Professor Eric Talley may soon have a surprise summer project: a major rewrite of his long-running syllabus for his core class on corporate law at Columbia Law School.
The standards for US mergers and acquisitions and corporate governance jurisprudence have been set for decades in the state court of Delaware, the tiny mid-Atlantic state where most US public companies remain incorporated.
It is partially a historical accident but also through conscious public policy decisions that an otherwise unremarkable jurisdiction has essentially developed a monopoly on setting case law on the relationship between American corporate managers and shareholders.
But the likes of Elon Musk and other entrepreneurs — who have lost big cases or faced intrusive lawsuits — have increasingly complained that these standards are now excessively punitive for their kinds of companies. Tesla and other Musk businesses as well as a handful of other prominent companies such as Dropbox have reincorporated in Texas or Nevada, states that themselves are actively marketing their pro-billionaire bona fides.
The worry for Delaware, where incorporation fees generate billions in revenue, is that several others were similarly lining up a so-called “D-exit”. In response, the new Delaware governor and legislative allies are now quickly seeking to enact sweeping changes to the law this spring to make traditional shareholder litigation much more difficult to bring.
More broadly, Delaware’s hallmark had been to let its technocratic judges apply their discretion in cases so standards were flexible and dependent on the particular facts. The new law would be much more prescriptive in defining conflicts of interest and how much scrutiny directors and officers can face on their decision-making.
Talley estimates that dozens of previously binding Delaware judicial precedents are about to be made obsolete by the potential law. “These changes to my own pedagogy will be costly to me, no doubt,” he said.
It may, however, prove enough to avoid the so-called “D-exit” of a large number of companies and help the state retain the associated fees. But on the flip side, the policing and deterrent mechanism of shareholder lawsuits may fall away. And an almost certain consequence of that is the diminution of a system that grappled constantly with the consequential and intellectually interesting questions at the intersection of corporate law and corporate finance. Such issues will simply not be as richly litigated or studied any more.
“We have this wonderful ecosystem, where we are litigating high stakes cases in front of a highly sophisticated and demanding court. Every time we are matched up against the very best and brightest. It is cool,” said Ned Weinberger, a well-known Delaware shareholder attorney.
“Chancery litigation is one of the key economic engines in Wilmington. Big lawsuits create big demand. This bill, if it passes, is going to be devastating to the city and the state and hurt a lot of people across many industries.”
A 2019 economic impact report from the University of Delaware said that Wilmington, despite having fewer than 75,000 residents, had a branch office for 19 of the 100 largest US law firms. At the same time, there are multiple locally based firms also filled with top law school graduates who could otherwise work in any other major market. The spillover effects include allowing the Delaware federal and bankruptcy courts to punch above their weight.
Joel Friedlander, another top shareholder lawyer who has won large recoveries from Fortune 500 companies and investment banks, reminisced about being told as a law student, following the late 1980s hostile takeover wave largely contested in Delaware courts, that he should become a litigator in the state rather than a New York deals lawyer.
Over his 30-year career, Friedlander said big companies were impressed enough with the Delaware Court of Chancery to insist that various types of other governance and transactional disputes also be decided by Delaware judges. However, he said he would no longer recommend that law students come to Wilmington if this legislation is enacted.
“Some people in Delaware want to wreck what is special about Delaware, which is its case law and its judiciary — that cannot be replicated.”
sujeet.indap@ft.com
