Editor: Welcome, Chancellor Strine. Please start our discussion by telling us about your history with the Delaware Court of Chancery.
Strine: I’ve been on the court for nearly 15 years. I first served as Vice Chancellor starting in November of 1998 and then transitioned to the role of Chancellor in June of 2011.
Editor: The Delaware courts are well-known as pacesetters for the nation and important sources of precedent in corporate matters. Are there any current developments or trends that our readers should know about?
Strine: It’s interesting that you say “pacesetters.” It speaks to the idea that, to some extent, the Delaware courts represent a body of neutral government regulators and a distinct form of regulator inasmuch as we get to speak to emerging trends. So we’re not so much the pacesetters as we are the first group that has a chance to address new market developments, trends and even situations where old issues begin to move in new directions.
A good example involves the common use of confidentiality agreements during negotiations of mergers or asset sales. Naturally, a company would be ill-advised to share non-public information with a strategic competitor, or even with a private equity firm, without controls to protect the company’s intellectual property. Now, those agreements often come with standstill provisions, which may lead to disputes concerning whether a party can ask for a waiver of those provisions. Although this is not a new issue, it is increasingly common, and within the last calendar year, the implications of standstills that have provisions preventing the potential buyer or merger partner from asking for a waiver have become the source of litigation, for instance, surrounding the question of whether they fall away when a company actually goes into an auction. Further, in speaking to new and emerging issues such as this, Delaware courts are operating in the context of injunctions and other fast-moving proceedings, and we are providing this guidance to the market in fairly short order.
Another recent phenomenon that my colleagues and I have been encountering relates to the obligations of directors who serve on the boards of American-listed corporations whose operations are solely based abroad. What are the duties of those directors to stay apprised of material developments in a language they don’t speak and a political and business culture quite different from that of the U.S.? We’ve also been addressing concerns that arise when people buy shell corporations that have been delisted – and therefore may no longer fall under close regulatory scrutiny – and bring them back to life for the purpose of luring in new public investors. These kinds of issues have emerged because nations around the globe have become powerful competitors, and people are interested in those markets. And these emerging issues create interesting situations that tend to come to the Delaware courts quickly.
Editor: When you mentioned directors and their obligations, were you speaking in terms of personal liability or the goal of making great business decisions on behalf of their companies?
Strine: The latter, and it’s an interesting point. In my view, directors and managers often make a mistake in focusing on what will immunize them from liability. Instead, if they think first about what is necessary to do the job that they’re entrusted to do, essentially thinking like business people would if their own money was at stake, then they will behave in a way that almost certainly will shield them from liability.
Consider a company with a single-nation focus that is external to the United States. The language of that nation may be alien to the directors, or the nation may have a challenging political and legal culture. If your company is located entirely in China and you don’t speak Mandarin, how will you arrange for reliable information to flow to the board and ensure integrity in the translation of key documents? Also, many emerging countries have corruption issues, which are a constant temptation for companies in dealing with selfish officials seeking favors as a condition to getting permits.
These are not unsolvable problems, but they can’t be ignored and probably won’t be resolved by a director who is operating solely or even primarily by telephone. To address the demands of their company’s environment, directors will have to travel abroad frequently and make substantial efforts to develop reliable sources of information. At the companies with multinational operations that do it well, general counsel, CEOs and their boards spend a lot of time thinking about these challenges, and some opt for a board that operates almost on a rotating schedule, covering at least one major international sector per year with an onsite board meeting and some intensive review. All prospective directors should think about these issues, and companies that ask for their services should be willing to commit the financial resources and provide the necessary tools.
Editor: How do these issues tie in with companies that incorporate in Delaware? What are the expectations?
Strine: In Delaware, we love for high-quality, high-integrity companies to make us their home, and we want Delaware corporations and companies that use an American listing to operate transparently and provide the kind of governance that investors deserve. To demand less is not good for the United States or our exchanges.
But there is a price to success for both the U.S. and Delaware. Although most entrepreneurs who want to use a Delaware-domiciled U.S. entity to enter our market want to do the right thing, fraudsters and sharpies are as old as commerce itself. Delaware has no tolerance for having its good name misused. Our Department of State and our courts don’t hesitate to condemn practices that lack integrity. If you want to use a Delaware entity but not respect the duties that you have to follow the law, pay your bills and honor your fiduciary duties to investors, then your interest in our state is not welcome. Go away.
Editor: Let’s talk more about the advantages for companies that choose to incorporate in Delaware, particularly in being able to bring their disputes to the Chancery Court.
Strine: I’m proud to be an American, but I’ll be honest in saying that the U.S. is typically a very expensive and slow venue for dispute resolution. Given the tremendous costs of discovery, and particularly of delay, it may not be optimal to seek the perfect decision in five years when the alternative may be a solid decision in nine months that enables you to move on to appeal and final resolution. And being a litigation-intensive society is not only a problem internally in the U.S. Perhaps more important, it’s also a deterrent to people from other markets in terms of wanting to do business here. And, that’s not good for job or wealth creation for our children.
One related challenge for the U.S. is the volume of discovery, particularly in business-to-business cases. Some say that the courts should limit e-discovery, but in doing so we face the reality that most of the evidence is now in electronic, not paper, form, and that is even more, not less, likely to be true in cases involving smaller businesses. Business executives generate millions of pages with their thumbs. The cost is not really in finding it; the cost is in reviewing it for privilege. A fundamental change in approach is going to occur at some point, because business-to-business cases in particular involve so much evidence that figuring out how to allow the parties to cost-effectively resolve a dispute has never been more challenging. Here, I will mention that one of Chancery’s major assets is our experience with these issues and our ability to create mutual incentives for the parties to cooperate. We act with more speed, and we don’t hesitate to set sensible, case-specific limits that take into account what is at stake.
Companies that form in Delaware also enjoy a variety of tools for dispute resolution, including mediation, arbitration and the unique option of agreeing to an expedited trial in Chancery. It’s easy to imagine, for example, that a company with a joint venture in a developing country like Brazil would see the benefit of incorporating in Delaware and using the Court of Chancery for its litigation and other dispute resolution.
Along with those tools comes the state’s commitment to the dispute resolution process, and a big share of Chancery’s docket is business-to-business litigation. In broad terms, businesses want the ability to work out their differences and, if necessary, to fight hard but keep it in proportion. They have business relationships that they want to preserve after a dispute is resolved; thus, protracted litigation is costly in many ways. Arbitration is increasingly more expensive than litigation, with some arbitrators charging more than leading M&A lawyers. It’s also often as slow. Worst of all are disputes that bounce between the two, where parties can’t resolve underlying issues, such as whether the matter is arbitrable in the first place.
So the principal advantages of being a Delaware entity are access to efficient dispute resolution services and the ability to rely upon guidance from our corporate law and precedent. Both are important, but the first has become increasingly important in light of the priority placed on business relationships.
Now in terms of cost to actually form and maintain a Delaware entity, we are essentially the high-cost provider for entity formation. People often quip that we “make money in Delaware by charging no taxes”; however, while we are very good at what we do, we’re not alchemists and can’t survive without charging fees. As I often say, we are Bergdorf Goodman, not the Dollar Store. But the price you pay in annual franchise taxes is what gives you the services provided by our courts in terms of more efficient dispute resolution and a reliable body of law to help you implement corporate strategies with certainty and less legal risk. These important benefits make the higher franchise taxes good value for high-quality businesses, particularly for those that are public companies or with complicated ownership structures.
Editor: How are the Delaware courts addressing e-discovery issues and concerns over proportionality?
Strine: Taking a step back, lawyers are frustrated by the need to manage multiple sets of rules, from the Rules of Civil Procedure to local court rules and even chamber-specific rules. The latter raises the question of what hundreds of individual judges across various courts prefer and adds to the burden of figuring out what rules will apply in a given case.
In Delaware, we take this problem seriously, and we have developed consistent e-discovery guidelines in collaboration with leading practitioners on the Rules committee and our own Masters in Chancery. We worked with our Bar to communicate expectations and address common problems, and we committed to abolishing judge-specific approaches. Thus, the guidelines for the Court of Chancery apply to all seven judges, and I’d like to see other courts adopt similar guidance because the current idiosyncratic approach is not fair to litigants.
Your focus on proportionality in e-discovery is one Chancery embraces. Disproportionate discovery costs can defeat the whole purpose of a system committed to doing real justice. Thus, we always look at what’s at stake in the case: clearly, we cannot allow discovery costs of two million dollars in a case that involves two million dollars in controversy; we can’t even allow near half of those costs. The guidance we developed addresses very practical aspects, such as pacing, scheduling orders and presentation materials, which cost money when people are haggling over details. Setting the right expectations will reduce everybody’s cost.
The guidelines also allow lawyers who regularly litigate before the court to share information with general counsel about how the process works. Sometimes, clients are the problem. They may be seeking an Armageddon, and it can be useful, frankly, for a lawyer who’s trying to serve the company well and who has a sense of proportionality and good sense to say “That won’t fly in Delaware, and here’s why.”
Our guidelines are the result of candid feedback from litigators who represent both plaintiffs and defendants across the nation. They have put aside individual client concerns and focused instead on the overall integrity and efficiency of the system. The resulting guidance helps practitioners work with each other, and we expressly forbid citing the guidance against adversaries. We’re pretty proud of the result.
Editor: What is your sense of the direction of litigation versus settlements and how that might affect the body of precedent going forward?
Strine: I consider a certain suggestion I hear about the state’s arbitration statute to be ridiculous, to wit, the idea that if judges on the court act in the distinct statutory role of an arbitrator and resolve some cases that way that there will then be no judicial precedent. The reality is that a growing world requires more dispute resolution, and if you don’t resolve some cases by ADR and settlements, the whole system will break down. We in the Delaware courts currently write, and will continue to write, more opinions in less time than virtually any court in the world, so I see no reasonable prospect that there would be a diminution in precedent.
And there’s another important point for Delaware: when your “coin of the realm” is the dependable guidance from published precedent, it would be suicidal to stop providing that precedent. The arbitration statute really is designed for commercial disputes and doesn’t deal with matters like corporate class actions. Businesses fight all the time, and many contracts don’t have ADR clauses, so there will remain plenty of opportunity to develop precedent in the commercial area.
Editor: We understand you serve as Special Judicial Consultant to the Corporate Laws Committee of the American Bar Association. Please talk about the ABA’s Model Business Corporation Act and its interaction with Delaware General Corporation Law.
Strine: I’m honored to serve in this capacity. People are often cynical in this world, so it’s important to note the extraordinary commitment and passion of this diverse group to “get it right.” This involves an extensive, and sometimes maddening, level of debate – a corporate law nerd factory, if you will. Committee members put special interests aside and often speak candidly about issues from both sides, not just the side they are on in their practices.
As discussed above, Delaware courts often are the first to address emerging legal issues and business disputes, and the interaction between our General Corporation Law and the ABA Model Business Corporation Act is influenced by that. The Model Business Act tends to be more of a restatement of developments and is a bit more prescriptive than Delaware’s law, but there are also many similarities, and the general idea is that the Model Business Act fosters consistency on a national level.
Delaware tests out new ideas in concert with the ABA committee on issues like majority voting and even current work on the Public Benefit Corporation statute. Delaware benefits from the cross-fertilization of ideas from diverse experts nationwide, and the ABA benefits from participation in the constant flow of decisions about cutting-edge issues that Delaware courts and practitioners regularly address. It’s a real intellectual and professional joy to serve with this group, which may be one of the more pathetically earnest things I have ever said.
Editor: The Chancery Court has a reputation for unique insights and creative thinking. How would you describe this court’s signature on the history of Delaware corporate law?
Strine: To the extent that we have a signature, I would characterize it in terms of the sweat equity invested by our judges to read the briefs, to read all the important documents, and then go back over them time and again so they can deliver a decision with an equitable, sensible result in the required time frame. It’s also important to remember that we handle many cases involving ordinary people and their affairs: guardianships, trusts and estates, boundary disputes and injunction contests. They get the same careful and expeditious treatment. It’s not sexy, but this is really what we do.
Innovation is neat, and we’re capable of it, but the main idea is to give people a fair shot, deliver common-sense rulings and create incentives for an efficient system of corporate governance. This is our tradition, shared with the Delaware Supreme Court. Having a dependable body of law to help order their affairs enables people to have confidence in our system of commerce, despite the occasional loss any individual might take. And over time, this proves to be a very livable and fair world for businesspeople and investors, and one where they can both make money.