I've blogged about Delaware's new arbitration procedure
before. Now that the parties in the legal challenge to the procedure are
preparing for arguments on a summary judgment motion, I thought it might be an
appropriate time to chime in again. Delaware's value and the source of its
competitive strength is its vast body of corporate common law. In order for
Delaware to maintain this position, it has to ensure that it has a regular
supply of cases that it can adjudicate. Where and when new fact patterns arise,
the courts are then challenged to reinterpret the law to adapt to new
circumstances. When there are a lot of cases, the changes tend to be marginal. No
single move means much, but, like glaciers in stop motion, when you observe it
from afar there can be big moves over time.
Anything that threatens to slow down the flow of cases to
Delaware becomes a threat to the development and the maintenance of the
Delaware's competitive position. That's why the whole multi-forum litigation
question is a problem for Delaware. If litigants bring Delaware cases outside
of Delaware, Delaware's common law machine will slow down. The same is true of
private arbitration. Now, let me distinguish between what Carlyle is attempting
to do with its mandate to arbitrate all shareholder claims and what Delaware is
doing with it arbitration system. Delaware's arbitration system requires two
consenting parties. That means that no shareholders bringing fiduciary duty
claims against directors will be required to arbitrate against their will.
Neither will hostile acquirers challenging director actions to protect the
corporation against an unwanted offer. My guess is few (if any) of those kinds
of cases will ever end up being submitted to the arbitration system.
Cases that will end up in arbitration are of a particular
type: contract litigation between buyers and sellers in a merger transaction. That's
all litigation about deals gone bad, MAC's, termination and other walk rights.
Many of those kinds of cases are candidates for arbitration. Once parties
become comfortable with the system they'll being to insert Delaware arbitration
language in their agreements and this kind of litigation will begin to
disappear from the courts. When they start to disappear from the courts,
transaction planners will begin to see a decline in the positive externalities
associated with the Delaware law, including its predictability. Even though the
courts may continue to innovate and adapt to new circumstances in arbitration,
the drawback of arbitration is that none of those innovations and adaptations
become part of the public record and none of them can be relied on by
transaction planners working on other deals. If arbitration becomes the norm
for that subset of cases, Delaware's value will declines just a bit.
What's the alternative? I don't know yet. Of
course, the US Supreme Court has expressed a decided preference for
arbitration, so it's not like one can stand up and say, "No more
arbitration!" That's just not going to happen. Perhaps, Delaware's
policymakers took a look at the changing landscape and figured getting into the
game was the least worst of the alternatives. That may be so, and if it is I
sympathize with their position. It won't change the fact that by jumping onto
the arbitration bandwagon, the state is giving away some its own value.
Oh, and Joe Biden was in Delaware yesterday praising its courts for
"making us look so good for so long."
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