M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, January 31, 2012

Delaware's fragile network

I've blogged about Delaware's new arbitration procedure before.  Now that the parties in the legal challenge to the procedure are preparing for arguments on a summary judgment motion, I thought it might be an appropriate time to chime in again.  Delaware's value and the source of its competitive strength is its vast body of corporate common law. In order for Delaware to maintain this position, it has to ensure that it has a regular supply of cases that it can adjudicate.  Where and when new fact patterns arise, the courts are then challenged to reinterpret the law to adapt to new circumstances.  When there are a lot of cases, the changes tend to be marginal.  No single move means much, but, like glaciers in stop motion, when you observe it from afar there can be big moves over time.  

Anything that threatens to slow down the flow of cases to Delaware becomes a threat to the development and the maintenance of the Delaware's competitive position. That's why the whole multi-forum litigation question is a problem for Delaware. If litigants bring Delaware cases outside of Delaware, Delaware's common law machine will slow down. The same is true of private arbitration.  Now, let me distinguish between what Carlyle is attempting to do with its mandate to arbitrate all shareholder claims and what Delaware is doing with it arbitration system.  Delaware's arbitration system requires two consenting parties. That means that no shareholders bringing fiduciary duty claims against directors will be required to arbitrate against their will. Neither will hostile acquirers challenging director actions to protect the corporation against an unwanted offer. My guess is few (if any) of those kinds of cases will ever end up being submitted to the arbitration system.  

Cases that will end up in arbitration are of a particular type: contract litigation between buyers and sellers in a merger transaction.  That's all litigation about deals gone bad, MAC's, termination and other walk rights. Many of those kinds of cases are candidates for arbitration.  Once parties become comfortable with the system they'll being to insert Delaware arbitration language in their agreements and this kind of litigation will begin to disappear from the courts. When they start to disappear from the courts, transaction planners will begin to see a decline in the positive externalities associated with the Delaware law, including its predictability.  Even though the courts may continue to innovate and adapt to new circumstances in arbitration, the drawback of arbitration is that none of those innovations and adaptations become part of the public record and none of them can be relied on by transaction planners working on other deals. If arbitration becomes the norm for that subset of cases, Delaware's value will declines just a bit.  

What's the alternative?  I don't know yet.  Of course, the US Supreme Court has expressed a decided preference for arbitration, so it's not like one can stand up and say, "No more arbitration!"  That's just not going to happen.  Perhaps, Delaware's policymakers took a look at the changing landscape and figured getting into the game was the least worst of the alternatives.  That may be so, and if it is I sympathize with their position.  It won't change the fact that by jumping onto the arbitration bandwagon, the state is giving away some its own value.

Oh, and Joe Biden was in Delaware yesterday praising its courts for "making us look so good for so long."



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