Making things worse

Usually, we do things. Then people say, "hey, that doesn't work." And, in response, we fix things up and try to do better. Is it possible to get comments on a thing and then make things worse? That's hard. I mean, you really have to try. 

Take, for example, proposed § 122(18). In its first iteration, it was already pretty bad. Then the DSBA made revisions to its proposal and made it worse! After the DSBA handed it over to the legislature, the language looked like this: 

(18) Notwithstanding § 141(a) of this title, make contracts with one or more current or prospective stockholders (or one or more beneficial owners of stock), in its or their capacity as such, in exchange for such minimum consideration as determined by the board of directors (which may include inducing stockholders or beneficial owners of stock to take, or refrain from taking, one or more actions); provided that no provision of such contract shall be enforceable against the corporation to the extent such contract provision is contrary to the certificate of incorporation or would be contrary to the laws of this State (other than § 115 of this title) if included in the certificate of incorporation.  

When I saw this language, my reaction was, "That basically looks the same. Hmm, what's that in the parenthetical? Why are they carving out  § 115 (exclusive forum provisions)?"

The legislative text, then provides some helpful notes that describe what the drafters think this carveout does: 

The proviso excludes § 115, so that corporations may enter into contracts under § 122(18) with exclusive forum and arbitration provisions that do not select the courts of this State to adjudicate claims under the contracts.

Wait. What. So, do I understand this correctly? The legislature, which only in the last decade or so fought off a challenge of cases leaving Delaware's court system is now inviting litigation regarding proposed § 122(18) to leave Delaware? To litigate in Texas? Or Ohio? Or to require binding, confidential, arbitration somewhere outside of Delaware? Who thought that was a good idea? You might think that if you are going to take a big swing at § 141(a) before the Delaware Supreme Court had a chance to weigh in that you might want to allow the courts of your own state have an ability to set the tone and work out the kinks of this § 122(18) thing once you get it on the books. Or, perhaps not. Maybe that's the last thing you want?

Section 122(18) is a fundamental challenge to Delaware corporation law - § 141(a) in particular. And, the Delaware legislature intends to hand over deciding how it will work to an arbitrator - worse, some arbitrator in NY in confidential arbitration?? Whose idea was this? Is there anyone in Dover thinking about how to preserve the value of the Delaware franchise? Because this is a pretty cavalier way to treat the thing that has allowed you eschew an income tax and still fund your government for the past one hundred years. 

Wild guesses what percentage of stockholder agreements are going to include confidential arbitration provisions after § 122(18) passes? I'll tell you: 100%. 

I guess, someone might say, don't worry, in the worst case bad decisions can still can appealed back up through Delaware. No, that's not how arbitration under the Federal Arbitration Act works. If a challenge to an arbitral decision with respect to a § 122(18) claim gets appealed in Delaware, the only real question for the court will be did the parties form a contract when they adopted the arbitration provision. If so, that's the end. The court will almost never look at the underlying substance of the arbitrator's decision. 

Moving litigation of § 122(18) cases to confidential arbitration is a good way to do to corporate law what arbitration did to contract law. Ever wonder why contract law casebooks are so dull and full of old cases? Arbitration basically killed the public development of law. Innovations in contract law now all hide behind confidential arbitration. And for some reason, the Delaware legislature thinks this a good thing to do to corporate law? 

-bjmq