Delaware’s Latest Show of Corporate Savvy

Delaware continues to be the savviest seller in the world of corporate charters and related services, thanks to a combination of judicial vision and legislative elegance supported by all the state’s leadership and citizens alike. The most recent example appears in the intersection of two technical corners–strike suit merger litigation and forum selection bylaws.

As detailed in this Wall Street Journal article of Wednesday, Delaware’s Chancery Court, led by Vice Chancellor Travis Laster, has been cracking down on frivolous shareholder suits challenging mergers. The cases tend to be settled quickly based on corporate governance promises. Most of the cash that changes hands goes to plaintiffs’ lawyers while defense lawyers and boards seem to accept paying this “merger tax” as an investment in the certainty that that there will be no future litigation.

The WSJ piece suggests that the Chancellors’ crackdown may simply lead plaintiffs’ lawyers to file such suits in other forums. But this overlooks one of the most important developments in recent DE corporate law, with which the savvy Delaware judges are keenly attuned. If plaintiffs lawyers start filing increasing numbers of suits outside the Chancery Court, more and more boards would unilaterally adopt bylaws barring such cases from any forum but Delaware.

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The Delaware legislature recently authorized boards to do just that and courts elsewhere are bound to respect such arrangements and transfer any filed cases over to Delaware (as the Oregon Supreme Court did at year end in Roberts v. Triquint Semiconductor, Inc.).

True, in the past, DE boards and defense lawyers settle the frivolous cases and may find value in the finality. To that extent, the Chancellors’ crackdown on settlements may lead them to prefer litigating in courts more willing to give a rubber stamp, perhaps states eager to compete with Delaware in the corporate chartering and services business.

Except the Delaware judges are signaling a new world where boards need not fear these suits and crave their settlement as much as in the past. If so, that makes Delaware more attractive and favors its selection for forum. That increases board incentives to adopt Delaware forum bylaws.

A clearly virtuous effect of this combination of legislative, judicial, and directorial innovation is to make the merits matter more. For DE, it is yet another way to cement the state’s deserved reputation as an attractive place to be incorporated. And it does so primarily in the name of quality corporate law administration, rather than being either pro-management or pro-shareholder.

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Larry is a professor of law at the George Washington University Law School. He joined the GW Law School faculty in 2007, having previously taught for 6 years at Boston College (where he served a 2-year term as Academic Dean) and for 8 years at Cardozo (where he served a 5-year term as Director of the Heyman Center on Corporate Governance). He also taught courses at many other schools in the US and abroad, including Central European University, Columbia University, Hebrew University, University of Navarra, and Vanderbilt University. Before entering academia, he practiced corporate law for 4 years at Cravath, Swaine & Moore. He earned his BA from University of Delaware and his JD magna cum laude from Cardozo. Larry writes extensively in corporate and securities law, with a special emphasis on law and accounting and investor perspectives. He teaches courses in those fields as well as Contracts. He has published a dozen books and 50 law review articles. His recent books include: Contracts in the Real World: Stories of Popular Contracts and Why They Matter (Cambridge University Press 2012), The AIG Story (Wiley 2013), The Essays of Warren Buffett: Lessons for Corporate America (Carolina Academic Press 2013), and Berkshire Hathaway’s Value of Values (Columbia University Press 2014). Areas of Interest: Accounting, Auditing, Contracts, Corporate Law, Finance, Investing, Legal Education, Securities Regulation