Can Delaware maintain its corporate capital status

Most Delawareans are aware that a majority of Fortune 500 companies are incorporated in Delaware and the same is true of the companies listed on the New York Stock Exchange.  In addition, most of the IPOs in the United States involve Delaware corporations.

Delaware has more corporate entities than the number of people who live in this state. Why is this so?

Among the reasons include the highly-regarded corporate statute that is annually streamlined and updated in order to make sure it adapts to changing concerns of both stockholders and directors. 

Another reason is that the court system is generally viewed as addressing corporate and business lawsuits in a competent, prompt and fair manner.

A corollary to the foregoing is that the Delaware courts are often viewed as a preferred forum to litigate corporate and commercial cases. Recent scholarship, however, has questioned whether Delaware can maintain the prominence it has long enjoyed for corporate and commercial litigation. Within the last decade or so, more than half the states have adopted either a separate business court or a commercial division of their trial courts.

In addition, some scholars have observed that recent decisions of the Delaware courts have been so critical of certain types of cases that the Delaware courts view as non-meritorious, that a net result of that approach is to discourage some plaintiffs’ lawyers around the country from filing their lawsuits in Delaware when they have the option of filing those lawsuits elsewhere.

Some commentators suggest that Delaware is losing its prominence as a favored forum for filing corporate and commercial lawsuits. Recent articles by Professor Larry Hamermesh and Professor Stephen Davidoff Solomon add to the learned commentary on these issues. In essence, Professor Davidoff Solomon argues based on a statistical analysis that he and a co-author conducted, that even though Delaware judges may be discouraging plaintiffs from filing lawsuits through their dismissal, with criticism, of those suits more frequently than similar suits are dismissed in other states, there is some evidence to suggest that the fees awarded in Delaware are higher than the fees awarded in other states. The net result suggests that plaintiffs who file a high volume of such cases may take their chances if Delaware might approve higher fee awards on average.

For those not familiar with this type of litigation, known as representative litigation, those challenging the fiduciary duties of directors in connection with the sale of a company, file suits as class actions and the amount of lawyers’ fees must be approved by the court.  Professor Davidoff Solomon suggests that Delaware may be awarding larger fees in certain types of cases as a way of maintaining Delaware as a preferred forum for litigation.

Professor Hamermesh identifies other factors that may make it hard to predict whether Delaware can maintain its prominence as a favored forum in the future.  For example, recent developments such as forum selection clauses which require suits to be filed in a particular jurisdiction will have an impact that is hard to predict or measure at this time.

If a majority of corporations adopt forum selection clauses that require lawsuits to be filed in one jurisdiction as opposed to the current practice of multiple lawsuits being filed in multiple jurisdictions even though they are challenging the same merger, that will have an impact that may favor Delaware.

In addition, a recent development may allow corporations to require the losing plaintiff to pay fees incurred by the company when a stockholder sues that company. If widely adopted and enforced, that could have the net result of limiting the total number of suits that are filed anywhere against companies by disgruntled stockholders.  Whether those provisions, known as fee-shifting provisions, will have an impact on the number of suits filed, is not easily measured at this time, but the expectation is that the number will decrease. Although the Delaware Supreme Court has upheld fee-shifting provisions in a non-stock corporation, it has not yet been conclusively established by the Delaware courts whether fee-shifting provisions will be upheld in stock corporations and whether those provisions need to be in the certificate of incorporation or whether they can be upheld even if they are in the bylaws only.

Another development that may impact whether the volume of corporate litigation is maintained in Delaware is an arbitration clause that is included either in the bylaws or in a certificate of incorporation. That type of a provision would require any suits against the company to be arbitrated as opposed to a suit filed in court.  If those provisions are upheld and if they become more prevalent that could reduce the number of cases filed in Delaware courts and could impact Delaware’s prominence in corporate litigation. 

Francis G.X. Pileggi is the member-in-charge of the Wilmington, Delaware, office of Eckert Seamans Cherin & Mellott, LLC. He summarizes key corporate and commercial decisions of Delaware’s Supreme Court and Court of Chancery at www.delawarelitigation.com.

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