The Race Out of Delaware

Whether a race to the top or a race to the bottom, Delaware has long been the leading “brand” in attracting incorporations. However, researchers John Armour, Bernard Black and Brian Cheffins now find that over the past decade the proportion of corporate suits involving Delaware public companies filed in Delaware has dropped markedly. Since one of the major attractions of incorporating in Delaware is their deep experience in case law, the state is now in danger of losing its status as the dominant locus for corporate law for U.S. public companies. (Is Delaware Losing Its Cases? @ SSRN)

Three datasets were used: (i) corporate law cases arising between 1995-2009 where directors of public companies were named as defendants and the case generated one or more judicial opinions on Lexis, Westlaw, or the Delaware Chancery Court website (ii) lawsuits arising under corporate law from leveraged buyouts taking place between 1999-2009 and (iii) lawsuits arising under corporate law from allegations of options backdating. All three datasets tell a consistent story; Delaware is losing its own cases.

The authors review a number of possible reasons for the exodus and conclude that since plaintiff lawyers are often the real parties in interest in shareholder lawsuits, they have a strong incentive to take case elsewhere if they anticipate lower fee awards in Delaware.

Of course, the best way to find out why Delaware is losing cases is probably to ask those plaintiff lawyers and they hope to do so as their research continues. Meanwhile, Delaware corporations could follow a recommendation made by Ted Mirvis in 2007 by including a provision in their charter or bylaws selecting Delaware as the exclusive forum for litigation of shareholder claims for breach of fiduciary duty, although such provisions have not been tested at court.

The authors discuss at least two options for Delaware but conclude,

If Delaware judges yield to the temptation to tilt the playing field so as to ensure the bulk of corporate litigation proceeds in Delaware courts, the reputation they have built up for service and even-handedness could be greatly compromised.