Delaware's Fall: The Arbitration Bylaws Scenario

Abstract

Delaware dominates the competition to sell corporate charters. Leading scholars consider that dominance so great as to be irreversible. This book chapter argues that the advent of arbitration bylaws makes reversal not merely possible, but likely.

Delaware’s competitive advantage results almost entirely from Delaware’s highly successful judicial strategy. Delaware has the only court system meaningfully specialized in corporate law. No other state has the caseload or constitutional provisions needed to replicate it. Because its courts are the only aspect of its law that other states cannot copy, Delaware has relied heavily on them. In combination with a vague and indeterminate statute, Delaware’s courts enable Delaware to provide, on a case-by-case basis, maximum benefits to the managers who bring incorporations to the state, while still maintaining the respectability of Delaware incorporation.

Arbitration bylaws threaten to deprive the Delaware courts of their cases. Federal law arguably prevents Delaware from barring their adoption. By failing to provide for fee awards to plaintiffs’ attorneys, arbitration bylaws can sharply reduce the numbers of cases that are brought. The cases that are brought will be decided by arbitrators, not the Delaware courts—leaving the Delaware courts without cases. Without cases, Delaware’s judicial strategy would collapse. Absent Delaware’s judicial advantage, corporate charter competition may melt down into a simple price competition in which no state can profit from charter sales.

Keywords: Corporations, Delaware, Charter Competition, Business Associations, Arbitration, Arbitration Bylaws, Business Courts, Judicial Regulation, Charter Competition Meltdown