April 5, 2010
Arbitration in Delaware
In the last couple of days there have been a couple of pieces on line (like this one) that suggest that arbitration proceedings in Delaware will be the end of the world for corporate law. I'll admit, my first thought when I saw that Delaware was instituting voluntary arbitration was that perhaps too many litigants would take their disputes private, thus depriving the Delaware courts of the judicial oxygen required to keep the Delaware common law alive. Thinking about it now, I think that fear is over-stated for a couple of important reasons.
First, it's voluntary. Plaintiff cases may derive higher settlement values by staying public - if a director thinks that embarrassing testimony would be presented at trial, he may be more interesting in avoiding a trial. If the process is private, no one will know that you were a bad director, so there may be greater incentive to fight. If I can figure that out, plaintiffs can as well. So there's an incentive for them to resist agreeing to take cases dark.
Second, the arbitration process only involves cases where the claim is one for a monetary remedy. There are precious few of those cases out there. Why? If a plaintiff brings a derivative suit alleging some violation of the duty of care (in the takeover context) and the only claim is for monetary damages, that case will be quickly shown the door (BJR, 102(b)(7), ...). The smart plaintiff attorney simply doesn't bring those cases. Their cases always have some claim for injunctive relief in an attempt to survive a motion to dismiss.
More likely than not, arbitration in Delaware will be limited to commercial disputes and not include many shareholder/corporate law actions. That's my guess. If we are worried about the common law atrophying I'd be more worried about the trend spotted by Armour, Black, and Cheffins noted (see below).
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