Editor: What makes Delaware such an attractive jurisdiction for incorporation and venue for litigation?
Steele: People tend to look for three ingredients: the quality of the court system, a supportive legislative climate and an efficient secretary of state’s office. Delaware excels in all three.
In regard to the court system, Delaware offers trial courts of distinction that resolve business disputes expeditiously and efficiently. On request, expedited appeal is available directly to the Supreme Court, which has five members, four of whom are former members of the trial court that I just described. The judges are well informed and familiar with business law and cases. Unlike some other jurisdictions, they’re not transferred every three years from the family court division to sit on business law cases.
If your case is one where you want a knowledgeable court, Delaware is certainly a place you want to be. If you’re going to be a defendant in an action, presumably you want to be removed from the vagaries of jury fact-finding. You want to have a judge who is well versed in the law so you’re not subject to wide unpredictable swings in outcome. Our courts are organized to provide as fast a service as can be provided anywhere.
In our Court of Chancery, there is no option for punitive damages. That business court also has equity jurisdiction, which means you can get equitable remedies that are often sought rather than money damages in order to resolve a dispute or move a deal along.
The second ingredient is that the Delaware Bar Association’s Corporate Counsel Section works closely with the General Assembly to fine tune the General Corporation Law and the alternative business organization statutes to make sure that there is client or constituent input into whether those statutes should be updated. On corporate issues, the General Assembly is completely apolitical. Unlike the U.S. Congress, there is never partisan gridlock on business law issues.
The third ingredient is our well-organized, well-funded and modern high-tech Secretary of State’s Division of Corporations. Expedited service is available when corporate paperwork is needed. It’s as efficient and up to date as any such system in the country.
Editor: In what types of cases is Delaware particularly to be preferred?
Steele: Two immediate categories come to mind. The first is the books and records cases. If you’re chartered in Delaware, Delaware has well-developed law about the extent to which stockholders can get access to business records for the purpose of determining whether they want to move forward with litigation. This helps expedite cases without the significant expense of voluminous discovery.
Those cases as well as challenges to elections are required by statute to be completed within 60 days, so you can get information that is helpful in determining whether you have a genuine basis for proceeding. Several of our cases have affirmed dismissals of actions in which people have failed to take the steps necessary to obtain information essential to going forward.
If you’re serious about litigation against a Delaware chartered corporation, you want to be in Delaware. Many people, particularly in M&A deals – and whether the parties are chartered in Delaware or not – will provide that their merger agreement is governed by Delaware law and that the venue for resolving any dispute about the merger agreement is Delaware.
Statistics from the American Bar Association’s M&A Committee bear out that Delaware is by far the preferred venue for M&A litigation. Delaware was the designated venue in 47 percent of the deals involving a billion dollars or more. New York was next with 19 percent, and the balance is scattered around the country. Most corporations would like to have derivative suits brought by shareholders litigated in Delaware. Plaintiffs agree when they have a good case, and when they have a bad case, they tend to want to go somewhere else.
Editor: To what extent do federal and state courts cite Delaware cases as authority?
Steele: Delaware law is clear enough and consistent enough that other jurisdictions cite our law as authority. Where other state and federal courts or the SEC are uncertain about how Delaware law would apply in particular circumstances, we have a constitutional provision that provides that they may request an opinion from the Delaware Supreme Court. We would hope that another jurisdiction would not cite our law to resolve a case where it’s a significant case of first impression under Delaware law. In those situations, we would tend not to yield to another state because we need to reserve the right to have the first word on our own law.
Editor: Discuss some of the novel ways in which Delaware courts have made themselves an attractive venue for dispute resolution, including the Complex Commercial Litigation Division.
Steele: We have introduced two innovative dispute resolution mechanisms with which we’re experimenting. One is the Complex Commercial Litigation Division in our Superior Court, which has proved to be very effective and popular. It takes judges from the Superior Court and specially assigns them to complex civil litigation with a view toward expediting those cases and focusing particular expertise on the underlying substantive dispute – much like Chancery does under its equity jurisdiction or the jurisdiction that flows from the General Corporation Law or the alternative business organization statutes.
The other, although it’s now involved in First Amendment litigation filed in the Federal District Court, is the Court of Chancery’s experiment with arbitration and mediation whereby that court’s expertise is made available in ADR proceedings. It has been challenged in a Federal District Court on the theory that, under the U.S. Constitution, if courts are involved, the proceedings must be open to the public.
Arbitration and mediation are attractive because they are private. You can’t logically imagine people wanting to mediate or arbitrate a case with a business ally or enemy and have all of the inner workings of their business exposed to people who, like voyeurs, are sitting in a courtroom. We don’t yet know the outcome of this First Amendment litigation. We’re hopeful that the court will focus on the fact that what the business community needs is continuing experimentation with better and more cost-effective ways of dispute resolution, and, subject to applicable law, we intend to continue to pioneer them.
Editor: With other states setting up business courts, what do you predict will be the impact on Delaware?
Steele: Business courts are a good thing and produce positive results. I think that Delaware has the best approach; however, we welcome competition from other states, which improves the chances for the entire country to produce a better product at the end of the day. I’m happy to see the progress that North Dakota and Nevada have made, and they have taken a path that differs from Delaware’s. Under federalism, business is being offered an opportunity to see whether or not they prefer an approach that is different and arguably better than ours. That’s helpful to our country.
Editor: Dodd-Frank and other federal laws have encroached into areas that have previously been the domain of state corporate law. How do you view this trend?
Steele: It’s troublesome because historically federal intrusion into areas that are normally the province of state law is frequently the product of a crisis climate and not the result of thoughtful deliberation.
Congress should be more careful before it decides to act precipitously simply because it wants to be perceived as having taken immediate action in response to a crisis. The 32 pages of the 2,300 pages of Dodd-Frank that are purported to devote themselves to corporate governance were driven by a desire to see greater stockholder participation in the development of the long-term corporate strategy, and are couched in terms of enhancing stockholder power or giving stockholders rights that they may not otherwise have.
At the end of the day, what came out of Dodd-Frank – other than proxy access, which is temporarily, at least anesthetized, if not dead – was much less harmful than the five different proposals in Congress that were put forth at the beginning of the hurried “crises” response.
As Congress deliberated, it realized how much damage could be done by too great an intrusion into the traditional province of state law. So at the end of the day, it wasn’t as radical a move as seemed possible in the beginning. I have no comment on the balance of Dodd-Frank, just on the portion that purported to affect the internal corporate governance of state-chartered corporations.
Editor: What are the key considerations for international corporations that wish to incorporate their U.S. operations? Are they tending to select Delaware and why?
Steele: If they have a specific U.S. purpose in mind such as a U.S. acquisition, the surviving corporation is more likely than not to be in Delaware for the very same reasons that domestic businesses would incorporate in Delaware. Many international corporations are concerned that incorporation of their U.S. operations would subject them to the federal tax climate and federal regulatory maze that prevails in the United States.
Editor: There have been many significant Delaware opinions in recent years. Please give some examples.
Steele: The opinions involving Airgas and Air Products are typical because of their importance going forward. Initially there was a very thoughtful opinion written by the Chancellor. On appeal, an opinion written by the Supreme Court had a direct effect on the relationship between a hostile takeover attempt and a target that had both a staggered board and a poison pill.
There has also been a lot of attention paid recently to the fiduciary duty of the investment banker in the process of developing a board’s recommendations to stockholders about whether to vote for or against a proposed merger agreement. The Del Monte case was a very significant case that resulted in a temporary injunction until a particular problem was resolved.
Then there are two more recent cases of great importance that may be on appeal so I can’t get into the substance of them. These are the Southern Peru and the El Paso cases, which deal with what was alleged to be a flawed process and directors’ breach of their fiduciary duties. Those two cases, depending on the final outcome, will be cited in future cases relating to the conduct of boards and how they structure acquisitions.
Editor: Many cases require an early decision by the courts. Are the Delaware courts able to respond quickly?
Steele: We’re very conscious that in business disputes people want to move their money, and they are not interested in having their money in effect escrowed by a dilatory court system for a long period of time. We’re very conscious of that. We have the ability to give litigants both choices.
They can litigate under the rules at the speed they want. If extensive discovery is involved, how quickly the case is decided may be less important to them than being sure they have uncovered important documents. In those cases, the parties are allowed to manage their discovery and scheduling in a way that suits both parties, with court intervention only when they have a dispute over implementation. On the other hand, if the parties request that their case be expedited, it will go on a fast track that includes appeal directly to our Supreme Court.
Editor: How have Delaware courts coped with advances in the use of technology?
Steele: We have gone completely to e-filing in all of our business courts, including the Superior Court, Chancery and the Supreme Court, which was the first supreme court to go to e-filing. The future is probably an entirely paperless court. We must find mechanisms to deal with the expense and the distraction of e-discovery. To this end, we have created an atmosphere where we encourage the parties to cooperate to make the e-discovery process as painless and inexpensive as possible while still being able to get the necessary information to put the facts in front of the court. We have not found a magic bullet yet, but are actively searching for the best solution.