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Modest Reflections on the State of Delaware Litigation

Articles & Publications

July 30, 2014
By: Edward M. McNally
Delaware Business Court Insider

Delaware's courts are going through a period of rapid change. While it is too early to decide whether those changes are for the better, some preliminary comments are possible. In general, the recent events are a cause for optimism that Delaware is maintaining its position as the best forum for corporate litigation. There is, however, one dark cloud on the horizon.

The Sources of Delaware's Strength

Delaware has been a good place to litigate. The Delaware courts have been staffed with able judges well-experienced in the types of business disputes filed in Delaware. For example, Delaware is the leading jurisdiction for appraising the value of corporate stock in damage actions. That is often a complex matter and not easily done by those courts that seldom value corporations. You can predict fairly well what your client will get or pay, if you are in the Delaware Court of Chancery. Similarly, the interpretation of director and officer insurance policies is critically important to those corporate officials. The Delaware Superior Court has many decisions dealing with those policies and a predictable approach to resolving disputes. Hence, an increasing number of D&O policy disputes are being filed here.

The Recent Changes in Delaware

Delaware litigation has benefited from stability in its courts and in its laws. Change has come gradually. But recently, big changes have occurred in both Delaware's courts and in how corporate internal disputes may be resolved. The impact of those changes remains to be seen.

Changes in the Courts

Delaware's judges are appointed for 12-year terms and almost always reappointed for successive terms. That provided great stability. Yet in 2014 so far, several important jurists have retired. As much as 50 percent of the Delaware Supreme Court justices and Court of Chancery chancellors will be new this year. Justices Myron T. Steele and Jack B. Jacobs have already retired, and Justice Carolyn Berger has announced she will retire. Justice Henry duPont Ridgely is rumored to also be considering retirement. All of those justices had prior experience on the Delaware Court of Chancery or Superior Court and all had more than 20 years as a jurist. Now suddenly, all of that experience, particularly in business disputes, is gone. On the Court of Chancery, Andre Bouchard is the new chancellor, replacing Leo Strine.

What will the impact be of all those changes? While Berger's replacement has not been named, Strine is the successor to Steele as chief justice. Strine served for more than 15 years as a vice chancellor and later chancellor in the Delaware Court of Chancery. He proved to be an energetic and able court administrator as chancellor and is expected to do as well as chief justice. The successor to Jacobs is Karen Valihura, a very experienced corporate litigator with an impressive academic background as well.

Predicting whether these two new justices, the third yet-to-be-named justice and the new chancellor will change Delaware law is, of course, not really possible. However, at least a few admitted guesses come to mind. Previously, Steele was a strong advocate of requiring investors to negotiate for their rights in the form of charter provisions, limited liability or limited partnership agreements. If it was not "in the contract," a right or duty did not exist. For example, if an LLC agreement did not spell out a particular right of investors, they had no such right for Steele. In contrast, Strine has said there is an implicit fiduciary duty owed to investors, at least when their agreement does not clearly state otherwise. Thus, he seems more inclined to "read between the lines" than his predecessor. Investor rights then may have a louder voice in Delaware's supreme court.

A similar impact may be felt in the Delaware Court of Chancery. Bouchard is also energetic, smart and well-experienced in corporate litigation. Moreover, Bouchard's prior firm had an active plaintiffs practice in the Court of Chancery that may influence his approach now that he is calling the balls and strikes. Previously, then-Chancellor Strine was not afraid to question the continued strength of old precedent, even as he reluctantly followed it. That led the Court of Chancery, with its four other vice chancellors in support, to become the chief innovator in Delaware corporate law. While that group of vice chancellors remains intact, it seems likely the new chancellor will be more reticent than his predecessor to make new law.

Changes in Delaware Remedies

For several years now, there has been a storm of criticism of the number of suits filed contesting proposed business combinations. The Court of Chancery has sometimes echoed those critics and, more recently, gradually imposed what reforms it could, such as by enforcing forum-selection clauses in corporate bylaws and agreements and reducing attorney fee awards for less-meritorious derivative and class actions. That gradual approach also provided stability and predictability. You know where you should litigate a merger dispute and what fees might be paid as part of settling that dispute.

That might all change. As is well-known, the Delaware Supreme Court recently upheld a bylaw for a non-stock Delaware corporation that required a stockholder who filed an action against that corporation to pay its attorney fees if the stockholder-plaintiff did not substantially prevail on any claim in the litigation. If widely adopted, such bylaws would drastically reduce stockholder litigation. No logical stockholder would run the risk of an adverse, large attorney fee judgment if the stockholder were not to prevail on the asserted claims. Moreover, some commentators argue that corporate bylaws may now require all internal disputes to be arbitrated. That too would, if upheld, limit Delaware litigation.

Immediately after the Supreme Court upheld the attorney fee bylaw, the Delaware corporate bar sought legislation that would have precluded such attorney fee bylaws. Unfortunately, the timing of the Supreme Court decision left little time for that legislation to be fully considered before the Delaware General Assembly recessed for the rest of 2014. Given the opposition raised by the Chamber of Commerce and others to a fast passage, the legislation was withdrawn. While it or a similar bill will surely be proposed in 2015, already corporations are adopting fee-shifting bylaws.

The point here is that such bylaws will change Delaware business litigation. That may take time given the cautious nature of most corporate counsel who advise in such matters. But there is little doubt change will occur if the proposed legislative override is not adopted. We will see.

Delaware Business Court Insider  |  July 30, 2014

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