Delaware Corporate Law Research Articles

The Brussels Effect and the Extraterritoriality of Delaware Corporate Law

The Brussels Effect and the Extraterritoriality of Delaware Corporate Law

Taking Personhood Seriously

This Article takes the recent Twitter merger litigation, along with other high-profile legal developments, as an opportunity to re-examine one of the most important, and misunderstood, concepts in the modern social landscape: legal personhood. The Article makes three main contributions to the literature: first, it originally connects several key stages in personhood’s historical development, from the common law, through the hurdles of legal realism and the early law and economics movement, to the recent revival of substantive personhood, both in scholarship and following the Supreme Court’s decisions on corporate constitutional rights. It then integrates this history with an analysis of the legal scene where personhood achieved its most profound impact, from the 1980s takeover era to the Twitter story: Delaware corporate law. Finally, this Article builds upon these insights to offer a new theoretical account of personhood as a legal degree of freedom, which holds the capacity to generate a practically unlimited range of situational outcomes. So far, scholars have tended to discuss personhood in a limited, context-specific manner. This Article brings personhood front and center in its own right, illustrating for the first time how personhood can be a no less, and often more, significant fact of legal life than contract, property, or public law, and why we should place it at the start of the analysis, prior to delving into the policy discussion of the day.

A Comparative Study of Fiduciary Duty Examination Systems in Corporate Decision-Making

In recent years, China has witnessed a surge in corporate governance irregularities both internally and externally. Terms like "financial scandals" have frequently trended, drawing high attention from the general public and causing significant damage to China's financing environment. Even though there are complex regulations in place, there are still speculators who, under the guise of legal decision-making processes, act dishonestly, making it difficult to prevent. Perhaps we should consider introducing a fiduciary duty system and learning from the legal systems of the United States and the United Kingdom to protect the interests of small and minority shareholders. In the state of Delaware, often referred to as the world's corporate capital, a shareholder lawsuit involving "the world's richest person," Elon Musk, and his prideful Tesla company unfolded in the Delaware Chancery Court. It immediately attracted the attention of business owners, investors, and corporate legal scholars from across the United States and the world. Since Tesla officially announced the acquisition of Musk's affiliated enterprise in 2016, SolarCity, founded by his cousins, a protracted legal battle initiated by a substantial group of plaintiffs lasted for over five years, finally coming to an end in early 2022 with Musk's victory. This enduring lawsuit, centered around whether Musk violated his fiduciary duties to minority shareholders under Delaware corporate law, with its lengthy process, complex evidence, and the judge's astute rulings, has provided us with insights into the examination logic and techniques applied by top-tier corporate law regarding fiduciary duties. This holds significant guiding significance for the subsequent amendments and practices of China's Company Law.

Artificially intelligent boards and the future of Delaware corporate law

ABSTRACT This article argues that the prospects for Artificial Intelligence (AI) to impact corporate law are at once over- and under-stated, focusing on the law of Delaware – the predominant jurisdiction of incorporation for US public companies. Claims that AI systems might displace human directors not only exaggerate AI’s foreseeable technological potential, but ignore doctrinal and institutional impediments intrinsic to Delaware’s competitive model – notably, heavy reliance on nuanced applications of the fiduciary duty of loyalty by a true court of equity. At the same time, however, there are discrete AI applications that might not merely be accommodated by Delaware corporate law, but perhaps eventually required. This would appear most likely in the oversight context, where loyalty has been interpreted to require good faith effort to adopt a reasonable compliance monitoring system, an approach driven by an implicit cost-benefit analysis that could lean decisively in favour of AI-based approaches in the foreseeable future.

Delaware’s copycat: Can delaware corporate law be emulated?

Abstract Delaware’s famous corporate law and its highly respected specialized Court of Chancery attract entrepreneurs from all over the world, who choose the small state as their locus of incorporation and litigation forum, and global investors who choose Delaware law as the law governing their corporate investments and mergers and acquisitions (M&A). Other jurisdictions vie with Delaware in regard to these choices. This interjurisdictional competition makes Delaware a significant global norm exporter in the field of corporate law because jurisdictions emulate some of its corporate law. Israel leads the global pack. For two decades, it has been approximating its corporate law to Delaware’s and emulating its principal institutions, including by establishing a specialized Chancery-like court whose judges seek guidance in Delaware’s case law in deciding open corporate law questions. This Article employs qualitative methods—interviews with M&A practitioners from the United States, the United Kingdom, and Israel. We use the interviews to assess whether the project of approximating Delaware corporate law has succeeded in shifting incorporation decision preferences away from Delaware to Israel and watering down the natural reluctance of global investors to accepting an unfamiliar corporate law when engaging in cross-border corporate M&A transactions involving an Israeli party. Our findings indicate that the approximation project has countervailing effects, opinions about its success being polarized and nuanced; that approximation increases the familiarity of domestic practitioners with the foreign law being emulated, making the emulated law easier to implement; and that approximation creates more room for other aspects of interjurisdictional competition to influence private choices.

Not So Fast, SPACs: Disloyalty, Emerging Delaware Corporate Law, and How to Protect SPAC Management and Shareholders Alike

Not So Fast, SPACs: Disloyalty, Emerging Delaware Corporate Law, and How to Protect SPAC Management and Shareholders Alike

Artificially Intelligent Boards and the Future of Delaware Corporate Law

The prospects for Artificial Intelligence (AI) to impact the development of Delaware corporate law are at once over- and under-stated. As a general matter, claims to the effect that AI systems might ultimately displace human directors not only exaggerate the foreseeable technological potential of these systems, but also tend to ignore doctrinal and institutional impediments intrinsic to Delaware's competitive model – notably, heavy reliance on nuanced and context-specific applications of the fiduciary duty of loyalty by a true court of equity. At the same time, however, there are specific applications of AI systems that might not merely be accommodated by Delaware corporate law, but perhaps eventually required. Such an outcome would appear most plausible in the oversight context, where fiduciary loyalty has been interpreted to require good faith effort to adopt a reasonable compliance monitoring system, an approach driven by an implicit cost-benefit analysis that could lean decisively in favor of AI-based approaches in the foreseeable future. This article discusses the prospects for AI to impact Delaware corporate law in both general and specific respects and evaluates their significance. Section II describes the current state of the technology and argues that AI systems are unlikely to develop to the point that they could displace the full range of functions performed by human boards in the foreseeable future. Section III, then, argues that even if the technology were to achieve more impressive results in the near-term than I anticipate, acceptance of non-human directors would likely be blunted by doctrinal and institutional structures that place equity at the very heart of Delaware corporate law. Section IV, however, suggests that there are nevertheless discrete areas within Delaware corporate law where reliance by human directors upon AI systems for assistance in board decision-making might not merely be accommodated, but eventually required. This appears particularly plausible in the oversight context, where fiduciary loyalty has become intrinsically linked with adoption of compliance monitoring systems that are themselves increasingly likely to incorporate AI technologies. Section V briefly concludes.

The Evolving Delaware Books and Records Jurisprudence and the Caremark Conundrum

Corporate litigation increasingly operates through stockholders’ books and records inspection these days. The rise and expansion of stockholders’ rights to information from corporations have been among the most significant developments, albeit underappreciated, of late under Delaware corporate law jurisprudence. In the aftermath of a few mid-2010’s Delaware Supreme Court corporate law seminal decisions that heightened the pleading standards for stockholder plaintiffs to challenge a wide range of intra-corporate business transactions, the Delaware courts have consistently relaxed the interpretation of a statutory rule (Section 220 of the Delaware General Corporation Law) that grants stockholders a qualified right to inspect corporations’ books and records. This judicial re-balancing of the pendulum, has provided pre-complaint discovery to stockholders seeking to prepare for potential fiduciary-breach litigation. Equipped with strengthened pre-filing discovery tools, stockholders use such access to broad range of intra-corporate materials to substantiate their allegations in order to overcome Delaware’s laxed standard of reviews of corporate transactions, as well as monitor the corporate decision-making process. In this edition of Equity Chambers, Lee Rudy and Eric Zagar, two of the most seasoned stockholder plaintiffs’ litigation counsel, provide an insider’s perspective of Delaware books and records rapid changing doctrinal landscape. In addition, they discuss the clash between corporate litigation actors in the lead plaintiffs process context, as well as the current state of director oversight liability claims.

SMEs’ Equity Financing: Does Corporate Law Matter?

Lack of appropriate financing is a major issue for European small or medium-sized enterprises (SMEs). They are highly dependent on bank lending for external funding, while there is a strong need for wider use of alternative finance, and especially of equity capital with respect to innovative and growth-oriented firms. In this Article, we explore the relationship between corporate law and SMEs’ access to equity finance, concluding that the organizational and governance structure of the enterprise is essential for making it attractive for investors.First, we provide evidence of this relationship showing the importance that US corporate law, and particularly Delaware corporate law, had in the successful funding of Silicon Valley’s startups. Second, we analyse the European framework. On one side, we address the measures adopted by the EU regulators for promoting SMEs’ alternative finance, which have been ineffective and have completely ignored business organization law. On the other side, we describe how a number of EU jurisdictions – with a focus on the Italian system – have amended their corporate law, easing access to equity finance.Finally, we discuss some empirical data and the possible implications in terms of regulatory competition among the EU Member States. financing SMEs, alternative finance, equity finance, corporate law, business form, regulatory competition

A Welcome Shift Away from Shareholder Supremacy - Significance of the US Business Roundtable New Statement in August 2019

A Welcome Shift Away from Shareholder Supremacy - Significance of the US Business Roundtable New Statement in August 2019

Delaware Corporate Law and the 'End of History' in Creditor Protection

In this Chapter, we briefly survey the common law’s adventures with creditor protection over the course of American history with a special focus on Delaware, the most important jurisdiction for corporate law. We examine the evolution of the equitable doctrines that judges have used to answer a question that arises time and again: What help, if any, should the common law be to creditors that suffer losses due to the purported carelessness or disloyalty of corporate directors and officers? Judges have struggled to answer that question, first deploying Judge Story’s “trust fund doctrine” and then molding fiduciary duty law to fashion a remedy for creditors. In Delaware, the appetite of corporate law judges to protect creditors reached a high point in the early 2000s as judges flirted with recognizing a “deepening insolvency” tort cause of action. Suddenly, though, a new course was set, and Delaware’s judges effectively abandoned this project in a series of important decisions around the time of the financial crisis. In this “third generation” of jurisprudence, Delaware’s corporate law judges told creditors to look to other areas of law to protect themselves from opportunistic misconduct, such as bankruptcy law, fraudulent transfer law, and their loan contracts. However, as this Chapter illustrates, the same question of whether the common law ought to protect creditors has arisen time and again and today’s “settled” law is unlikely to represent the end of history in creditor protection.

Leveraging Corporate Law: A Broader Account of Delaware's Competition

Delaware inhabits a competitive landscape that includes, but is not limited to, corporate law. Like other small jurisdictions active in cross-border corporate and financial services, Delaware has become widely associated with a particular area of specialization, providing de facto U.S. corporate law for large, publicly traded companies. However, the economic development imperatives prompting this have also led Delaware to explore opportunities in related though distinct fields that build upon this platform – effectively leveraging their corporate law advantage to expand and diversify the state's revenue streams. This article assesses Delaware's competitive position amidst this broader landscape. Part II provides an overview of prevailing accounts of U.S. corporate charter competition, which generally conclude that Delaware no longer faces substantial competition from other states; when the frame of reference is limited to domestic corporate charter competition, only federal preemption would appear to pose a substantial threat to Delaware's dominance. In response to these prevailing accounts, this part suggests that such a narrow view of the competitive landscape misses important dynamics that could affect Delaware's position moving forward. Minimally, these include the emergence of competitors abroad that challenge Delaware's corporate dominance on multiple fronts – both internationally and with respect to chartering of large companies based in the United States. Part III pushes the analysis further, however, by assessing Delaware's broader competitive landscape beyond corporate law, as such. This section reframes the matter by reference to underlying economic development imperatives, which are particularly pressing for smaller, resource-constrained jurisdictions like Delaware. It then examines Delaware's efforts to leverage corporate law – that is, to build on Delaware's corporate law advantage by expanding into related though distinct fields that build upon that preexisting platform, including aspects of financial services and insurance where chartering and innovative entity structures loom large. Part IV concludes, observing that this broader framing – including cross-border and extra- corporate dynamics – reveals a more complex competitive landscape than prevailing accounts can accommodate. Overall, Delaware faces real competition from a range of domestic and foreign jurisdictions that have grappled with similar economic development challenges through similar strategies, producing global competitive dynamics that may substantially impact Delaware's long-term prospects.

Japan’s Corporate Governance Code From the Perspective of ‘Sustainable Growth of the Company and Improvement of Medium- to Long-Term Corporate Value’

Japan’s Corporate Governance Code From the Perspective of ‘Sustainable Growth of the Company and Improvement of Medium- to Long-Term Corporate Value’

Corporate Oversight and Disobedience

Over a decade has passed since landmark Delaware corporate law decisions on oversight responsibility, and only a small handful of cases have survived a motion to dismiss. Scholars have puzzled over what it means to have the potential for corporate accountability lodged within the duty of good faith, but almost never brought to fruition in terms of trial liability. This article explores the public-regarding purpose of the obedience and oversight duties in corporate law and provides a descriptive account of how they are applied in practice. The Article argues that the fidelity to external law required by the duty of good faith largely serves a legitimizing role for corporate law. Expressing obligations of legal compliance and oversight within corporate law acknowledges societal interests in the rule of law and preserves the ability of courts to flexibly respond to particularly salient and egregious violations of public trust, should they arise, without upending case law developed over decades. Further, this article examines the body of Delaware law concerning the oversight and obedience aspects of the duty of good faith and argues that they have become functionally linked. In practice to date, Delaware courts have prioritized giving directors broad latitude to take business risk by drawing a line at legal risk, despite the possibility that both types of activity could create social value or harm depending on the circumstances. Under current Delaware case law, courts have allowed Caremark claims to proceed where evidence exists to infer that the board utterly failed to implement a compliance monitoring system or that the directors engaged in disobedience by knowingly managing legal risk or flouting, violating, or ignoring the law. Bringing together these threads of discussion, this Article concludes that corporate law’s public-regarding commitment to the rule of law supports accountability in these instances of disobedience as well as more broadly when fiduciaries act with willful ignorance or an awareness that their efforts at compliance are insufficient.

The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court. In Sciabacucchi, Chancery applies “first principles” to invalidate FFPs primarily on grounds that charter provisions may only regulate internal affairs, and that Securities Act claims are always external. In so concluding, Sciabacucchi adopts a novel definition of internal affairs that is narrower than precedent, and asserts that plaintiffs have a federal right to bring state court Securities Act claims. It describes all Securities Act plaintiffs as purchasers who are not owed fiduciary duties at the time of purchase. The opinion constrains all actions of the Delaware legislature relating to the DGCL to comply with its novel definition of “internal affairs.” Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect. It asserts that FFPs are “contrary to the federal regime” because they preclude state court litigation of Securities Act claims. But the U.S. Supreme Court in Rodriguez holds that there is no immutable right to litigate Securities Act claims in state court, and enforces an agreement that precludes state court Securities Act litigation. Sciabacucchi assumes that Securities Act plaintiffs are never existing stockholders to whom fiduciary duties are owed. But SEC filings and the pervasiveness of order splitting conclusively establish that purchasers are commonly existing holders protected by fiduciary duties. The opinion fears hypothetical extraterritorial application of the DGCL. To prevent this result, it invents a novel definition of “internal affairs” that it applies to constrain all of the Legislature’s past and future activity. But the opinion nowhere addresses the large corpus of U.S. and Delaware Supreme Court precedent that already precludes extraterritorial applications of the DGCL. It thus invents novel doctrine that conflicts with established precedent in an effort to solve a problem that is already solved. The opinion’s novel, divergent definition of “internal affairs” also conflicts with U.S. and Delaware Supreme Court precedent that the opinion nowhere considers. Sciabacucchi is additionally problematic from a policy perspective. By using Delaware law to preclude a federal practice in federal court under a federal statute that is permissible under federal law, Sciabacucchi veers Delaware law sharply into the federal lane and creates unprecedented tension with the federal regime. Its narrow “internal affairs” definition invites sister states to regulate matters traditionally viewed as internal by Delaware, and advances a position inimical to Delaware’s interests. By propounding its divergent internal affairs constraint as a categorical restriction on the General Assembly's actions, past and future, the opinion causes the judiciary to intrude into the legislature’s lane. And, data indicate that the opinion in Sciabacucchi caused a statistically and economically significant decline in the stock price of recent IPO issuers with FFPs in their organic documents. In contrast, a straightforward textualist approach would apply the doctrine of consistent usage and use simple dictionary definitions to preclude any extension of the DGCL beyond its traditional bounds. Textualism avoids all of the concerns that inspire the invention of a divergent “internal affairs” definition. Textualism does not require counter-factual assumptions, conflict with U.S. or Delaware Supreme Court precedent, cause Delaware to constrain federal practice in a manner inconsistent with federal law, or advocate policy positions inimical to Delaware’s interest. Textualism also interprets the DGCL in a manner that profoundly constrains the ability of all Delaware corporations to adopt mandatory arbitration of Securities Act claims. Textualism validates FFPs in a manner that precludes the adverse, hypothetical, collateral consequences that animate Sciabacucchi’s fragile analysis, without generating Sciabacucchi’s challenging sequelae.

Deference to Delaware Corporate Law Precedents and Shareholder Wealth: An Empirical Analysis

Delaware is home to more than half of all public corporations, and its market share among initial public offerings is even higher. Not surprisingly, therefore, an extensive body of literature is dedicated to exploring the causes and consequences of Delaware's preeminence as a state of incorporation. There exists, however, a second and largely ignored dimension in which Delaware has come to dominate U.S. corporate law: the common law process. Courts in numerous other states now accord Delaware case law a previously unheard-of level of deference: many state judiciaries have declared explicitly that they will look to Delaware cases in deciding open legal questions. In this paper, I undertake an empirical analysis of Delaware's impact on the corporate common law of other states. Using a hand-collected dataset of state and federal cases, I gain a number of important insights. First, deference to Delaware may be driven in part by functional considerations. States that have based their law on the Model Business Corporation Act (MBCA) and can therefore rely on case law from other MBCA states are less likely to defer to Delaware precedents. Second, firms are more likely to incorporate locally if their home states' courts look to Delaware precedents in corporate law matters. Third, stocks of corporations that are incorporated in the deferring state tend to experience positive abnormal returns at the time of court decisions that introduce the principle of deferring to Delaware case law. Fourth, there is some, albeit mixed, evidence that that stock price reaction is substantially stronger for those firms where agency conflicts between managers and shareholders are more pronounced. This last finding is intuitive in the sense that well-governed firms, if they stood to benefit from the application of Delaware case law, might already have (re)incorporated in Delaware.

Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty

On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit. Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm. This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought. Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.

The National Security Exception in US-China FDI and Trade: Lessons from Delaware Corporate Law

The National Security Exception in US-China FDI and Trade: Lessons from Delaware Corporate Law

기회이용 허용 정관 규정의 입법 필요성과 델라웨어주의 입법 동향

기회이용 허용 정관 규정의 입법 필요성과 델라웨어주의 입법 동향

Discrimination as a Business Policy: The Misuse and Abuse of Corporate Social Responsibility Programs

This article examines legal issues associated with so-called “Corporate Responsibility Programs” (CSR), which promote the interests of third parties over those of a public company's shareholders. In many ways, the rise of CSR programs can be seen as a logical interim development to help boards of directors balance the need to respond to aggrieved constituencies, on the one hand, with the relative paucity of tools meant to deal with such issues available under corporation statutes, on the other hand. Those who promote CSR programs, however, have myriad agendas, some as benign as ensuring that companies are responsible for pollution emitted into local communities and others acting as a facade for political campaigns that punish targeted groups or entities. In the worst of cases, activists have used CSR programs as cover to promulgate discriminatory campaigns of racial and national origin discrimination. Beginning in 2010, in response to the rise of CSR programs, a number of American states formally addressed the need for a new corporate form that tempered shareholder primacy and elevated corporate stakeholder interests by creating a new statutory corporate form that allows shareholders to adopt non-financial objectives for the corporation (these entities are known as “Benefit Corporations”). A majority of American states now have some form of Benefit Corporation statute. The question of how an American corporation can adopt and abide by a CSR program containing guidelines that conflict with local and federal American laws is one that has received minimal scholarly attention to this point. This article will provide an overview of the shareholder primacy norm and competing theories of the corporation followed by a brief history of CSR programs in Europe and the United States. This article with then examine whether CSR programs are viable under state corporation law generally and specifically under Delaware corporation law, where many publicly traded corporations are incorporated and where a strong Benefit Corporation statute exists. Next, this article will examine how CSR programs have been used to compel corporations into adopting discriminatory policies and how those policies constitute violations of state and federal anti-discrimination laws, putting companies that adopt such CSR programs at risk of legal sanction. Finally, this article will examine the legal risks faced by a corporation that adopts a CSR program that incorporates unlawful discrimination.