It’s an article of faith among many businesses and lawyers: Delaware. It doesn’t matter what the question is. Where should you incorporate? What should the governing law of your contract be?
Delaware! Delaware’s good for business.
Not necessarily. Much ink has been spilled over why, exactly, businesses constantly incorporate in Delaware and/or insert Delaware into choice of law provisions in their contracts. Among the most common reasons is: Delaware has more developed and thus stable precedent than any other jurisdiction.
I’m not sure this reason stands even on its own merits. E.g., the law of malpractice and negligence is very well-developed and yet we still find plenty of legal issues to litigate, and still rarely settle until immediately before trial.
This "stability" has long been under fire, most recently as noted by The Harvard Law School Corporate Governance Blog, addressing two recent Chancery Court opinions on shareholder suits against Citigroup and AIG:
These cases seem to support the claim by William Carney and George Shepherd in The Mystery of Delaware Law’s Continuing Success (William Carney & George Shepherd, 2009 U. ILL. L. REV. 1) that Delaware law is infected by costly indeterminacy. After these cases, where, exactly, does a duty of loyalty claim for breach ofCaremark duties stand?
The courts in these cases distinguished a claim that directors ignored the inadequate controls of patent business risks (Citigroup) from one that the directors ignored inadequate controls of insider wrongdoing (AIG). While these distinctions seem clear, and the cases seem rightly decided on their facts, the distinctions fray at the edges. Deliberately and knowingly ignoring either kind of risk can give rise to a claim. The defendants in Citigroup, even if careless, did not sink to that standard, while the AIG defendants did. So how does insider wrongdoing affect the determination? Must the flags be redder to trigger liability where there is no insider wrongdoing, but the risk could bring the company down? If so, how much redder? Is there a sliding scale for the degree of insider wrongdoing the defendants allegedly ignored. In AIG, the complaint supported an assertion that the insiders led, in Vice Chancellor Strine’s words, a “criminal organization.” Would the result be different if the alleged wrongdoing had been somewhat less pervasive? But does not the pervasiveness tie to the defendants’ knowledge, which leads back to square one?
In fairness, though, this does not necessarily support a criticism of Delaware law. As Chancellor Chandler wrote (with Anthony A. Rickey) in responding to Carney & Shepherd’s criticism in Manufacturing Mystery: A Response to Professors Carney and Shepherd’s “The Mystery of Delaware Law’s Continuing Success (2009 U. Ill. L. Rev. 95), Delaware is at least no more indeterminate than other jurisdictions.
Indeed, I argued in my own response to Carney & Shepherd, The Uncorporation and Corporate Indeterminacy, (2009 U. ILL. L. REV. 131), that indeterminacy is inherent in corporate law rather than specifically in Delaware jurisprudence. The solution is to turn to “uncorporate” law, which leads directly to my next two points.
Well said, and the whole post (as well as its references to Wachtell, Lipton, Rosen & Katz client memorandum posted here and Francis Pileggi’s own comments here) are required-reading for those interested in shareholder derivative suits.
The overarching theme bears repeating — the law is fundamentally "indeterminate." Businesses aren’t going to be able to change that by just doing what every other business does because they think they should.
The problem is compounded by the way many businesses "choose" Delaware law, often in conjunction with an arbitration or choice of venue provision that ensures that Delaware law will be "applied" by a court or arbitrator with no experience in Delaware law. How "stable" and "determinate" can that possibly be?