORP. L. 921, 928 (1990); Renee M. Jones, Rethinking Corporate Federalism in the Era of Corporate Reform, 29 J. CORP. L. 625, 645-54 (2004). 75 Stevelman, “Regulatory”, supra note xx, 97. 76 Thomas E. Willging and Shannon R. Wheatman, Attorney Choice of Forum in Class Action Litigation: What Difference Does It Make?, 81 NOTRE DAME L. REV. 591, 611 (2006). 77 Cary, “Federalism”, supra note xx, 666, 690.
28
Delaware case law, “Delaware courts are not any more ‘pro-stockholder’ and less ‘pro-
director’ or ‘pro-manager’ than they were in the past, or vice versa.”78
C. Judicial Attitudes Concerning the Plaintiffs’ Bar
Various recent utterances and rulings by Delaware judges indicate that the Delaware
judiciary has a rather jaundiced view of the plaintiffs’ bar. The misgivings expressed
plausibly could have caused law firms filing lawsuits on behalf of stockholders of Delaware
public companies to hesitate before filing in Delaware courts and thus could help to account
for the out-of-Delaware trend we document. Judicial skepticism towards the plaintiffs’ bar is
not merely a manifestation of whatever general pro-management orientation might exist
among Delaware judges. These can certainly be related. However, judicial misgivings
concerning the plaintiffs’ bar can operate separately from any sort of pro-managerial bias.
Judges might believe that derivative actions and class action lawsuits that target managerial
misfeasance constitute, as Chancellor Chandler said in In re Fuqua Industries Inc.
Shareholder Litigation “a cornerstone of sound corporate governance”,79 and yet still take the
view that the attorneys who bring the cases do judges, executives, directors and stockholders
a disservice by launching a plethora of weak suits that are an unnecessary inconvenience for
those implicated.
A 2005 ruling by Vice Chancellor Strine in Cox Communications Inc. Shareholders
Litigation and a 2010 decision of Vice Chancellor Laster In re Revlon Inc. Shareholders
Litigation stand out as cases indicating Delaware judges have substantial doubts about the
plaintiffs’ bar.80 In Cox Communications Vice Chancellor Strine ruled that plaintiffs’
attorneys who settled a class action lawsuit where minority shareholders were allegedly
78 Veasey and DeGugliemlo, supra note xx, 1496. 79 In re Fuqua Industries Inc. Shareholder Litigation, 752 A.2d 126, 133 (Del. Ch., 1999). 80 In re Cox Communications Inc., Shareholders Litigation 879 A. 2d 604 (Del. Ch., 2005); In re Revlon Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (2010).
29
subjected to a “freeze out” when their company was taken private should receive $1.275
million in fees rather than the $5 million the parties had agreed upon. In so doing Vice
Chancellor Strine expressed misgivings about both shareholder class actions and the
plaintiffs’ bar that files such claims, saying it was standard for the announcement of a freeze
out transaction to prompt “hastily-filed, first-day complaints that serve no purpose other than
for a particular law firm and its client to get into the medal round of the filing speed (also
formerly known as the lead counsel) Olympics.”81 He argued that due to such disquieting
features of stockholder litigation Delaware courts should endeavour to keep plaintiffs’
attorneys in line. As Vice Chancellor Strine said,
“Particularly in the representative litigation context, where there are deep concerns
about the agency costs imposed by plaintiffs’ attorneys, our judiciary must be vigilant
to make sure that the incentives we create promote integrity and that we do not, by
judicial doctrine, generate the need for defendants to settle simply because they have
no visible alternative, even when they have done nothing wrong.82
Vice Chancellor Strine did acknowledge in the case that representative litigation was an
important check against director wrongdoing.83 Nevertheless, his skeptical assessment of the
plaintiffs’ bar could well have made lawyers bringing lawsuits on behalf of shareholders of
Delaware-incorporated companies pause before they filed in Delaware.84
In Revlon Vice Chancellor Laster ruled that control of class action litigation
concerning a going private transaction should be taken away from the lawyers who had been
acting as lead counsel and negotiated a settlement with the defendants in that capacity, saying
81 In re Cox Communications Inc., Shareholders Litigation 879 A. 2d 604, 608; see also at 614-23, 642-48 (Del. Ch., 2005). 82 In re Cox Communications Inc., Shareholders Litigation 879 A. 2d 604, 643. 83 Ibid. 84 David Marcus, State of Denial, DAILY DEAL, Nov. 20, 2006.
30
that the lead counsel’s duty to provide adequate representation had gone unfulfilled.85 In so
doing Vice Chancellor Laster took the opportunity to express serious misgivings about the
plaintiffs’ bar. He said of the cases “(e)ntrepreneurial litigators” bring under corporate law
“The resulting system involves little real litigation activity, generates questionable benefits
for class members, provides transaction-wide releases for defendants, and offers a good living
for the traditional plaintiffs’ bar. In a legal system that values representative litigation as a
positive force, the business model of filing and free-riding has nothing to commend it.”86
Such scorn for the plaintiffs’ bar is hardly likely to encourage lawyers launching derivative
actions or class actions under corporate law to rush to Delaware to file their claims.
In Delaware judicial antipathy towards plaintiffs’ lawyers appears to be a recent
phenomenon. Delaware has traditionally been characterized as litigation-friendly, with the
Delaware corporate bar allegedly ensuring there was ample scope for litigation – and thus
business for Delaware lawyers -- in what is otherwise well-known as a “pro-manager” state.87
Professor Joseph Bishop said of Delaware more than 40 years ago “Delaware’s general
approach to stockholder litigation...is to make it easy to sue the executives of Delaware
corporations, no matter where they reside or where the corporation does business, so long as
the suit is in Delaware courts, and conducted by Delaware counsel.”88 Or as Professor
Douglas Branson said just over 20 years ago, “Delaware makes suit in Delaware the obvious
choice among possible fora.”89 The rhetoric deployed in Cox Communications and Revlon
constitutes a marked departure from this litigation-friendly posture.
85 In re Revlon Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL, * 29 (2010). 86 In re Revlon Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL, * 36-37 (2010). 87 Cary, “Federalism”, supra note xx, 686-88; Macey and Miller, “Toward”, supra note xx, 510-13. 88 Joseph W. Bishop, Sitting Ducks and Decoy Ducks: New Trends in the Indemnification of Corporate Directors and Officers, 77 YALE L.J. 1078, 1084 (1968). Professor Bishop’s assessment of Delaware was subsequently quoted approvingly on various occasions: e.g. Cary, “Federalism”, supra note xx, 688; Macey and Miller, “Toward”, supra note xx, 512-13. 89 Branson, “Indeterminacy”, supra note xx, 91.
31
As the next sub-section of the paper describes, over the past decade Delaware courts
have toughened considerably their approach to the awarding of attorneys’ fees in
representative litigation, which confirms that misgivings the judiciary have concerning
plaintiffs’ attorneys have only come to the fore recently. Correspondingly, judicial
skepticism towards the plaintiffs’ bar would seem to be of relatively recent standing and thus
might have helped to cause plaintiffs’ attorneys formerly inclined to sue in Delaware to steer
clear. The extent to which plaintiff lawyers anticipate that Delaware courts will scrutinize
closely attorney fee awards provided for in settlement agreements also constitutes
independently a factor that could help to explain the out-of-Delaware trend we have found.
D. Attorneys’ Fees
Lawyers, when they develop preferences for filing in one court as compared with
another in cases involving representative litigation, focus closely on the extent to which
judges are prepared to overrule fee awards litigants have agreed upon in settlements and on
the willingness of courts to endorse fee arrangements implying high billing rates.90
Correspondingly, to the extent Delaware courts adopt a parsimonious approach towards
attorney fees’, regardless of whether this is a manifestation of general skepticism towards the
plaintiffs’ bar or not, plaintiffs’ attorneys have a potentially potent incentive to select a
different forum. Delaware judges have in fact changed their approach to attorneys’ fees over
the past few years in a way that coincides with and plausibly helps to explain why Delaware
has been losing its cases.
90 Association of the Bar of the City of New York’s Committee on Securities Litigation, supra note xx, 5; Todd J. Zywicki, Is Forum Shopping Corrupting America’s Bankruptcy Courts?, 94 GEO. L.J. 1141, 1174 (2006). See also Coffee, “Understanding”, supra note xx, 686 (making the more general point that in representative litigation such as derivative suits and class actions it is the attorney’s recovery, not anticipated plaintiffs’ damages, that establish the equilibrium level).
32
Traditionally, Delaware judges dealt with attorneys’ fees in a way that would have
created incentives for plaintiffs to sue in Delaware.91 In most states, when courts were
confronted with a case where the suitability of fee awards in derivative litigation or
corporate-oriented class actions had been questioned, they assessed matters using a “lodestar”
approach where the key was hours devoted to a case. Delaware courts, in contrast, used the
nature of the relief obtained as the primary benchmark.92 Delaware’s approach was widely
believed to be more generous to plaintiffs’ lawyers.93 As a 1989 law review article said, “the
multimillion dollar fees awarded in many shareholder actions brought in Delaware give some
credence to an old Italian proverb that describes a lawsuit as a fruit in the garden of the
lawyer.”94
There was hard evidence confirming the conjectures that Delaware courts were
magnanimous in dealing with attorneys’ fees. Empirical studies of settlements of in class
actions and derivative suits indicated that the Delaware Court of Chancery approved virtually
all settlements parties had reached and endorsed the awarding of the full amount of attorneys’
fees agreed upon in pretty much all instances.95 Delaware courts correspondingly gained a
reputation for being accommodating in dealing with requests by plaintiff attorneys for fees in
shareholder litigation.96 This apparently was a source of some pride among the Delaware
91 Branson, “Indeterminacy”, supra note xx, 101-2. 92 Macey and Miller, “Toward”, supra note xx, 497. 93 Branson, “Indeterminacy”, supra note xx, 101-2. 94 Donald E. Pease, Delaware’s Disclosure Rule: The ‘Complete Candor’ Standard, Its Application, and Why Sue in Delaware, 14 DEL. J. CORP. L. 445, 496-97 (1989). 95 Berger and Pomeroy, supra note xx, (study of 98 corporate and class action suits arising between 1990 and 1992 finding that more than 95% of the proposed settlements were approved and approximately two-thirds of the attorneys' fee applications were granted in full); William B. Chandler, Awarding Counsel Fees in Class and Derivative Litigation in the Delaware Court of Chancery, unpublished working paper, (2001) (study of settlements between 1998 and early 2001 showing that two-thirds of fee petitions were granted in full and the remaining one-third were reduced, on average, by 20%); Elliott J. Weiss and Lawrence J. White, File Early, Then Free Ride: How Delaware (Mis)Shapes Shareholder Class Actions, (2004) 57 VAND. L. REV. 1797, 1847, 1872 (reporting that all 47 settlements arising from 1999-2001 merger cases were approved, with all fees requested in 40 instances). 96 Fisch, “Peculiar”, supra note xx, 1092.
33
judiciary, and was perceived as an ingredient of the successful Delaware brand. Carolyn
Berger, then a vice chancellor of the Delaware Court of Chancery and co-author of an
empirical study of attorney fee awards covering between 1990 and 1992, said of the study,
“we have come up with some internal statistics that just might demonstrate convincingly why
plaintiffs’ lawyers often head in our direction.” The verdict was “Plaintiffs stand an
extremely good chance of having their settlements approved here, and their lawyers are likely
to be awarded handsome fees.”97
Chancellor Chandler, in the 1999 case of In re Fuqua Industries Inc. Shareholder
Litigation, identified the rationale underlying the approach Delaware courts had traditionally
taken towards attorneys’ fees, saying the judiciary wanted to ensure plaintiffs’ lawyers were
“economically incentivized” to perform a “service on behalf of shareholders.”98 A change of
heart was imminent, however. Chancellor Chandler, in a 2001 working paper that updated
the study by Vice Chancellor Berger and confirmed that Delaware judges typically affirmed
without variation attorney fee arrangements submitted to them, indicated his unease with past
practice by saying that “in the absence of an adversarial process at the fee award stage, judges
in a common law system do not have the tools necessary to make consistently reasonable and
fair judgments about such questions.”99
Chancellor Chandler’s misgivings were soon reflected in a 2001 decision of his. The
law firm of Grant & Eisenhofer sought his approval of a fee of $24.75 million in a case where
the firm secured a settlement worth $180 million from Intermedia, WorldCom and
Intermedia’s board of directors after Intermedia, the majority shareholder in Digex, opted to
97 Berger and Pomeroy, supra note xx, 7. 98 In re Fuqua Industries Inc. Shareholder Litigation, 752 A.2d 126, 133 (Del. Ch., 1999). 99 Chandler, “Awarding”, supra note xx, 5.
34
merge with WorldCom, thus allegedly diverting a gain potentially attributable to Digex.100
Chandler awarded Grant & Eisenhofer $12.3 million, 7.5% of the overall settlement, instead
of $24.75 million, saying “There is no reason for the court to believe that a 7.5 percent fee
will provide a disincentive to plaintiffs’ attorneys or their clients.”101 Stuart Grant, a senior
partner at Grant & Eisenhofer, disagreed, saying that, despite his law firm receiving $12.3
million, the ruling created bad incentive effects for future plaintiffs.102
Skepticism about attorneys’ fees was more transparent in Vice Chancellor Strine’s
judgment in the 2005 case of In re Cox Communications Inc., Shareholders Litigation.103 As
we have seen, Vice Chancellor Strine not only cut substantially the fees awarded to the
plaintiffs’ lawyers in the settlement between the plaintiffs and the defendants but also used
rhetoric concerning the utility of shareholder litigation that was of a much different character
than that deployed by Chancellor Chandler in Fuqua Industries.104 A ruling by Vice
Chancellor Lamb later in 2005 confirmed that Cox Communications was not an aberration, as
he ruled plaintiffs’ attorneys who had provisionally received a $1,623,000 allowance for fees
and costs in a settlement arising from a lawsuit challenging Instinet Group Inc.’s sale to
NASDAQ Stock Market Inc. should be granted only $450,000.105 These cases prompted
speculation that the approach Delaware’s courts were taking towards attorney fees could
encourage lawyers to shun Delaware courts and file elsewhere.106
100 David Marcus, Half a Loaf is Still Plenty of Bread, DEL. L. WEEKLY, May 29, 2001, 1; see also Thompson and Thomas, supra note xx, 1777-78 (citing a figure of $165 million rather than $180 million). There were other concessions granted that potentially increased the amount the plaintiffs would receive to $420 million: Marcus, op. cit. 101 Marcus, “Half”, supra note xx. 102 Ibid. 103 In re Cox Communications Inc., Shareholders Litigation, 879 A. 2d 604 (Del. Ch., 2005). 104 Supra note xx and related discussion. 105 In re Instinet Group Inc., Shareholders Litigation (Del. Ch., Dec. 14, 2005), available at http://courts.delaware.gov/opinions/download.aspx?ID=69640 (last visited May 19, 2010). 106 Marcus, “Did Chancery”, supra note xx.
35
Was the ruling in Cox Communications a turning point with the out-of-Delaware trend
we have documented? What we would expect to see if it was would be a marked change in
the data from 2005 onwards. Our LBO case data match the pattern. While migration out of
Delaware was a general trend through the 2000s, 2005 constituted an inflection point, as up
to then a majority of the cases filed involving Delaware-incorporated companies were filed in
Delaware courts whereas from 2006 onwards only a minority were. The pattern was
different, however, our data on judicial opinions and M&A mega-deals. In both instances,
there was a general out-of-Delaware trend during the 2000s and 2005 was not an obvious
inflection point. Perhaps Chancellor Chandler’s scaling back of Grant & Eisenhofer’s fee in
the Intermedia litigation was sufficient to prompt a change in practice. Equally plausibly,
factors other than the approach the Delaware judiciary took to attorneys’ fees were
contributing to the out-of-Delaware trend.
E. Selection of Lead Counsel
The approach Delaware courts have taken when dealing with the selection of lead
counsel could well be one of the additional causes of the out-of-Delaware trend we have
documented. As is the case with attorneys’ fees, changes have occurred on this front in the
relatively recent past that plausibly could have encouraged the filing of lawsuits outside
Delaware. Hence, there is a time dimension that could help to explain why over the past
decade or so lawyers increasingly bypassed Delaware courts when launching lawsuits
involving Delaware public companies.
When multiple lawsuits based on the same facts are filed raising similar claims and
the litigation is consolidated as a single lawsuit, the lawyers involved will typically want to
be named lead counsel with the power to control and direct the proceedings. This is because
lead counsel will have the opportunity to coordinate the work done by the loose syndicate of
plaintiffs’ law firms who ultimately work on the case and will be entitled to the lion’s share
36
of the eventual fee award (if any) when the case is settled or otherwise resolved.107 If being
first to file in a Delaware court in a case involving a Delaware corporation provides a law
firm with a leg up should a dispute arise over the lead counsel role, lawyers will have an
incentive to file quickly in Delaware courts. If Delaware courts take a different approach this
will mean nimble law firms will have good reason to steer clear of Delaware and file in a
court where promptness is rewarded. As we will see now, at the beginning of the 2000s
Delaware courts indicated, contrary to the practice lawyers had adopted to resolve between
themselves disagreements about the lead counsel role, that being first to file was of little
importance. In so doing Delaware courts may well have encouraged plaintiffs to bring
lawsuits outside Delaware, at least when law firms seeking to gain an advantage through
prompt filing were involved.
In corporate litigation Delaware courts traditionally took a hands-off approach when
multiple complaints were filed stemming from the same facts and disputes arose as to who
should be lead counsel, as judges admonished plaintiffs’ lawyers to sort out matters for
themselves.108 The plaintiffs’ bar responded by deploying a simple organizing principle,
namely that the law firm who filed first should be lead counsel, or co-lead counsel.109 The
natural and foreseeable result was a race to the courthouse.110 Thompson and Thomas report
107 Thompson and Thomas, “New Look”, supra note xx, 156, n. 94; Jill E. Fisch, Lawyers on the Auction Block: Evaluating the Selection of Class Counsel by Auction, 102 COLUM. L. REV. 650, 654 (2002). 108 See Weiss and White, “File”, supra note xx, 1846; TCW Technology Ltd. Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 at * 3 (Del.Ch., Oct 17, 2000); In re Siliconix Inc. Shareholders Litigation 2001 WL 618210 * 1 (Del.Ch., 2001). 109 Weiss and White, “File”, supra note xx, 1846 110 Jill E. Fisch, Aggregation, Auctions, and Other Developments in the Selection of Lead Counsel Under the PSLRA, 64(2) LAW & CONTEMPORARY LEGAL PROBLEMS 53, 56 (2001).
37
that of 623 acquisition-oriented class actions filed in Delaware courts in 1999 and 2000
almost 70% were filed within three days of the announcement of the transaction.111
The Delaware Supreme Court acknowledged in 1993 in Rales v. Blasband that the
first to file “custom” had generated “a plethora of superficial complaints.”112 Only in 2000,
however, did the Delaware courts take concrete steps to displace the presumption that
promptness would be rewarded as and when disputes arose among plaintiffs’ lawyers over
the lead counsel role. In TCW Technology Ltd. Partnership v. Intermedia Communications,
Inc.113 which arose from the same Digex/Intermedia/WorldCom transaction that prompted
Chancellor Chandler’s ruling on attorneys’ fees, he said of the presumed advantage a plaintiff
who was first to file had “Although it might be thought, based on myths, fables, or mere
urban legends, that the first to file a lawsuit in this Court wins some advantage in the race to
represent the shareholder class, that assumption, in my opinion, has neither empirical nor
logical support.”114 The first-to-file “custom” had remained undisturbed up to this point
because, as Chancellor Chandler explained, Delaware courts steered clear of dictating who
lead counsel should be in particular cases, leaving it to plaintiffs’ lawyers to sort the matter
out for themselves. To quote Chancellor Chandler again:
“Over the past ten years, members of the Court of Chancery have been asked, with
increasing frequency, to become involved in the sometimes unseemly internecine
struggles within the plaintiffs' bar over the power to control, direct and (one suspects)
ultimately settle shareholder lawsuits filed in this jurisdiction. In every single instance
111 Thompson and Thomas, “New Look”, supra note xx, 182-83. See also Weiss and White, “File”, supra note xx, 1827 (of 104 mergers of Delaware-incorporated public companies occurring between 1999 and 2001, 77 occurred within one day of the merger announcement). 112 Rales v. Blasband, 634 A. 2d 927, 934 n. 10 (1993). 113 TCW Technology Ltd. Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 (Del.Ch., Oct 17, 2000). 114 TCW Technology Ltd. Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 at * 3 (Del.Ch., Oct 17, 2000).
38
that I am able to recall, this Court has resisted being drawn into such disputes. In
every instance, the plaintiffs' bar has been able to work out a consolidation
compromise. It may have been imperfect, but the compromise has always seemed, in
the end, to accommodate reasonably the interests of all the parties and the Court.”115
Chancellor Chandler indicated that in the case before him the lawyers who had filed
claims on behalf of various plaintiff shareholders in relation to the
Digex/Intermedia/WorldCom transaction had in fact not resolved among themselves who
would serve as lead counsel. Correspondingly he named Grant & Eisenhofer, the law firm
acting on behalf of an institutional shareholder, the Kansas Public Employees Retirement
System, to act in that capacity. In so doing, Chancellor Chandler identified three factors a
Delaware court would consider should the issue arise again, these being the quality of the
pleadings filed, the energy and enthusiasm demonstrated by the various attorneys and the size
of the economic stake each plaintiff had in the litigation, with the shareholder with the largest
economic interest to be preferred.116 This third factor, as Chancellor Chandler
acknowledged, was similar to a model introduced by the Private Securities Litigation Reform
Act of 1995 (PSLRA)117 for class actions brought under federal securities litigation whereby
the class member with the largest economic interest in the action was the leading candidate to
be given responsibility to control the litigation.118 Chancellor Chandler indicated that
Delaware courts had not formally adopted the federal model, but did say it was appropriate
115 TCW Technology Ltd. Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 at * 3 (Del.Ch., Oct 17, 2000). 116 TCW Technology Ltd. Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 at * 4 (Del. Ch., Oct 17, 2000). See also In re Siliconix Inc. Shareholders Litigation 2001 WL 618210 * 2 (Del.Ch., 2001) (Vice Chancellor Noble said various factors could come into play in a case where a court was determining who should be lead counsel but specifically acknowledged that Chancellor Chandler had said in TCW Technology that quality of the pleadings, the economic stake in the outcome of the litigation and the vigor with which a litigant had prosecuted the action were important). 117 Pub. L. No. 104-67, 109 Stat. 737. 118 TCW Technology Ltd. Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 at * 4 (Del. Ch., Oct 17, 2000).
39
“to give recognition to large shareholders or significant institutional investors who are willing
to litigate vigorously on behalf of an entire class of shareholders.”119
TCW Technology did not mean that Delaware courts discounted completely the
significance of being first-to-file. In In re IBP Inc., Shareholder Litigation, a 2001 case
where Vice Chancellor Strine declined to stay Delaware-based litigation arising from a
merger in favor of Arkansas courts, he said “The fact that the court treats these actions as
contemporaneously filed does not mean that the first time-stamp should lose all relevance. In
close cases where the issue of convenience is in equipoise, it makes sense as a matter of
comity to regard the first time-stamp factor as a tipping one in a forum non conveniens
analysis.”120 Still, any presumption in favour of first-to-file was now weak at best in
Delaware courts. In the 2003 case of Biondi v. Scrushy, where Vice Chancellor Strine
declined to stay a derivative lawsuit brought in Delaware in deference to litigation launched
earlier in Alabama, he remarked upon the “public policy interest favoring the submission of
thoughtful, well-researched complaints-rather than ones regurgitating the morning’s financial
press” and observed “Delaware law places more emphasis on quality than speed when
assessing derivative complaints.”121 Similarly, in Rosen v. Wind River Systems Inc., a 2009
case where Vice Chancellor Parsons declined to dismiss derivative litigation filed in
Delaware in deference to derivative lawsuits filed earlier in California state court, he said
“Although equity disfavors those who slumber on their rights, the inverse is not always true --
119 TCW Technology Ltd. Partnership v. Intermedia Communications, Inc., 2000 WL 1654504 at * 4 (Del. Ch., Oct 17, 2000). Delaware courts subsequently indicated that the size of a plaintiff’s holding was not to be used to generate a formalistic ranking but rather was relevant in determining whether the plaintiff had an economic incentive to monitor counsel. See Wiehl v. Eon Labs, 2005 WL 696764, at * 3 (Del. Ch. May 22, 2005); In re Revlon Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL * 28 (2010) 120 In re IBP Inc., Shareholder Litigation, 2001 WL 406292 at * 8 (Del. Ch., Apr. 18, 2001) 121 Biondi v. Scrushy, 820 A.2d 1148, 1162 (Del. Ch. 2003).
40
this Court should not necessarily reward the most fleet-of-foot in a sprint to the
courthouse.”122
Vice Chancellor Strine was even more forceful in his 2010 decision in King v.
VeriFone Holdings Inc.123 In this case he dismissed an application to examine corporate
books and records under section 220 of the Delaware General Corporation Law by a plaintiff
who had been named lead plaintiff in a derivative suit brought in federal court involving
Verifone, a Delaware corporation that had experienced a sharp drop in the stock price after it
announced it was restating financial statements it had issued. Vice Chancellor Strine
observed that “rewarding plaintiffs and their counsel who sue first, and investigate and think
second is likely to maximize the costs to investors of representative suits and minimize the
benefits” and correspondingly said “Perhaps it is time for the reversal of the traditional
presumption in favor of first filers in the derivative suit context.”124
While Delaware courts have since TCW Technology discounted heavily the
significance of quick filing, the first-to-file “custom” retained vibrancy elsewhere due to
courts continuing to leave it to the parties to sort out themselves who would be lead counsel
and continuing to recognize in cases where the courts had to intervene that the order of filing
was a relevant factor in the selection of lead counsel.125 King v. VeriFone Holdings Inc.
illustrates the continued vitality of the first-to-file custom outside Delaware. Counsel for the
lead plaintiff in the federal court derivative suit candidly admitted in the section 220 hearing
filing the complaint rapidly so as to be the first derivative complaint on file and therefore be
well-positioned to win what Vice Chancellor Strine called the “lead counsel Olympics 122 Rosen v. Wind River Sys., Inc., 2009 WL 1856460, at *5 (Del. Ch. June 26, 2009) 123 King v. VeriFone Holdings Inc., 2010 WL 1904972 (Del. Ch., 2010). 124 King v. VeriFone Holdings Inc., 2010 WL 1904972 * 18, n. 34 (Del. Ch., 2010). 125 WILLIAM RUBENSTEIN, ALBERT CONTE AND HERBERT B. NEWBERG, NEWBERG ON CLASS ACTIONS § 9.35 (4th ed, 2002). No statute or procedural rule gives the courts affirmative authority to appoint lead counsel: Fisch, “Aggregation”, supra note xx, 56, n. 17. However, MacAlister v. Guterma 263 F.2d 65 (2d Cir., 1958) is commonly cited as authority for the proposition that such authority exists.
41
race.”126 As Vice Chancellor Strine said, “Counsel’s sense of the incentive system at work
was vindicated”, in the sense that when all federal securities and derivative suits relating to
the VeriFone stock price drop were consolidated before a single judge of the United States
District Court for the Northern District of California, the plaintiff and his counsel prevailed in
the “lead counsel Olympics” due to winning the race to file.127
The growing discrepancy between the approach taken to nimble filers in Delaware
and elsewhere created incentives for at least some plaintiffs’ lawyers to steer clear of
Delaware courts. To understand why, assume that a lawyer who is a member of a modest-
sized plaintiff’s law firm is acting on behalf of a client who is not an institutional investor but
instead is a retail investor who owns stock worth a few thousand dollars in a Delaware-
incorporated public company headquartered in the same state as the client. The lawyer is
intending to bring a derivative lawsuit or class action lawsuit, and, as with the plaintiff’s
lawyer in King v. VeriFone Holdings Inc., aspires to be lead counsel.
The lawyer in our hypothetical is familiar with the Delaware case law indicating that
filing quickly in Delaware is unlikely to be of assistance on this count, and realizes that,
based on the criteria identified in TCW Technology, that he would not otherwise prevail if a
dispute over the naming of lead counsel was to come before the Delaware Court of Chancery.
Correspondingly, the plaintiff’s lawyer might well not bother filing promptly, or perhaps at
all, in Delaware. In contrast, the lawyer would have a clear incentive to take part in the “lead
counsel Olympics race” and file immediately elsewhere if the first-to-file custom was in
operation in the state court where the corporation was headquartered or in the federal court
district in which the lawyer would otherwise file. If the lawyer wins the race and is named
lead counsel, he should be well-positioned to make a claim for attorneys’ fees in settlement
126 King v. VeriFone Holdings Inc., 2010 WL 1904972 * 6 (Del. Ch., 2010). 127 King v. VeriFone Holdings Inc., 2010 WL 1904972 * 6 (Del. Ch., 2010).
42
negotiations down the line even if a more thoroughly formulated case was filed subsequently
in Delaware.
To the extent that TCW Technology and related cases discouraged nimble, modest-
sized law firms from filing cases in Delaware, one would anticipate that an out-of-Delaware
trend would have emerged during the first half of the 2000s. Our empirical evidence,
summarized in Part II, indicates this is what occurred. However, caution is required before
inferring causation.
One reason it is unclear whether the departure from the first to file “custom” in
Delaware influenced case filing patterns is that the decision in TCW Technology did not
generate the sort of attention that would be anticipated if it was the harbinger of a new
approach to corporate litigation tactics. The Cox Communications ruling on attorneys’ fees
generated much commentary and prompted speculation that plaintiffs’ attorneys might steer
clear of Delaware.128 In contrast, TCW Technology went largely unnoticed and failed to
elicit, at least in published sources, predictions that abandonment of the first-to-file custom
would drive litigation out of Delaware.129 The case also failed to put nimble litigators out of
business in Delaware. Vice Chancellor Strine, in his 2005 decision in Cox Communications,
remarked upon “hastily-filed, first-day complaints that serve no purpose other than for a
particular law firm and its client to get into the medal round of the filing speed (also formerly
known as the lead counsel selection) Olympics.”130 Similarly, in the 2010 Revlon case Vice
Chancellor Laster observed “the first cases often appear minutes or hours after the
announcement with others following within a matter of days.”131
128 See Marcus, “State”, supra note xx. 129 The only exception was a brief article on the case in the Andrews Delaware Corporate Litigation Reporter that did not discuss the venue point: Del. Judge Uses Reform Act Model, Chooses Institutional Investor for Lead Role, ANDREWS DEL. CORP. LITIG. REP., Nov. 13, 2000, 3. 130 In re Cox Communications, Inc., 879 A.2d 604, 608 (Del. Ch. 2005). 131 In re Revlon Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL, * 4 (2010).
43
Another reason caution is appropriate before inferring that TCW Technology and
related cases helped to cause an out-of-Delaware litigation trend is that the first-to-file
presumption is by no means absolute outside Delaware. According to Newberg on Class
Actions “The first attorney to file is not entitled to special consideration for appointment as
lead counsel simply by winning the race to the courthouse.”132 Likewise, a 20-member task
force composed of judges, lawyers and academics struck by the chief judge of the federal
Third Circuit said in a 2002 report “counsel’s diligence in filing an action is a relevant
consideration, but only if the filing indicates that counsel has done some real investigation
into and work on the case.”133 Hence, for law firms with modest resources and a client who
is not a major shareholder, the tactical advantage obtained by filing promptly outside
Delaware cannot be taken for granted. On the other hand, the facts in King v. VeriFone
Holdings Inc. do indicate that there are instances where promptness can be advantageous
outside Delaware. Correspondingly, TCW Technology and related cases likely contributed at
least in some measure to the out-of-Delaware trend we document.
F. Changes to Federal Securities Law
In the 1980s federal securities class action litigation burgeoned, particularly due to a
bevy of securities lawsuits against high-tech companies.134 A backlash ensued,135 with
hostility towards securities class actions ultimately setting the scene for reform in the form of
132 RUBENSTEIN, CONTE AND NEWBERG, supra note xx, § 9.35. 133 THIRD CIRCUIT TASK FORCE ON THE SELECTION OF CLASS COUNSEL, FINAL REPORT, (January 2002), available at http://www.ca3.uscourts.gov/classcounsel/final%20report%20of%20third%20circuit%20task%20force.pdf (last visited June 24, 2010), 99. On the composition of the task force, see Shannon P. Duffy, 3rd Circuit to Examine Class Counsel Selection, LEGAL INTELLIGENCER, January 31, 2001, 1. 134 Romano, “Shareholder”, supra note xx, 58-60; Securities Fraud Litigation: Both Sides Agree it is a Never-Ending Battle, CORPORATE LEGAL TIMES, Sept. 1992, 1 (remarks of William Lerach, indicating that the number of securities class action rose steadily from 1982 to 1991); Nanette L. Stasko, Competitive Bidding in the Courthouse: In Re Oracle Securities Litigation, 59 BROOK. L. REV. 1667, 1670-71 (1994). 135 William S. Lerach, Securities Class Actions and Derivative Litigation Involving Public Companies: One Plaintiff’s Perspective, in PLI/LITIGATION, October, 1990, 65, 99-101.
44
the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform
Standards Act of 1998.136 An unintended by-product was an increase in derivative suits, with
the new litigation being likely to occur outside Delaware. Correspondingly, reform of
securities law likely contributed to the out-of-Delaware trend we document.
There is considerable potential for derivative litigation brought under corporate law to
function as a substitute for or compliment to a securities lawsuit. For instance, intentional
misconduct by directors which results in corporate misdisclosure can provide the foundation
for both a derivative action arising under corporate law and a claim arising under federal
securities law.137 Likewise, director recklessness, in the sense of conscious disregard of
responsibilities undertaken, can provide grounds for a securities class action and a derivative
suit if the plaintiff shareholder can tie the alleged misconduct to an allegedly false or
misleading public statement.138 Moreover, for directors the risk of personal liability ends up
being similar in a derivative action arising under state corporate law and a federal securities
claim. With virtually all publicly traded companies taking advantage of statutory provisions
allowing corporations to exculpate directors and officers from liability for breach of duty
other than for dishonest conduct and breaches of duties of loyalty and good faith,
malfeasance that is sufficiently serious to be unprotected in a derivative suit should be
egregious enough to satisfy the federal securities law scienter standard.139
While there is potential for derivative litigation to act as a substitute for or a
compliment to a securities lawsuit, traditionally with public companies securities class
136 Pub. L. No. 105-353; 112 Stat. 3227. 137 Jessica Erickson, Corporate Misconduct and the Perfect Storm of Shareholder Litigation, 84 NOTRE
DAME L. REV. 75, 89 (2008); Malone v. Brincat, 722 A. 2d 5 (Del. 1998). 138 Erickson, “Corporate Misconduct”, supra note xx, 90. 139 Erickson, “Corporate Misconduct”, ibid. note xx, 88-90. Plaintiffs have an incentive, however, to allege knowing participation or acquiescence in dishonest conduct so as to disable the directors from considering demand to bring a derivative suit, thus removing an important procedural hurdle. See David Priebe, Piling On: The Reemergence of the Parallel Derivative Lawsuit as the Federal Securities Class Action Window Closes, 1136 PLI/CORP. 333, 337, 339 (1999).
45
actions and derivative suits operated in largely separate legal spheres.140 A desire to sidestep
PSLRA restrictions on securities class actions changed matters. Prior to the enactment of the
PSLRA plaintiffs’ lawyers reputedly regularly filed securities class actions with a minimal
factual foundation intending to use discovery to conduct a “fishing expedition” while
simultaneously counting on corporate concerns about the high cost of discovery to negotiate a
sizeable settlement from a potentially groundless claim.141 The PSLRA sought to correct
matters by prohibiting plaintiffs in securities class actions from obtaining discovery until after
a case had survived a motion to dismiss and by requiring courts to dismiss a class action
lawsuit unless the plaintiff alleged “with particularity...facts giving rise to a strong inference”
that the defendants had acted with the required state of mind.142
Many plaintiffs’ lawyers initially side-stepped the PSLRA restrictions by bringing in
state court claims based on state securities law, with the result being that soon more than half
of securities class action lawsuits were filed in state court.143 Congress reacted by enacting
the SLUSA in 1998.144 The Act gave defendants the right to remove a state law securities
class action lawsuit falling within the purview of Rule 10b-5, the far-reaching federal
securities law provision that creates a private right of action for material misstatements that
affect secondary trading of securities,145 to federal court, where a federal judge would in all
140 Erickson, “Corporate Misconduct”, supra note xx, 78; Priebe, “Piling”, supra note xx, 335; Robert B. Thompson and Randall S. Thomas, The Public and Private Faces of Derivative Lawsuits, 57 VAND. L. REV. 1747, 1773 (2004) (indicating that where plaintiffs could bring a federal securities class action or a derivative lawsuit under Delaware corporate law, they would usually opt for the former). 141 Erickson, “Corporate Misconduct”, supra note xx, 93. 142 15 U.S.C. §§ 77z-1(b), 78u-4(b)(3)(B) (discovery); 15 U.S.C. § 78u-4(b)(2) (pleading standard) 143 Peter Bassett and Kelly C. Wilcove, Post Reform Act Developments in Derivative, Financial Advisor, and State Court Securities Litigation, 1199/PLI CORP. 545, 550-51 (2000); Jordan A. Costa, Removal of Securities Act of 1933 Claims After SLUSA: What Congress Changed and What It Left Alone, 78 ST. JOHN’S L. REV. 1193, 1202-3 (2004). 144 Pub. L. No. 101-353, 112 Stat. 3227 (1998). 145 17 C.F.R. § 240.10b-5 (2010).
46
likelihood dismiss the proceedings. The SLUSA thus essentially consigned state law
securities class actions to the dustbin of history.146
Plaintiffs’ lawyers then turned to another tactic to circumvent the restrictions the
PSLRA had introduced, namely filing “parallel” or “tagalong” derivative suits under state
corporate law based on nearly identical facts that could “piggyback” on securities
litigation.147 Plaintiffs’ lawyers, knowing that due to the PSLRA they would be forced to
confront tough pleading requirements with a securities class action while possessing only
information available through their own independent investigations, turned to derivative suits
to build a case with meaningful settlement value.148 Discovery typically is available in
derivative lawsuits much earlier than in securities class actions due to derivative suits being
subject to the rules generally applicable to civil actions. Because of this, and because the
sharing of discovery materials between plaintiffs in securities litigation and derivative
lawsuits is generally permissible, for lawyers bringing securities class actions filing a parallel
derivative action could yield important tactical advantages.149 The SLUSA did not pose an
obstacle because it contained a Delaware “carve out” that specifically exempted actions based
on the corporate law of a company’s state of incorporation.150 Moreover, the courts generally
rejected applications for a discovery stay in a derivative action brought on a tagalong basis so
long as the plaintiff was not pursing discovery as a subterfuge to circumvent the PSLRA.151
146 Costa, “Removal”, supra note xx 1205; Priebe, “Piling On”, supra note xx, 335. 147 On the nomenclature, see Erickson, “Corporate Governance”, supra note xx, 1778; Erickson, “Corporate Misconduct”, supra note xx, 85-86. 148 Erickson, “Corporate Misconduct”, supra note xx, 94; Michael A. Collora and David M. Osborne, Class Action Reforms Spur Derivative Claims, NAT. L.J., February 15, 1999, B8; Lower Court Ruling Will Encourage ‘Tag Along’ Derivative Suits, Say Directors, ANDREWS SEC. LITIG. & REG. REP., April 14, 1999, 5. 149 Erickson, “Corporate Misconduct”, supra note xx, 94. 150 15 U.S.C. § 77p(f)(2)(B); 15 U.S.C. § 77p(d)(1); Bassett and Wilcove, “Post Reform”, supra note xx, 557-58. 151 For a summary of relevant decisions, see Marvin L. Frank, “Staying Derivative Actions Pursuant to PSLRA and SLUSA”, N.Y.L.J., October 21, 2005, 4. There have been cases, however, where courts have
47
Oracle CEO Larry Ellison, in a 2004 brief filed with the Supreme Court of California,
claimed “shareholders have transformed the derivative action into a new way to litigate
[securities] fraud actions.” 152 Likewise, according to a 2009 press report there had been an
“explosion” in tagalong derivative lawsuits.153 This PSLRA-induced surge in derivative
litigation likely contributed to the out-of-Delaware corporate litigation trend we have
documented. With a publicly traded corporation incorporated under Delaware law but
headquartered elsewhere, a plaintiffs’ attorney is unlikely to launch a parallel derivative
lawsuit in Delaware with the intent of building a stronger overall claim. This is because
Delaware is one of a minority of states where discovery in derivative actions is stayed during
the pendency of a motion to dismiss, which means it will be difficult to obtain expedited
discovery.154 Correspondingly, with Delaware-incorporated public companies plaintiffs’
attorneys have a tactical incentive to bring a tagalong derivative suit in federal court or in
state court in the state where the corporation is headquartered.
Delaware corporate law offers a potential substitute for expedited discovery, namely
obtaining an order permitting the inspection of books and records under section 220 of the
Delaware General Corporation Law. The Delaware judiciary has indicated that plaintiffs can
feasibly use an order obtained under section 220 to build a case sufficiently strong to
establish that the board of a targeted company has wrongfully refused a plaintiff’s pre-suit
demand to launch the suit or that making such a demand would be futile and thus should be
stayed “piggyback” derivative actions. See e.g. Breault v. Folino 2002 WL 31974381 (C.D. Cal. Mar. 15, 2002); Brudno v. Wise, 2003 WL 1874750 (Del. Ch., April 1, 2003). 152 Quoted in Erickson, “Corporate Misconduct”, supra note xx, 86. 153 Mark Friedman, Derivative Lawsuits on the Rise, ARKANSAS BUSINESS, July 6, 2009, 18. See also Frank, “Staying”, supra note xx (saying that derivative lawsuits were “often” filed concurrently securities class actions). 154 Frank, “Staying”, supra note xx.
48
excused.155 At the same time, however, for a plaintiff’s attorney bringing an application
under section 220 is risky. Considerable time and effort is typically required to build up
evidence to support a successful application, and for a lawyer working on a contingency fee
basis, as a plaintiff’s attorney no doubt will be, the “up front” investment required will be a
potentially worrying prospect. Correspondingly, even if a books and records application is a
possibility, a plaintiff’s attorney contemplating filing a tagalong derivative lawsuit in relation
to a public company incorporated under Delaware law might well opt to by-pass the
Delaware courts if there is another plausible venue that offers ample scope for discovery
early in the proceedings. To the extent this pattern was replicated going back through time,
reform of federal securities law occurring during the 1990s would have contributed to the
out-of-Delaware trend we have documented.
IV. The Delaware Courts’ Balancing Act
Losing corporate law cases to other courts potentially puts Delaware judges very
much on the spot. The trend, if it is sustained, could erode the value of the large body of case
law precedent widely recognized as a crucial element of the highly successful Delaware
corporate brand. Moreover, diminished case flow could jeopardize the much-envied status of
Delaware’s judges as the de facto “national” corporate judiciary. Correspondingly, Delaware
judges have incentives to try to reverse the out-of-Delaware trend. To follow through,
however, the Delaware judiciary will need to negotiate successfully a delicate and perhaps
impossible balancing act.
A. Judicial Incentives to Reverse the Out-of-Delaware Trend
Delaware’s Court of Chancery judges are often characterized as a judicial elite corps
that operates above the standard civil litigation fray and engages in principled, depoliticized
155 Radin, “New”, supra note xx, 1290, 1296; Romero v. Career Education Corp. WL 5750613 (Del. Ch., 2005).
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lawmaking, thus enhancing the legitimacy of Delaware as a national standard-setter for
corporate law.156 The Delaware judiciary’s self-perception accords with this portrait, as the
state’s judges take pride in keeping up with business trends and in reacting quickly in a
professional manner to challenges posed.157 William Allen, Chancellor of the Delaware
Court of Chancery from 1985 to 1997, argued in a 2000 speech that “The Delaware system
requires sophisticated and diligent judges” and maintained that “pride in the tradition of
excellence and the importance of Delaware law has played nationally act as an important
non-economic incentive for judges who serve under the light of national publicity to work
hard and do their best.”158 Similarly, a vice-chancellor of the Delaware Court of Chancery
was quoted anonymously in a 2002 law review article as saying Delaware judges are driven
by “pride and service” and that “In Delaware we believe we are doing something that benefits
all of society, and it is important to do this well.”159
The elite status of Delaware judges is by no means a given. Instead, their nationally
prominent role is contingent in part upon them having a steady flow of cases to hear,
particularly those of potentially major doctrinal importance.160 Correspondingly, to the
extent that the out-of-Delaware trend we report on deprives Delaware courts of the
opportunity to hear key cases involving Delaware companies, professional pride gives the
state’s judges an incentive to adopt tactics designed to channel cases towards the Delaware
court system.
156 See, for example, Kahan and Rock, “Symbiotic”, supra note xx, 1602-4, 1611; Simmons, “Branding”, supra note xx, 1142-43. 157 Roe, “Delaware”, supra note xx, 594. 158 William T. Allen, The Pride and the Hope of Delaware Corporate Law: Keynote Address by the Honorable William T. Allen, 25 DEL. J. CORP. L. 70, 73 (2000). 159 Marcus Cole, “Delaware is Not a State”: Are We Witnessing Jurisdictional Competition in Bankruptcy?, 55 VAND. L. REV. 1845, 1874 (2002). 160 Supra note xx and related discussion.
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Potential tarnishing of Delaware’s corporate brand provides Delaware judges with an
additional incentive to protect their “turf”. A key aspect of Delaware’s dominance of the
incorporation marketplace is the guidance an extensive and timely body of precedent arising
from prior cases offers to “users” of Delaware corporate law.161 As a 2001 article entitled
“Incorporate in Delaware. Yes” put it, “the inability of other states to actually create a
judicial system as competent, as predictable, and as quick as Delaware’s will always give
Corporate America great pause when prodded to incorporate elsewhere.”162 A sustained out-
of-Delaware trend could diminish the guidance Delaware case law provides going forward,
with Delaware case law becoming out-of-touch with corporate practice due to key cases
being filed and adjudicated elsewhere. This, in turn, could erode Delaware’s popularity as a
destination for incorporation.
Law professor Douglas Branson has said of Delaware, “Litigation and the flow of
chancery and supreme court opinions thereby produced actually generate the predictability
hometown counsel and their corporate manager clients desire.”163 To the extent Delaware’s
corporate clientele believe the state’s body of case law precedent is being devalued due to
Delaware courts losing important cases to other jurisdictions, corporations that previously
might have shifted to Delaware to benefit from Delaware jurisprudence may refrain from re-
incorporating and opt for the more convenient option of operating under the corporate law of
the state in which they are headquartered. At the same time, those corporations strongly
inclined to “shop” conceivably might choose a state other Delaware. For instance, Nevada,
Delaware’s closest (albeit distant) rival in the market for incorporation sweepstakes,164 might
become a more attractive choice. The Delaware judiciary reputedly is highly sensitive to
161 Supra note xx and related discussion. 162 John L. Reed and Frank E. Noyes, Incorporate in Delaware? Yes, DIRECTORS & BOARDS, January 2001, 33, 34. 163 Branson, “Indeterminacy”, supra note xx, 91. 164 Michal Barzuza and David C. Smith, What Happens in Nevada, unpublished working paper, (2010).
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signals generated by the market for incorporation.165 Correspondingly, evidence that a steady
migration of cases out of Delaware was undermining the state’s dominance as a provider of
corporate law plausibly could elicit a counter-reaction from Delaware’s judges designed to
recapture litigation “market share”.
There is no evidence yet that Delaware is losing out on incorporation business due to
concerns about Delaware case law precedents. Among companies in the Fortune 500, the
proportion incorporated under Delaware law was 63% in 2009, as compared with 60% in
2005.166 This should not be surprising, at least for now. While an out-of-Delaware litigation
trend ultimately could erode Delaware’s dominance in the market for incorporations by
hampering the evolution of Delaware case law, this is a process that is only likely to take
shape over the long term.
Due to a massive “first mover” advantage, even if key cases are only rarely resolved
in Delaware courts going forward Delaware’s body of case law will be much better
developed than that of any state for some time to come,. Moreover, to the extent that
litigation does continue to occur in Delaware, due to the reputation of the Delaware judges
opinions they issue are likely to have an outsized precedential impact. The experience with
options backdating litigation illustrates the point. While plaintiffs’ lawyers largely by-passed
Delaware when filing options backdating suits alleging breaches of fiduciary duty by
corporate directors,167 legal commentators analyzing options backdating devoted considerable
attention to Delaware decisions on point such as Ryan v. Gifford168 and Desimone v.
165 Timothy P. Glynn, Delaware’s Vantagepoint: The Empire Strikes Back in the Post-Post-Enron Era, 102 NORTHWESTERN L. REV. 91, 105 (2008) 166 DELAWARE DEPARTMENT OF STATE, DIVISION OF CORPORATIONS, 2005 ANNUAL REPORT, 1 (2006), available at http://corp.delaware.gov/2005%20doc%20ar.pdf (last visited July 2, 2010); DELAWARE
DEPARTMENT OF STATE, DIVISION OF CORPORATIONS, 2009 ANNUAL REPORT, 1 (2010), available at http://corp.delaware.gov/2009ar.pdf (last visited July 2, 2010). 167 Supra notes xx to xx and accompanying text. 168 Ryan v. Gifford, 918 A.2d 341 (Del. Ch. 2007).
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Barrows.169 This implies that Delaware courts will continue to “hit above their weight” with
corporate key issues even if much day-to-day corporate litigation occurs elsewhere.
While Delaware case law will remain highly influential for the time being, there is a
related but different channel through which an out-of-Delaware trend could prompt publicly
traded companies to steer clear of Delaware. For users of Delaware corporate law even if the
state’s case law retains substantial doctrinal importance, it will be disadvantageous if
Delaware judges only rarely hear cases that arise. One difficulty would be that non-Delaware
judges seeking to apply Delaware precedents may fail to do so as reliably as their Delaware
counterparts. The problem, to quote law professor Ehud Kamar, is that, “Other judges, no
matter how skilled and experienced, could not divine how a Delaware judge would decide a
given case.”170 To the extent this is correct, corporate defendants will potentially be
disadvantaged. As Kenton King, a litigation partner in Wall Street-based Skadden Arps Slate
Meagher & Flom, said in 2006,“What I tell clients is that even though Delaware law is being
applied, when it’s being applied by a bench that doesn't have as much familiarity with these
cases, the predictability goes down.”171 By extension, an out-of-Delaware trend concerning
litigation venue means incorporation in Delaware becomes a less attractive proposition than it
would be if corporate defendants could be confident that lawsuits they might face would be
heard in Delaware courts. Forestalling the erosion of Delaware’s popularity as a venue for
incorporation thus provides the state’s judges with an incentive to reverse a loss of litigation
market share.
169 Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007). For examples of commentators focusing on these cases, see Abbott, “Shareholder”, supra note xx, 604-17; “Corporate Governance”, Mondaq Bus. Briefing, August 3, 2007, 2007 WLNR 14910004; John L. Reed and Paul D. Brown, Corporate Governance Litigation 2007: 2007 Review, 32 DIRECTORS AND BOARDS, issue #4, 16 (2008). 170 Kamar, “Regulatory”, supra note xx, 1930. 171 Marcus, “State”, supra note xx. King was a partner in Skadden Arps’ Palo Alto office.
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The value of Delaware incorporation could also be reduced if non-Delaware courts
hear a large proportion of cases involving Delaware companies because the state’s corporate
law jurisprudence could become more strongly influenced by non-Delaware decisions. Well
developed precedent is valuable to business decision-making, and the large volume of case
law arising from Delaware courts combined with the continuity and expertise of Delaware’s
judiciary is a strong factor in Delaware’s success.172 An out-of-Delaware litigation trend
could compromise the advantages Delaware offers by reducing the Delaware courts’ ability
to control and develop precedent. Delaware case law might carry substantial weight in other
jurisdictions but would not be binding. Decisions of non-Delaware courts on Delaware
corporate law similarly would not be binding on Delaware courts; the Delaware courts would
need to decide how much persuasive effect to accord them. The risk of conflicting
precedents would rise, as would the risk that there will be no Delaware precedent to which
courts could look, wherever located.
The case law on when directors have not acted in good faith provides an example.
The question of good faith is central for the many public companies that have adopted
“Section 102(b)(7) charter provisions” which eliminate the monetary liability of directors for
breach of fiduciary duty for, to simplify, actions taken in good faith. The Delaware courts
have ruled that to show lack of good faith, plaintiffs must show either a conflict of interest or
“conscious disregard” of duty.173 But no Delaware case has found such a conscious
disregard, leaving little guidance on what fact patterns might meet this standard. The leading
cases on what is conscious disregard under Delaware law come from elsewhere – from
172 Fisch, “Peculiar”, supra note xx, 1063, 1070-71; Holland, “Delaware’s”, supra note xx, 771; Marcel Kahan and Ehud Kamar, Price Discrimination in the Market for Corporate Law, 86 CORNELL L. REV. 1205, 1212 (2001). 173
In re Walk Disney Co,. Deriv. Litig, 906 A.2d 27 (Del. 2006); Stone v. Ritter, 911 A.2d 372 (Del. 2006). Conscious disregard of duty is also relevant in assessing whether plaintiffs can be excused, in a derivative case, from making demand on the board of directors to bring the suit itself. See Andrew C.W. Lund, Rethinking Aronson: Board Authority and Overdelegation, 11 U. PA. J. BUS. L. 703, 720‐23 (2009).
54
Abbott Laboratories in the Seventh Circuit, and more recently from Pfizer in the Southern
District of New York.174
In Pfizer, the court rejected the defendants’ motion to dismiss a derivative suit against
the directors of Pfizer, a major pharmaceutical company incorporated in Delaware, which
alleged the directors had consciously disregarded evidence of widespread “off-label” drug
marketing. Judge Rakoff found that the complaint, accepted as true, established a substantial
likelihood the Pfizer directors had deliberately disregarded red flags suggesting illegal
marketing practices. The case is ongoing, but is already an important precedent in this area.
A similar decision on summary judgment could become a leading precedent that other courts
would look to – and perhaps one that the Delaware courts would rely on as well. It might be
a long time before the Delaware courts faced comparable facts, and could offer their own
views.
Would a Delaware court have reached the same conclusion? There is no way to know
for sure. What we do know is that Delaware was deprived, in Abbott Labs and again in
Pfizer, of the opportunity to develop its own case law.
B. Steps Delaware Judges Could Take to Reverse the Out-of-Delaware Trend
To the extent that Delaware judges are aware of the out-of-Delaware trend we have
documented and are inclined to try to reverse it, there are various steps they could take. One
would be for the Delaware judiciary to take a robust stance when inter-jurisdictional conflicts
arise in the context of corporate litigation so as to encourage courts elsewhere to defer to
Delaware courts when Delaware-incorporated companies are involved. Adopting this tactic
should be straightforward for Delaware judges as they already appear to be more than willing
to protect their “turf” when corporate litigation has a multi-jurisdictional aspect.
174 In re Abbott Labs Deriv. Shareholder Litig., 325 F.3d 795 (7th Cir. 2003); In re Pfizer Inc. Shareholder Deriv. Litig., No. 09 Civ. 7822 (S.D.N.Y., July 13, 2010).
55
Delaware courts have never been inclined to cede jurisdiction to another court when a
lawsuit has been filed first in Delaware, indicating that a defendant’s forum non conveniens
motion in Delaware will only succeed if “overwhelming hardship” is demonstrated.175
Delaware courts have also recently become increasingly willing to depart from the general
principle that they will grant a forum non conveniens motion in favor of another court where
the case before the Delaware courts was filed in the other court first, denying such motions
on grounds such as the presence of novel issues of Delaware law and the better framing of the
Delaware complaint.176 In re IBP Inc., Shareholder Litigation, Biondi v. Scrushy and In
Rosen v. Wind River Systems Inc., each of which was discussed in Part III.E., all illustrate the
trend, as in each case the Delaware Court of Chancery declined to stay or dismiss lawsuits
brought in Delaware on the basis of proceedings that had been launched earlier or
contemporaneously in another state.
VantagePoint Venture Partners 1996 v. Examen Inc. also indicates a willingness on
the part of Delaware judges to protect their turf. 177 In this 2005 case the Delaware Supreme
Court held that Delaware law on shareholder voting governed a dispute between shareholders
in a Delaware-incorporated, California-based closely held corporation despite California
having a statutory provision specifically on point. In so doing the Delaware Supreme Court
took the opportunity to declare the internal affairs doctrine that dictates that the law of the
state of where a corporation is incorporated governs disputes arising under corporate law is
not a mere a choice-of-law rule but has constitutional underpinnings under the Due Process
clause and the dormant Commerce Clause. The decision has been interpreted as a signal to
the Delaware Chancery Court to be aggressively pro-Delaware in future cases involving
175 Berger v. Intelident Solutions Inc., 906 A.2d 134, 135 (Del. 2006); Stevelman, supra note xx, 104-7. 176 For a review of the case law, see Stevelman, supra note xx, 108-18. 177 VantagePoint Venture Partners 1996 v. Examen Inc., 871 A. 2d 1108 (Del. 2005).
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inter-jurisdictional conflicts and to courts in other states that Delaware will “go to the mat” to
ensure Delaware corporate law applies to Delaware-incorporated corporations.178
A second tactic Delaware courts can potentially deploy to channel corporate law cases
back toward Delaware is to reverse judicial rulings and pronouncements that potentially deter
plaintiffs from filing in Delaware courts. Judicial scrutiny of attorneys’ fees would be an
obvious place to start. As Part III.D. discussed, Cox Communications Inc., the 2005 case
where Vice Chancellor Strine cut substantially the fees the plaintiffs’ lawyers were to receive,
has been identified as a catalyst for the out-of-Delaware trend we have documented.179 To
the extent this is a correct diagnosis, Delaware courts seemingly have an easy “fix”: adopt a
more liberal approach with attorneys’ fees. As law professor Geoffrey Miller said in a 2009
paper on Delaware courts and the duty of care of directors “Courts cannot engage in
commentary if they do not have cases, and cases will not be brought if the attorney does not
anticipate a fee.”180
Revisiting the approach taken with the selection of lead counsel is another doctrinal
reversal Delaware courts could execute to try to halt the outward migration of cases involving
Delaware-incorporated public companies. As Part III.E. described, Delaware courts have
indicated that, in contradistinction with the prevailing norm among the plaintiffs’ bar, they
will attach little weight to prompt filing when resolving disputes about who should be
appointed lead counsel in representative litigation, thus creating an incentive for nimble
plaintiffs’ lawyers to file outside Delaware.181 In order to get the law firms who opt to
participate in the “lead counsel Olympics race” to return, Delaware courts could reward
178 Stevelman, supra note xx, 88; Glynn, “Delaware’s”, supra note xx, 137. 179 Supra note xx and related discussion. 180 Geoffrey P. Miller, A Modest Proposal for Fixing Delaware’s Broken Duty of Care, NYU Center for Law, Economics and Organization, Working Paper No. 09-41, 17 (2009). 181 Supra note xx and related discussion.
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speedy filing by treating this as a factor to which weight would be attached in contests
between plaintiffs’ attorneys to be named lead counsel.
Third and finally, a change in rhetoric could help to reverse the out-of-Delaware
litigation trend. Again, in Cox Communications Vice Chancellor Strine expressed “deep
concerns about the agency costs imposed by plaintiffs’ attorneys” and in Revlon Vice
Chancellor Laster referred to a “business model of filing and free-riding”.182
Pronouncements of this sort give plaintiffs’ attorneys legitimate grounds for wondering how
level the playing field is in Delaware. Correspondingly, to convince plaintiffs’ attorneys to
return to Delaware, Court of Chancery judges may well need to emphasize the valuable role
representative litigation plays in imposing a check on wayward or dishonest managers and to
downplay the aspersions they have cast on entrepreneurial plaintiffs’ attorneys.
C. Obstacles
While the Delaware judiciary has incentives to seek to reverse the out-of-Delaware
trend we have documented and while it is possible to envisage steps Delaware courts could
take to encourage plaintiffs’ attorneys to file in Delaware, it is far from clear that the state’s
judges will be inclined to follow through. One reason is that the much-envied reputation the
Delaware judiciary has as elite, national arbiters of corporate law could be jeopardized.
Efforts Delaware courts have made to assert control over litigation involving Delaware-
incorporated companies where multi-jurisdictional filing has occurred illustrate the point.
Commentators have described Delaware’s stance as “aggressive” and “transparently self-
interested” 183 and have characterized the constitutional law analysis in VantagePoint as
“gratuitous” and an example of “remarkable overbreadth”.184 Criticism of this sort indicates
182 Supra notes xx and xx and accompanying text. 183 Glynn, “Delaware’s”, supra note xx, 118, 137. 184 Stevelman, supra note xx, 88.
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that aggressive efforts by Delaware courts to maximize control over corporate lawsuits
involving Delaware-incorporated companies could badly tarnish the judiciary’s hard-earned
image as even-handed arbiters of corporate law.
The reputational hit could be even more severe if Delaware judges sought to reverse
the out-of-Delaware trend by adopting a more liberal approach to attorneys’ fees, by giving
substantial weight to early filing in disputes over the designation of lead counsel and by
renouncing the skeptical rhetoric they have used to describe the plaintiffs’ bar. Executing an
about-face on these issues so as to create a hospitable environment for all and sundry to file
cases in Delaware would leave Delaware judges open to the charge they were hypocritical,
unprincipled promoters of the Delaware brand. Their standing as a judicial elite corps would
be compromised accordingly.
The fact that there are a lot of cases Delaware judges might not want back could also
deter the judiciary from reversing rulings and pronouncements that encourage plaintiffs to
steer clear of Delaware. The Delaware judiciary, it appears, has serious doubts about the
viability of many of the actions filed in the Delaware Court of Chancery. Vice Chancellor
Laster, for instance, indicated in his 2010 Revlon decision that cases filed immediately on the
heels of a merger transaction involving a Delaware corporation are often deeply problematic,
saying
“The number of actions and pace of filing were noteworthy only because similar
announcements of controlling stockholder transactions historically have triggered
more numerous filings within a much shorter period. As this Court has previously
observed, the first cases often appear minutes or hours after the announcement with
others following within a matter of days. But although the four complaints in this
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case were filed on a marginally more moderate schedule, the work product did not
reflect any noticeable improvement in quality.”185
For Delaware judges reversing the out-of-Delaware trend may well have little appeal
if the result is that the sort of cases Vice Chancellor Laster refers to are filed with greater
frequency in Delaware courts. If a plaintiff’s attorney has brought what turns out to be a
weak claim and is looking to press for a quick settlement rather than to pursue the case
seriously, managing the litigation is largely an administrative function involving addressing
motions to expedite an outcome and then approve the settlement negotiated (if any). The
likelihood of such cases generating the sort of disputes that would give Delaware judges the
scope to exploit their widely acknowledged expertise in corporate law will correspondingly
be small. Similarly, there will only be a remote chance this sort of case will provide the
opportunity for the development of a case law precedent of importance to users of Delaware
law. Delaware judges might well believe it will be beneficial if such cases are filed
elsewhere, and thus will not be inclined to make changes intended to repatriate such
litigation.
Concerns about scare judicial resources will likely reinforce this view. There are only
five Delaware Court of Chancery judges, and they do not have unlimited capacity to deal
with new cases, even of a largely perfunctory nature. Correspondingly, if adopting a liberal
policy towards attorneys’ fees or ascribing greater weight to prompt filing in disputes over
appointment of lead counsel restored and even bolstered Delaware’s cases-filed “market
share”, the Delaware Court of Chancery could find itself in a position where it could not
accommodate adequately the fresh demand for its services. Users of Delaware law thus
ultimately might be better served if the judiciary devoted the limited resources at hand to a
circumscribed number of significant cases involving real stakes and real disputes. Indeed, if
185 In re Revlon Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL *4 (2010).
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tough regulation of attorneys’ fees and a failure to reward hasty filers has merely discouraged
the launching of weak claims in Delaware courts, the outcome could be “win-win” for
Delaware judges, in that their limited resources are being conserved for the challenging,
complicated cases where their expertise will be put to most effective use and their reputation
as the de facto national court for corporate law should remain fully intact.
While Delaware courts and users of Delaware corporate law stand to benefit if careful
scrutiny of attorneys’ fees and a boycott of the “lead counsel Olympics race” mean Delaware
courts retain control over meritorious cases and marginal cases are filed elsewhere, it is
doubtful that matters will resolve themselves as neatly as this. For Delaware’s win-win
scenario to come to fruition, plaintiffs’ attorneys would need to be able to identify promptly
with some precision “good” cases and “bad” cases. The “serious” lawyers bringing
meritorious cases would then file their suits in Delaware to benefit from “serious” judges
whereas lawyers bringing speculative cases unlikely to do more than generate a modest
settlement on the basis of a nuisance effect would go elsewhere.
The problem with this scenario is that plaintiffs’ lawyers frequently cannot identify
whether a case is “good” or “bad” cases before filing. Intensive fact-gathering will
frequently be required before lawyers acting on behalf of stockholders in lawsuits arising
under corporate law can gauge with confidence whether a case is meritorious. Postponing the
decision to file so as to do the necessary “due diligence” will be an unattractive option so
long as an attorney seeking to be named lead counsel in a derivative lawsuit or a class action
can benefit from getting to the courthouse first. This means in the particular context of
Delaware that its courts can easily lose “good” cases as well as “bad”.
Consider a situation where an attorney who is contemplating launching a derivative
suit or class action in relation to a Delaware corporation is first off the mark but is unsure
about the strength of the case and is eager to be appointed lead counsel. The attorney,
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seeking to capitalize on his advantageous placing in the “lead counsel Olympics race”, steers
clear of Delaware and opts to file in the state where the corporation is headquartered. The
plaintiff’s attorney, relying on discovery and other forms of fact-finding, then deduces that
the case in fact is strong enough to take to trial unless a large settlement offer is forthcoming.
At this point, matters will likely have progressed too far for the case to go forward in
Delaware. Delaware will thus have lost the sort of “good” case likely to generate a precedent
instructive for “users” of Delaware law. To the extent this pattern recurs, the Delaware court
system will be deprived of the case flow that underpins the judicial contribution to the
Delaware “brand”.
Our analysis of options backdating litigation illustrates that there is a real risk of
Delaware courts losing “good” cases due to an out-of-Delaware trend. If a case settles for a
sizeable amount of money, this constitutes a reasonably reliable signal that it was a “good”
case because defendants (or their insurers) are unlikely to agree to pay an appreciable sum to
resolve a case unless there is a realistic risk of a loss at trial. In our options backdating
dataset, of the 169 instances where allegations of options backdating prompted a lawsuit
under corporate law, we found 52 cases where there was a cash settlement, with the aggregate
value of deals struck being nearly $1.6 billion. A $900 million settlement involving
UnitedHealth Group, a Minnesota company, accounted for more than half of this total.186
There were, however, 17 other options backdating cases where derivative litigation yielded a
settlement of $10 million or more, and 13 of these cases involved Delaware companies. With
settlements of this sort, the underlying case likely was strong enough to mean Delaware
judges would have wanted to be involved. However, of the 13 cases involving Delaware
companies, in only one instance, involving NVIDIA Corp., was derivative litigation
186 For the details regarding this settlement, see http://dandodiary.blogspot.com/2007/12/unitedhealth-derivative-settlement.html#links .
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commenced in Delaware, and these proceedings were ultimately subsumed in favor of
lawsuits brought in federal and state court in California.
Assume now that Delaware judges, having taken into account a possible reputational
“hit” and resource constraints, are convinced a loss of “market share” with respect to cases
filed is seriously detrimental to Delaware’s interests and are inclined to seek to correct
matters. A final obstacle to proceeding would be concerns their efforts would not succeed.
One reason success could not be guaranteed is that plaintiffs’ attorneys, aware of the rhetoric
used in cases such as Cox Communications and Revlon, might remain unconvinced Delaware
had become genuinely plaintiff-friendly and continue to file cases elsewhere with
considerable regularity. Delaware courts would therefore have run the risk of being labelled
hypocritical, unprincipled promoters of the Delaware brand without re-establishing Delaware
courts as the clearly dominant venue for corporate litigation.
Success also could not be guaranteed because the out-of-Delaware trend is not
attributable solely to stances Delaware judges have adopted. As Part III.F. described, the
dramatic growth of “tagalong” derivative lawsuits prompted by the PSLRA and SLUSA
contributed to the increase in the growth of litigation outside Delaware. This pattern would
be unaffected by the stance Delaware courts took concerning attorneys’ fees, the selection of
lead counsel and the merits of the business model of plaintiffs’ attorneys. Correspondingly,
even if Delaware judges did a complete about-face on these various counts, it is unlikely
Delaware courts would dominate the corporate litigation terrain to the extent they did
formerly.
If Delaware judges did successfully lure plaintiffs’ attorneys back to Delaware
courtrooms by reversing gears, there is a final potential twist. While the Delaware courts
would, at least temporarily, secure the desired flow of cases, as Douglas Branson has
observed, “Overly generous fee awards and excessive litigation...unduly burden corporate
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treasuries and are inimical to longer term shareholder interests.”187 Correspondingly, if the
Delaware judiciary gave the green light to corporate lawsuits by rewarding hasty filing, by
giving settlements providing for generous attorneys’ fees a free pass and by deploying
plaintiff-friendly rhetoric, corporations might begin to forsake Delaware as their
incorporation destination on the basis the state was too litigation-friendly. This would for
Delaware be a case of winning the battle but losing the war. Hence, Delaware courts, by
readjusting matters to attract corporate litigation, might get the balance badly wrong, both
from the perspective of the Delaware judiciary and Delaware’s incorporation brand more
generally. Being aware of this, Delaware judges might well deduce that being proactive to
recover the state’s litigation “market share” is unlikely to be worthwhile and opt to stand pat.
V. Extra-Judicial Responses to the Out-of-Delaware Trend
While it is unclear whether the Delaware judiciary will be inclined to take steps to
reverse the migration of corporate law cases out of Delaware and it is an open question
whether judicial efforts on this front would succeed, this does not mean a continuation of the
out-of-Delaware trend we have documented is a foregone conclusion. Instead, there are
various possible ways matters could be reversed that would not require Delaware judges to
make adjustments to the approach they take when dealing with cases that come before them.
This could potentially occur, for example, due to “self-help” by potential corporate
defendants, reform by the Delaware legislature and reform at the federal level.
A. “Self-Help”
To this point, we have sought to account for the out-of-Delaware trend we have
documented largely in terms of incentives affecting and strategies available to the plaintiffs’
bar. Plaintiffs’ attorneys, however, do not have decisive control over where corporate
187 Branson, “Indeterminacy”, supra note xx, 102.
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litigation proceeds.188 Instead, there are strategic responses available to lawyers representing
corporations and their directors to influence venue. One possibility, canvassed in Part II.A.,
is ex post in orientation, in that corporate defendants can, after a lawsuit is brought, bring
forum non conveniens proceedings to try to channel litigation to a preferred jurisdiction.
Another possibility, and the one focused on here, is acting ex ante by securing adoption of a
provision in a corporation’s charter or bylaws specifying an exclusive forum for litigation of
shareholder claims alleging breaches of fiduciary duty.
To the extent lawyers acting on behalf of public companies and public company
directors seek to influence where litigation occurs, their efforts will likely reverse at least
partially whatever out-of-Delaware trend plaintiffs’ lawyers create. This is because Delaware
courts are generally popular with corporations, directors and the lawyers who represent them.
As Stephen Radin, a senior litigation partner at Weil, Gotshal & Manges LLP specializing in
defense work said of the Delaware Court of Chancery in a 2004 interview, “It is a great court.
There is a Chancellor and four Vice Chancellors. Each is expert in corporate law. I wish
more of my practice was in Delaware.”189 Similarly, Kenton King, the Skadden Arps partner,
said in 2006 of options backdating lawsuits involving public companies incorporated under
Delaware law heard outside Delaware, “What I tell clients is that even though Delaware law
is being applied, when it’s being applied by a bench that doesn't have as much familiarity
with these cases, the predictability goes down....For the same reason that as a defendant I'm
uncomfortable with the uncertainty it creates, the plaintiffs’ bar may see that as a positive.”190
188 Stevelman, “Regulatory”, supra note xx, 100. 189 A Corporate Governance Practitioner on the Delaware Courts, METROPOLITAN CORPORATE COUNSEL, November 2004, 47. 190 Marcus, “Did Chancery”, supra note xx.
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Only a tiny handful of Delaware corporations have adopted a bylaw or charter
provision purporting to make Delaware the exclusive forum for fiduciary duty claims.191
Nevertheless this form of self-help has various adherents. When Wachtell Lipton partner Ted
Mirvis drew attention to what he referred to as the “Anywhere But Chancery” phenomenon in
2007 his proposed cure was for Delaware corporations to adopt charter or by-law provisions
selecting Delaware as the exclusive forum for litigation.192 Vice Chancellor Laster endorsed
Delaware-only forum selection clauses in In re Revlon Inc. Shareholders Litigation saying “if
boards of directors and stockholders believe that a particular forum would provide an
efficient and value-promoting locus for dispute resolution, then corporations are free to
respond with charter provisions selecting an exclusive forum for intra-entity disputes.”193 At
least one law firm told clients in the wake of the Revlon decision that a provision of this sort
was the new “must” for companies incorporated under Delaware law.194
While Delaware-only forum selection clauses have their adherents, it is unlikely they
will halt the out-of-Delaware trend we document. Stockholder resistance is one potential
obstacle. Even shareholders with genuine respect for the expertise of the Delaware judiciary
could balk at the notion that litigation concerning a Delaware-incorporated company should
only occur in Delaware. In particular, institutional investors that partner with some regularity
with plaintiffs’ law firms – particularly public pension funds195 -- could be uneasy about
being tied down in this way.
191 Lewis, “Transforming”, supra note xx, 203 Latham & Watkins, Designating Delaware’s Court of Chancery as the Exclusive Jurisdiction for Intra-Corporate Disputes: A New ‘Must’ for Delaware Company Charter or Bylaws, CORPORATE GOVERNANCE COMMENTARY, April 2010, 4, available at http://www.lw.com/upload/pubContent/_pdf/pub3510_1.pdf (last visited June 10, 2010). 192 “Anywhere But Chancery”, supra note xx. 193 In re Revlon Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL, 38* (2010). 194 Latham & Watkins, “Designating”, supra note xx, 4. 195 Some law firms even make campaign contributions to public pension officials seeking re-election: Mark Maremont, Tom McGinty and Nathan Koppell, Trial Lawyers Contributed, Shareholder Suits Follow, WALL ST. J., Feb. 3, 2010.
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Even if Delaware companies could get their shareholders onside, the enforceability of
a Delaware forum selection provision is uncertain, particularly because there does not appear
to be a case directly on point.196 Delaware courts have applied provisions in operating
agreements of Delaware LLCs compelling arbitration under the laws of a different state to
dismiss derivative suits brought in Delaware courts.197 However, the enforceability of a
forum selection provision in favor of Delaware would not come up before Delaware courts.
Instead, what would happen is that a derivative suit or class action would be brought in
another court and defense counsel would rely on the clause in forum non conveniens
proceedings to get the proceedings stayed or dismissed. Assuming the court otherwise had
jurisdiction (e.g. because the lawsuit had been launched in state court in the state where the
corporation was headquartered) the judge would then have to rule on the effect of the
Delaware-only forum selection provision.
Traditionally, state and federal courts refused to enforce forum selection clauses,
reasoning contractual terms of this nature were void as against public policy because courts
were being ousted of their jurisdiction.198 However, this hostility was reversed dramatically
by the United States Supreme Court’s 1972 decision in M/S Bremen v. Zapata Off-Shore Co.,
where the Supreme Court held that forum selection clauses are prima facie valid and should
be upheld unless the resisting party could show enforcement would be unreasonable under
the circumstances.199 Correspondingly, a judge asked to determine the enforceability of a
Delaware forum selection provision could well accept, as Delaware courts do, that a 196 Lewis, “Transforming”, supra note xx, 204. 197 Elf Atochem North America, Inc. v. Jaffari, 727 A. 2d 286 (Del. Sup. Ct., 1999) (clause favoring application of California law); Douzinas v. American Bureau of Shipping, 888 A. 2d 1146 (Del. Ch., 2006) (clause favoring application of Texas law). 198 Walter W. Heiser, Forum Selection Clauses in State Courts: Limitations on Enforcement After Stewart and Carnival Cruise, 45 FLA. L. REV. 361, 366-67 (1993). 199 M/S Bremen v. Zapata Off-Shore Co. 407 U.S. 1 (1972). The Supreme Court indicated that its holding was limited to admiralty jurisdiction and international commercial contracts, but lower federal courts and state courts in most jurisdictions quickly applied the reasoning in other contexts: Heiser, “Forum…State”, supra note xx, 363, 367-72.
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corporation’s charter and bylaws are analogous to a contract,200 and then rule accordingly the
clause should be upheld.
A judge’s reaction could be much different, however. Assume a case involving a
Delaware-incorporated public company is brought in state court in the state where the
headquarters are located, the corporation is an important fixture in that state and the plaintiffs
advance plausible prima facie evidence that the corporation’s directors had engaged in
serious misconduct. Defense counsel then relies on a Delaware-only forum selection clause
to argue the state court should defer to Delaware. The judge fielding the application quite
plausibly could respond with annoyance, taking the view that the corporation and its lawyers
should not be telling him (or her) not to take the case. As Jesse Finkelstein, co-author of
Delaware Law of Corporations & Business Organizations201 said when asked about the
enforceability of a Delaware-only forum selection provision, “When states believe that a
citizen of that state has been injured by some conduct, they tend to seize jurisdiction.”202
All else being equal, a Delaware-only forum selection clause is less likely to be
enforced if it is in the by-laws as opposed to the charter. With most Delaware corporations,
the board can adopt a by-law without any follow up action being taken by the shareholders.203
Assuming this occurred with a Delaware-only forum selection provision, a judge skeptical of
the clause might well take the view that it is inappropriate for directors to determine
unilaterally the jurisdiction in which they are to be sued. The counter-argument would be
200 Centaur Partners, IV v. National Intergroup Inc., 582 A 2d 923, 928 (Del. 1990) (“Corporate charters and by-laws are contracts among the shareholders of a corporation and the general rules of contract interpretation are held to apply); Jackson Walker LLP v. Spira Footware Inc., 2008 WL 2487256, at 4* (Del. Ch., June 23, 2008) (“A company’s bylaws are contractual in nature.”). 201 JESSE A. FINKELSTEIN AND R. FRANKLIN BALOTTI, DELAWARE LAW OF CORPORATIONS & BUSINESS
ORGANIZATIONS (3rd ed., 1998). 202 Quoted in “Anywhere But”, supra note xx, 18. 203 See Del. Gen. Corp. Law §109(a), which stipulates that a Delaware corporation can use its charter to confer on the board the power to adopt, amend or by-laws unilaterally. Most Delaware corporations have charter provisions of this sort.
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that under Delaware corporate law properly adopted by-laws are binding on shareholders
regardless of whether or not the shareholders have voted.204 A judge unsympathetic to a
Delaware-only forum selection clause might rule, however, that the provision he was dealing
with was of a different character than a typical by-law and should be treated in a distinct
manner. There would be legitimate scope to do so, because, as the U.S. Supreme Court’s
decision in Bremen indicates, a forum selection clause will not be enforced unless it is
reasonable and just in the circumstances.205
As for a Delaware-only forum selection provision in the corporate charter, the
wording of the Delaware General Corporation Law provides plausible grounds for a judge in
another state to disregard such a clause in forum non conveniens proceedings. Section
102(b)(1) stipulates that the charter of a Delaware corporation can contain “Any
provision...creating, defining, limiting and regulating the powers of the...stockholders...not
contrary to the laws of this State.” Arguably, due to constraints imposed on Delaware’s
lawmaking powers under the Full Faith and Credit Clause, Delaware cannot preclude
stockholders of a Delaware corporation from suing the corporation or its directors for breach
of Delaware law in a court, state or federal, which otherwise has personal and subject matter
jurisdiction. Correspondingly, a judge might rule that a Delaware-only forum selection
provision in the charter was “contrary to the laws of” Delaware and decline to enforce it.
Uncertainties concerning the effectiveness of a Delaware-only forum selection clause
would be compounded if a defendant was seeking to reroute litigation filed in federal court,
particularly given that the enforceability in federal court of agreements compelling litigation
to occur in state court is an unsettled and complex issue that has received little academic
204 CA Inc. v. AFSCME Employees Pension Plan, 953 A.2d 227, 234 (Del. 2008) (“Bylaws, by their nature, set down rules and procedures that bind a corporation’s board and its shareholders.”). 205 Most states follow the same test for enforceability the U.S. Supreme Court set down in Bremen: Heiser, “Forum…State”, supra note xx., 369-70. See, for example, Sternberg v. O’Neill, 532 A.2d 993, 997 (Del. Ch., 1987) rev'd in part and aff'd in part, 550 A.2d 1105 (Del. 1988).
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attention.206 It might be thought section 1441(a) of the federal transfer of venue statute,
which provides a defendant with the right to apply to have a case initiated in state court
removed to federal district court, would decide the matter because a choice of law clause
could not dislodge a defendant’s right to go to federal court. The federal courts, however,
have said this provision constitutes a waivable statutory right that can be displaced in advance
by contract.207 Correspondingly, so long as the state court stipulated in a forum selection
clause has concurrent subject matter jurisdiction over a case, federal courts will typically
uphold an agreement to litigate in that state court.208 This means a federal court will likely
decline to exercise jurisdiction on the basis of a forum selection provision where a plaintiff
has brought a case to federal court on the basis of the principle of diversity because state
courts necessarily have subject matter jurisdiction in such instances.209
Situations where Congress has vested exclusive jurisdiction in the federal courts are
more problematic. In such instances, a court may well treat a forum selection provision as
being unenforceable because parties cannot by private agreement deprive the federal courts of
their exclusive jurisdiction and confer jurisdiction on state courts.210 This is a potentially
crucial qualification in the corporate context because the Securities and Exchange Act of
1934 gives the federal courts exclusive jurisdiction over claims arising under the Act.211 To
illustrate, consider a case involving a Delaware corporation with a Delaware-only forum
selection clause where an action is filed in federal court that encompasses a state law claim
for breach of fiduciary duty that is pendent to a claim arising under federal securities 206 Michael B. Moberly, Judicial Protection of Forum Selection: Enforcing Private Agreements to Litigate in State Court, 1 PHOENIX L. REV. 1, 4, 55 (2008). 207 28 U.S.C. §1441(a); Walter W. Heiser, Forum Selection Clauses in Federal Courts: Limitations on Enforcement After Stewart and Carnival Cruise, 45 FLA. L. REV. 553, 595-96 (1993). 208 Moberly, “Judicial”, supra note xx, 12-13. 209 Ibid., 13. On the fact that the federal court will be declining to exercise jurisdiction as opposed to being in a situation where jurisdiction has been ousted, see Heiser, “Forum…Federal”, supra note xx, 597-98. 210 Moberly, “Judicial”, supra note xx, 21-23, 37. 211 15 U.S.C. § 78aa.
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legislation. The defendants seek to rely on the clause to argue that the federal court should
defer to Delaware courts. The federal court will in all likelihood deny the motion because
federal courts have exclusive jurisdiction with respect to the 1934 Act. The best outcome the
defendants are likely to get would be for the federal court to stay proceedings until the
Delaware courts adjudicated claims falling within concurrent state and federal jurisdiction.212
B. Delaware Legislation
To the extent that the out-of-Delaware trend we document could have an adverse
impact on the Delaware corporate “brand”, Delaware politicians, presumably eager to
preserve the state’s dominance as the corporate destination of choice, have an incentive to
adopt a “fix” to try to reverse matters. There is precedent for this, as there have been various
instances where Delaware lawmakers have introduced provisions which facilitate litigation
before Delaware courts. For instance, the Delaware Supreme Court Rules Court provide that
where a federal court or state appellate court concludes there are important and urgent
reasons for the Delaware Supreme Court to address immediately questions of Delaware law
the court in question can certify those questions to the Delaware Supreme Court to resolve.213
Extending this right to state courts is highly exceptional,214 implying that the Delaware
Supreme Court is open for business to a greater extent than its peers in other states.
Moreover, in 2003 a provision was added to Delaware’s “long-arm” statute (legislation
allowing Delaware courts to exercise jurisdiction over an out-of-state defendant) extending
its operation to any non-resident accepting election or appointment as an officer of a
212 On this possibility, see Moberly, “Judicial”, supra note xx, 57.
213 Delaware Supreme Court Rules, Rule 41. See also Del. Const. art. IV, 11(8). [This example was provided by Verity Winship at Illinois, noting that the provision had been expanded in 2007 to cover SEC references but saying the rule may have been in place for other states since the early 1990s.] 214 According to Verity Winship.
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Delaware corporation,215 thus facilitating the launching of litigation against Delaware-
incorporated companies.
The most obvious step the Delaware legislature could take going forward would be to
enact a statutory provision addressing forum selection that specifically authorizes Delaware
corporations to stipulate that fiduciary duty litigation must occur in Delaware courts.216 This
sort of explicit statutory endorsement should make it less likely that a judge would rule that a
Delaware-only forum selection provision was unenforceable. The Association of the Bar of
the City of New York’s Committee on Securities Litigation has indeed recommended that
legislation should be enacted explicitly authorizing public companies to contract with their
investors to limit the venue for M&A-oriented shareholder litigation filed under state law to
the courts of the state of incorporation.217
An amendment to the Delaware General Corporation Law explicitly authorizing
adoption of a forum selections clause would not guarantee, however, that a court in another
state or a federal judge would defer when confronted with such a clause. To the extent
Delaware itself lacks the constitutional authority to dictate the location of litigation affecting
Delaware companies, a provision in the Delaware General Corporation Law explicitly
endorsing the adoption of a forum selection clause would necessarily be ineffective.
Moreover, even if Delaware was competent to endorse forum selection provisions statutorily,
this would not resolve complications concerning enforcement in cases where a corporate law
claim was pendent to a claim to a lawsuit arising under federal securities legislation.218 The
upshot is that an amendment to the Delaware General Corporation Law explicitly authorizing
215 10 Del.C. § 3114(b). 216 Stevelman, “Regulatory”, supra note xx, 135. 217 Association of the Bar of the City of New York’s Committee on Securities Litigation, supra note xx, 8-9. 218 See supra note xx and accompanying text.
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adoption of a forum selection clause could at best only reverse partially an out-of-Delaware
litigation trend.219
C. Federal Reform
The out-of-Delaware trend we have documented could elicit change at the federal
rather than the state level. For instance, the Association of the Bar of the City of New York’s
Committee on Securities Litigation used its 2010 policy paper to put on the agenda federal
reforms designed to channel corporate litigation towards Delaware courts. The Committee,
citing the costs multi-jurisdictional M&A litigation imposes, suggested federal legislation
could be enacted which mandated that corporate lawsuits arising in a merger context occur in
state court in the state where the target company is incorporated.220 Given that most public
companies are in fact incorporated under Delaware law, reform of this nature would channel
lawsuits towards Delaware courts.
Federal reform, however, would not necessarily have to bolster the Delaware courts in
the corporate context. Instead, federal rule-making could plausibly have the opposite effect
and largely sideline Delaware courts as adjudicators of corporate disputes involving public
companies, with the out-of-Delaware trend providing the justification. Prompted by mistrust
of class action lawyers and concerns state courts lacked the wherewithal to regulate class
actions properly, the PSLRA and the SLUSA were designed to channel class action litigation
away from state courts to federal courts.221 Due, however, to the Delaware carve out,
derivative suits and class actions arising under corporate law were specifically excluded from
the new regime and a similar carve out was provided for in the Class Action Fairness Act of
219 A more radical possibility would be adoption of a statutory provision mandating litigation in Delaware courts. It is doubtful, however, that a statutory measure of this sort would be constitutionally valid. See Stevelman, “Regulatory”, supra note xx, 135. 220 Association of the Bar of the City of New York’s Committee on Securities Litigation, supra note xx, 9. 221 Supra note xx and related discussion.
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2005 when it dramatically expanded federal subject matter jurisdiction over state law class
actions.222 The basic rationale was that the Delaware judiciary had proved it could deal with
class actions in an efficient and predictable manner for all litigants.223 Delaware courts,
unlike their potentially wayward counterparts in other states, were thus assumed to offer a
safe pair of hands that rendered unnecessary a Congressionally-backed diversion of class
actions to federal courts.
Given the rationale underlying the Delaware carve outs, the out-of-Delaware litigation
trend we have documented implies a rethink may be in order. If class action lawsuits brought
under corporate law are now being filed more often in other state courts than they are in
Delaware, the Delaware court system no longer offers the secure backstop it provided when
the SLUSA and the Class Action Fairness Act of 2005 were enacted. Hence, to the extent
that it is sensible public policy to shift class action litigation from state to federal courts, the
Delaware carve outs arguably should be abolished, meaning class action lawsuits arising
under corporate law would be heard in federal court.
Abolition of the Delaware carve outs would radically reorient the corporate litigation
landscape at Delaware’s expense. Would this be beneficial? Or might the status quo in fact
be preferable, with Delaware courts being left free to carry out the delicate balancing act Part
IV described, perhaps assisted by a statutory provision specifically authorizing the adoption
of Delaware-only forum exclusion clauses? We do not stake out for present purposes a
definitive position on these difficult questions, but can identify the factors that should be
taken into account when assessing the desirability of reform. We do this next.
VI. The Out-of-Delaware Trend: Pros and Cons
222 Pub. L. No. 109-2, 119 Stat. 4 (2005) (codified at 28 U.S.C. § 1453); 28 U.S.C. § 1453(d)(2)-(3). 223 Strine, “Delaware’s”, supra note xx, 1257, 1273.
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As Part IV.A. discussed, a plausible by-product of the out-of-Delaware trend we have
documented is that Delaware’s dominant status as the locale for incorporation could be
placed under threat. Nevertheless, in assessing the costs and benefits associated with this
trend, it is instructive to assume initially that there will not be a major erosion of Delaware’s
incorporation market share. Doing so serves to isolate concerns about whether competitive
federalism yields a “race to the top” or a “race to the bottom” from other salient normative
variables.
A. Implications of Forum Shopping
With respect to corporate litigation, an out-of-Delaware trend necessarily implies
forum shopping, a practice that is routinely denounced.224 One point critics make is that
forum shopping is undesirable because jurisdictional or venue rules get exploited strategically
to manipulate lawsuit outcomes.225 Critics also argue that forum shopping is inefficient, in
the sense that duplicative expenses are generated as litigants aim to proceed in the forum that
is the most favorable, rather than the simplest or closest.226 Inefficiency of this sort could be
a major downside with an out-of-Delaware trend, as there is considerable potential for
duplicative suits being brought in more than one jurisdiction. For instance, while in the
1990s it was standard for corporate litigation involving mega-deal M&A transactions to occur
in Delaware courts only, during the latter half of the 2000s this sort of “Delaware only”
scenario was a rarity.227 Likewise, in our options backdating dataset in only four out of the
25 instances of alleged options backdating where a derivative lawsuit was filed in Delaware
224 Juenger, “Forum”, supra note xx, 553; Note, Forum Shopping Reconsidered, 103 HARV. L. REV. 1677, 1680 (1990). 225 Juenger, “Forum”, supra note xx, 553; Bassett, “Forum”, supra note xx, 388 (summarizing the argument). 226 Note, “Forum Shopping”, supra note xx, 1684, 1691 (summarizing the argument).
227 Supra notes xx to xx and accompanying text.
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courts were proceedings brought in Delaware exclusively.228 The growing prevalence of
multi-jurisdictional litigation implies in turn the investment of time and effort by lawyers and
judges to reconcile matters in a way that would be unnecessary if multiple suits were largely
confined to a single jurisdiction, such as Delaware. This was the rationale the Association of
the Bar of the City of New York’s Committee on Securities Litigation provided in its 2010
policy paper when it indicated that a way to reduce duplicative litigation in the M&A context
would be for federal legislation to be enacted mandating that corporate lawsuits arising in a
merger context occur in courts in the state where the target company was incorporated.229
While aspects of forum shopping can be inefficient the practice is not objectionable
per se. It cannot be taken for granted that in a particular instance there is clearly a single
proper law to apply or a single proper court to hear a case. Selection between courts by
parties thus can be a legitimate, necessary aspect of civil litigation.230 Moreover, forum
shopping, instead of being conceived of as legal sharp practice, can be thought of more
charitably in market terms. Litigants, under this analogy, constitute the demand side, judges
constitute the supply side and the competitive discipline imposed by litigant choice can be
said to generate efficient outcomes by feedback and trial-and-error.231 In other words, forum
shopping, depending on the circumstances, could generate net benefits, despite involving
some inefficiency. Correspondingly, assessing properly the normative implications of an out-
of-Delaware corporate litigation trend necessitates focusing on the particular institutional
228 Supra note xx and related discussion. 229 Association of the Bar of the City of New York’s Committee on Securities Litigation, supra note xx, 9. 230 Bassett, “Forum”, supra note xx, 384-88. 231 Zywicki, supra note xx, 1146-47.
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context rather than assuming a priori overlapping multi-jurisdictional lawsuit activity renders
the trend undesirable.232
B. Will an Out-of Delaware Trend Diminish the Quality of Judicial Decision-Making in
Corporate Law Cases?
Delaware-based adjudication of corporate litigation is potentially beneficial in various
respects. Delaware judges, with their good “feel” for the realities of corporate life, are
theoretically well-positioned to make rulings that accord with sound business logic.233 As
Vice Chancellor Strine has said extra-judicially of litigation in Delaware courts “the system
(has) produced predictable, efficient results that balanced the needs of managers for
flexibility and consistency with those of stockholders in policing self-dealing and managerial
sloth.”234 Moreover, Delaware’s judicial leadership arguably fosters greater legal coherence
in the context of corporate law, to the benefit of all. To quote Vice Chancellor Strine again,
“Through this means, the United States realizes the benefits of a virtual national company
law, but more efficiently. Even for firms not chartered in Delaware, the insights of Delaware
courts are likely to be more important than their own state’s law, as a practical matter.
Delaware law is, in essence, American corporation law for most purposes.”235
The benefits of Delaware-based adjudication of corporate law disputes will be
jeopardized if opportunities for Delaware courts to hear cases involving Delaware corporate
law are steadily eroded. To the extent that Delaware judges lose “market share” to
counterparts elsewhere lacking their “feel” for business, the risk of ill-advised corporate law
232 Zywicki, ibid., 1148, 1157-60 (making the basic point, and concluding after examining Delaware corporate law that it is unclear whether forum shopping is a good or bad thing). 233 Daines, “Does”, supra note xx, 540. 234 Strine, “Delaware”, supra note xx, 682. 235 Strine, ibid., 683-84.
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decisions increases.236 Also, the U.S. could lose the de facto national corporate law it
presently benefits from. As Vice Chancellor Strine said in In re Topps Co. Shareholders
Litigation, the “important coherence-generating benefits” of Delaware courts will be at risk if
“decisions are instead routinely made by a variety of state and federal judges who only deal
episodically with our law.”237
It cannot be taken for granted, however, that an out-of-Delaware trend will necessarily
diminish the quality of judicial decision-making in corporate cases. Endorsements of
Delaware are by no means unanimous. Some argue, consistent with the theory that
Delaware’s manager-friendly judiciary helped to ensure Delaware won a “race to the
bottom”, that Delaware’s judges unjustifiably shield directors and officers from liability for
corporate misdeeds.238 Other critics maintain that, due to over-reliance by Delaware courts
on indeterminate, fact-intensive legal tests, key areas of Delaware law are plagued by
uncertainty that delays transactions and increases litigation costs.239 To the extent the critics
are correct, a migration of corporate litigation out of Delaware is unlikely to have a serious
detrimental impact on the quality of corporate law. Moreover, freedom of choice regarding
forum selection arguably could have a salutary, disciplinary impact on Delaware corporate
law, in that forum shopping will counteract whatever temptation Delaware judges might have
to be “manager-friendly” to buttress the Delaware brand.240
236 Klausner, “Corporations”, supra note xx, 845-46 (saying “once a judge is appointed, his or her performance in the corporate law area…will depend at least in part on the number of corporate law cases the court hears.”) 237 In re Topps Shareholders Litigation, 924 A. 2d 951, 959 (Del. Ch., 2007). 238 See, for example, Jones, “Rethinking”, supra note xx. 239 See, for example, William J. Carney and George B. Shepherd, The Mystery of Delaware’s Law’s Continuing Success [2009] U. ILL. L. REV. 1, 14-48. Not all commentators who maintain Delaware’s corporate law is biased in favor of indeterminacy are critical of the pattern. See, for example, Fisch, “Peculiar”, supra note xx. 240 Stevelman, supra note xx, 65.
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An “as compared to what” dimension also comes into play. If an out-of-Delaware
trend puts the abolition of the Delaware carve outs in federal legislation governing securities
law and class actions squarely on the agenda, then, with respect to judicial expertise, the
relevant comparison becomes the current mix of Delaware courts, federal courts and state
courts versus a regime where federal courts clearly dominate. How would the federal courts
stack up?
Some commentators speculate that Delaware judges have greater legitimacy than
federal judges in the context of corporate litigation due to having more experience with
corporate cases.241 The heterogeneity of the federal court system in fact complicates any
assessment of how federal judges measure up against their Delaware counterparts. There are
federal courts, such as the Northern District of California and the Southern District of New
York, where judges are exposed sufficiently regularly to corporate and securities litigation to
develop a good “feel” for corporate-related cases.242 Judges elsewhere will not be so well-
positioned. They might encounter derivative lawsuits and corporate-related class actions only
very rarely during their judicial careers, and thus could find themselves somewhat at sea
when confronted with such a case.
A study by James Cox, Randall Thomas and Lynn Bai indicates that differences in
pleading standards rarely result in forum shopping as between federal court districts in class
actions brought under federal securities law despite plaintiffs having substantial discretion to
decide where to file.243 This implies that if the Delaware carve outs were abolished and class
actions arising under state law were heard in federal court, plaintiffs would only rarely
241 Simmons, “Branding”, supra note xx, 1165. 242 On why cases are filed in the Southern District of New York, see supra note xx (discussing the location of the court). On suits being common in the Northern District of California, see supra note xx and related discussion. 243 James D. Cox, Randall S. Thomas and Lynn Bai, Do Differences in Pleading Standards Cause Forum Shopping in Securities Class Actions? Doctrinal and Empirical Analyses, [2009] WISC. L. REV. 422, 439-45.
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engage in forum shopping among federal court districts to try to ensure their cases were heard
by judges renowned for their familiarity with corporate and securities law. Correspondingly,
given the widely acknowledged expertise of Delaware Court of Chancery judiciary, abolition
of the Delaware carve outs would likely compromise at least to some degree the expertise
level of judges hearing corporate-oriented cases involving publicly traded companies.
C. Impact on the Delaware Brand
Assume now that an out-of-Delaware trend concerning corporate litigation can
influence the extent to which Delaware dominates the market for incorporations. As Part
IV.A. discussed, migration of litigation away from Delaware courts could cause corporate
“customers” to defect to other states because Delaware would be offering a less authoritative
and up-to-date body of case law precedents than was formerly the case. Would Delaware’s
loss of incorporation market share be a bad thing? All the domestic constituents who benefit
directly or indirectly from the Delaware brand – the state’s lawmakers, taxpayers, lawyers
and judges -- would be adversely affected.244 However, those who characterize U.S.
corporate federalism as a “race to the bottom”, in the sense that Delaware has dominated the
competition for incorporation business by pandering to corporate directors and officers,
would likely treat the erosion of Delaware’s dominant position in corporate law as a positive
development. If Delaware genuinely is the lowest common denominator from a corporate
law perspective, outward migration must by definition be beneficial.
For those inclined to characterize U.S. corporate federalism in terms of a “race to the
top”, in the sense that competition is beneficial because it induces states to offer corporate
law designed to maximize firm value, the situation is more complicated. On one view,
uniting the corporate legislation of a particular state with adjudication by that state’s courts
244 Marcel Kahan and Edward Rock, How to Prevent Hard Cases From Making Bad Law: Bear Stearns, Delaware, and the Strategic Use of Comity, 58 EMORY L.J. 713, 751 (2009).
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facilitates brand recognition and therefore is essential to the successful operation of the
beneficial federal competition.245 As Frank Easterbrook and Daniel Fischel argued in a 1984
paper, “Jurisdictional competition is most effective when the consequences of a decision will
be experienced in one jurisdiction. Because only one state’s law governs the ‘internal affairs’
of a corporation, competition can be effective.”246 Or as Marcel Kahan and Ed Rock have
said, a view widely held among the Delaware judiciary, the corporate litigation bar and
corporate law academics is that “publicly traded companies incorporate in Delaware (and pay
its high franchise taxes) at least in part because of its high-quality and specialized courts, and,
as a general matter, want important and high-profile cases to be decided by Delaware
judges.”247 Among those boosters of the U.S. system of corporate federalism who see the
“bundling” of state law and state judges as essential to its operation, the out-of-Delaware
trend logically will be an unwelcome one that should be reversed.
On the other hand, for those inclined to characterize U.S. corporate federalism in
terms of a “race to the top” condemning an out-of-Delaware trend puts them in something of
an intellectual bind. Underpinning the race to the top view is a presumption that it is
beneficial for private parties to have wide discretion to choose the laws (and courts) that
govern their affairs, as this will not only help parties to maximize their joint welfare but can
put market pressure on politicians to generate value-enhancing laws and on judges to make
efficiency-promoting case-by-case rulings. An out-of-Delaware trend seemingly is a good
“fit” with this worldview, in that litigants will be sorting through various litigation choices to
select the option that suits them best, thereby placing the onus on courts to respond to the
preferences of those bringing and defending actions. Those who laud U.S. corporate
245 Stevelman, supra note xx, 83. 246 Frank H. Easterbook and Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 VA. L. REV. 669, 697 (1984). 247 Marcel Kahan and Edward B. Rock, How to Prevent Hard Cases From Making Bad Law: Bear Stearns, Delaware and the Strategic Use of Comity, 58 EMORY L.J. 713, 748-49 (2009).
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federalism but recoil against cases migrating away from Delaware courts are correspondingly
put in the awkward position of arguing in favor of denying litigants choices the federal
structure of the U.S. judicial system otherwise provides.
VII. Conclusion
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.248 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.249 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,250 frequently refer to Delaware cases to provide examples
or as a source of further explanation.251 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.252
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
248 Simmons, “Branding”, supra note xx, 1175. 249 Simmons, “Branding”, ibid., 1173; WILLIAM ALLEN, REINIER KRAAKMAN, AND GUHAN
SUBRAMANIAN, CASES AND COMMENTARIES ON THE LAW OF BUSINESS ORGANIZATION xxiii (3d ed. 2009) (“the book places primary emphasis on the Delaware statute and decisions, as that law grows in its dominant importance for publicly financed corporations in the United States”). 250 MODEL BUSINESS CORPORATION ACT ANNOTATED, xii (4th ed., 2008). 251 William B. Chandler and Anthony A. Rickey, Manufacturing Mystery: A Response to Professors Carney and Shepherd’s ‘The Mystery of Delaware Law’s Continuing Success, [2009] U. ILL. L. REV. 95, 113. 252 Chandler and Rickey, ibid., 114-15; Scott R. Haiber, Derogating the Derivative: Tandycrafts Inc. v. Initio Partners and the Role of Attorneys’ Fees in Shareholder Litigation, 3 DEPAUL BUS. L.J. 242 (1990) (“many jurisdictions with minimal experience in corporate law look to the more experienced Delaware courts for guidance”).
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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
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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.