The Mystery of Delaware Law's Continuing Success

Abstract

This Article challenges the widely held view that Delaware corporate law is dominant because it possesses superior traits, such as a well-understood statute, many judicial decisions interpreting the law, and wise and experienced judges administering that law. The authors evaluate superiority by the measure first identified by Romano as the relevant one for jurisdictional choice-reducing transactions costs in major transactions. The authors show that since the 1980s Delaware law has become increasingly complex and uncertain, due largely to judicial decisions that appear to tailor doctrines to produce fairness in individual cases, at the expense of certainty in planning and executing transactions. The result has been a variety of mini-rules that require firms and their lawyers to structure transactions formalistically to avoid the most intrusive forms of judicial review. These rules have led to a litigation explosion in Delaware, with concomitant high litigation costs. The authors also demonstrate the weaknesses of the Delaware General Corporation Law as compared to the Model Business Corporation Act. Finally, the authors examine and reject a series of apologies for Delaware law by commentators who concede at least some of these problems.

Keywords: corporation, federalism, Delaware, competition

JEL Classification: K22