Delaware Law Mid-Century: Far From Perfect but Probably Not Leaving for Las Vegas

Abstract

This Essay examines controversies surrounding certain recent Delaware corporate law decisions from the perspective of the jurisdictional competition among states for corporate charters.  I begin with the assumption that Delaware has state-of-the-art and up-to-date corporate law interpreted in a legal environment avoid of corruption. Delaware’s dominance in the jurisdictional competition for corporate charters, however, may be in jeopardy nevertheless, as significant stockholders increasingly express an interest in fleeing Delaware for other states, and Delaware lawyers and corporate advisors express unprecedented unease about the legal environment in Delaware. The apparent vulnerability of Delaware is understandable when one recognizes that sometimes even outstanding products sometimes fail in the marketplace. Products sometimes fail because they are too complicated or risky to use, or because the people who make the decision to buy the product assign a low or even negative value to their supposedly superior characteristics. Here I argue that this is happening in Delaware. The problem is exacerbated by what are perceived to be the “suspicious and negative tone adopted towards corporate boards and management” by in certain opinions that weaken the contracting power of controlling shareholders and afford legal “protection” to minority and noncontrolling shareholders who neither want nor value the “protections” foisted on them. These protections appear to be unwelcome by controlling shareholders and their advisors who are highly influential in the decision about where to incorporate. Their increasing dissatisfaction with the Delaware legal landscape explains certain of the actual and threatened departures from Delaware. 

 The Essay makes three points about the recent decisions and the intervention by the Delaware legislature to unwind those decisions. First, while these decisions alienated important Delaware constituents, particularly controlling shareholders, the minority shareholders who ostensibly were the beneficiaries of those decisions did not perceive any benefits from the decision, and actually opposed the decisions when they had the opportunity to do so.  Support for my contention that recent opinions “protecting” minority shareholders did not really protect them is found in: (a) empirical findings that Delaware law does not improve the value of controlled firms, and may decrease it; (b) votes of Tesla non-controlling shareholders to approve Tesla CEO Elon Musk's pay both before and after a ruling "protected" those very shareholders from Musk by striking down his pay; and (c) the willingness of non-controlling shareholders to invest in companies (like Moelis) after being fully informed of the very contractual arrangements between the controlling shareholder and the company that were subsequently struck down by the Delaware Chancery Court. Second, the Delaware constituents most involved in making chartering decisions are increasingly uncomfortable advising firms to charter in Delaware because they have been targeted by the recent decisions. Prominent among these constituents are controlling shareholders and transactional attorneys and their advisors. Finally, while the Delaware legislature can, and did, reverse decisions that harm Delaware’s competitive position, the legislature cannot change the anti-controlling shareholder tone in those decisions. As, such, the risks to Delaware’s competitive position seem to be higher than at any other time in recent history.

Keywords: Corporate Governance, Corporate Law, Controlling Shareholders, Fiduciary Duties, Jurisdictional Competition for Corporate Charters