Delaware Corporate 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.

Maximizing D&O Insurance Coverage for Delaware Corporations

Alexandra Roje is partner in the Los Angeles office of Lathrop GPM's Insurance Recovery practice. In this article, she discusses the do's and don'ts every decision‐maker needs to know regarding Directors' and Officers' insurance coverage for their organizations.

Pairing International Taxation and Conflict of Laws: Common Challenges and Reciprocal Lessons

This article explores the relationship between two legal fields which represent the legal backbone of contemporary cross-border and Internet commercial activity: conflict of laws and international taxation. Despite the growing significance of the two fields of law, legal scholarship has yet to explore their intriguing relationship. Which state can levy tax on a multi-billion-dollar Delaware (US) corporation with headquarters in London (UK) that sells $500,000,000 worth of products to Australian consumers each year? Which law should adjudicate an online contract between a NSW corporation and a German corporation, signed online and addressing the delayed delivery of goods in Brazil due to the coronavirus outbreak? Despite the paramount significance of both disciplines, their traditional underpinnings appear to be fundamentally challenged and pressed by the realities of COVID-19, dynamic commerce and the digital environment. Our cross-disciplinary partnership aims to design a unifying conceptual framework that captures the essentials of both disciplines. Through reciprocal lessons, this framework will help address the uncertainty in both disciplines.

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

Mission Critical: Caremark, Blue Bell, and Director Responsibility for Cybersecurity Governance

If the potential for Caremark liability hangs like the sword of Damocles over corporate directors of Delaware corporations, then that sword has been considerably more secure than that of the original myth. For decades, Chancellor Allen’s description of a Caremark claim as “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment” held true. Caremark claims that survived a motion to dismiss were for decades few and far between. That changed in 2019. In the space of little over a year, Delaware courts have allowed five Caremark claims to survive in the corporation context and one claim to survive in the limited partnership context. The thread holding that sword is beginning to look more like the single horse hair of myth. The scope and likelihood of Caremark liability are matters of considerable interest and concern for directors. Under most circumstances, a board simply doing its job poorly is relevant only to the directors’ duty of care and protected by the business judgment rule, exculpatory provisions under Section 102(b)(7), and advancement and indemnification. Failure to monitor under Caremark, however, is a breach of the duty of loyalty. A breach of the duty of loyalty is not protected by the business judgment rule. It cannot be exculpated. And it cannot be covered by indemnification. 2019 marked an abrupt shift in Caremark in application, if not in theory. In June of that year the Supreme Court of Delaware (“Delaware Supreme Court”) reversed a decision by the Delaware Court of Chancery (“Chancery Court”) dismissing a claim against the directors of Blue Bell Creameries, Inc. (“Blue Bell”) under Caremark. Within a little over a year, the Chancery Court would sustain Caremark claims in four cases. In Clovis, the Chancery Court sustained a Caremark claim against directors of a pharmaceutical company who allowed the company to misrepresent the clinical trial success of one of its three drugs. In Hughes, the Chancery Court sustained a Caremark claim against directors of a Chinese company incorporated in Delaware that suffered from severe and pervasive accounting issues. In Teamsters Local, the Chancery Court sustained a Caremark claim against directors of a large pharmaceutical company who allowed an indirect subsidiary to essentially operate a criminal enterprise. And in Boeing, the Chancery Court sustained a Caremark claim against directors of an airplane manufacturer who did not pay attention to safety issues. Cybersecurity has become just such a mission critical risk for large corporations. This Article makes four key arguments. Black letter Caremark doctrine has not changed, but it is newly reinvigorated and the risks of Caremark liability for directors is greater than just a few years ago. Future Caremark liability will be centered on failure to provide board-level oversight of mission critical risks. Cybersecurity is mission critical to effectively all large companies today. The risk of Caremark liability can be mitigated by taking a few simple steps to ensure that the board is addressing cybersecurity. This Article is the first to make these arguments together and the first to make the final argument.

Delaware versus California and Choice of Law: JUUL Labs, Inc. v. Grove

The William West v. Access Control Related Enterprises, LLC decision in which a California court held that a California citizen could not be required to litigate an action involving a Delaware LLC in the Delaware Chancery Court because that forum does not provide for jury trials. In a subsequent addition to the choice of law battle between California and Delaware, the Delaware Chancery Court in JUUL Labs, Inc. v. Grove held that the inspection of books and records of a Delaware corporation is governed by Delaware law notwithstanding a California statute to the contrary.

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.

Amending the Delaware Corporate Code By Going to Court: Some Thoughts on Sciabacucchi v. Salzberg

In Sciabacucchi v. Salzberg, the Delaware Chancery Court held that Delaware corporations are prohibited from providing in their charters provisions that would route certain federal securities act claims to federal rather than state court. However, to reach this result, the court had to adopt an approach to choice of law rules and form contracts that is very different from the one courts usually take and without providing any justification for such exceptional treatment. The Delaware Supreme Court should reverse the decision and let the Delaware Legislature amend the statute if the result in Sciabacucchi really is the policy of the state of Delaware with respect to the scope of the corporate contract.

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’

The Shifting Sands of Conflict of Interest Standards: The Duty of Loyalty Meets the Real World with Questions of Process and Fairness

Standards governing the validity of conflict-of-interest transactions by corporate directors or others in dominant positions have significantly evolved from the early days of strict judicial condemnation to the current statutory provisions. These provisions place great faith in and emphasis on the judgment of disinterested directors or shareholders. This evolution has not been consistent among states, given that substantial variations exist regarding both statutory provisions and judicial interpretations. To illustrate the variations, this article examines and compares the Delaware and Model Business Corporation Act standards. The variations reflect the concerns that arise when a director’s fiduciary duty of loyalty conflicts with the realities and demands of the commercial world. This article examines the evolution of conflict-of-interest standards and existing variations in light of two fundamental issues: (i) whether the combination of statutory and fiduciary standards obligates directors to obtain advance approval of conflict transactions and (ii) the capacity of shareholders to challenge conflict transactions on the grounds of fairness to the corporation, even after board or shareholder approval. The article concludes that statutory and fiduciary standards obligate directors to obtain advance approval of conflict transactions and provides recommendations for addressing these two issues in a manner consistent with statutory provisions and fiduciary standards.

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.