Panel: Delaware's World: Who are its Competitors 


PANEL: DELAWARE'S WORLD: WHO ARE
ITS COMPETITORS?t

MARK J. ROE': I thought I would talk about shareholder
access in the context of constraints in Delaware and the
interaction among the corporate lawmaking jurisdictions in
the United States.

As Jack Coffee mentioned in the introduction, this
traditional model of jurisdictional competition has been
worse for wear over the last ten or fifteen years. And there
are several reasons for this, only one of which I want to talk
about because I do not think that people think as much
about this as they should. There is an aspect about how
people do their jobs where even if you are competing in some
distant sense, you do not think of this competition on any
day-to-day basis. People go to work; do their jobs as
professionals. It is hard for me believe that anybody on the
chancery court is thinking on a day-to-day or even a week-to-
week basis, "This is something I've got to think about in
terms of jurisdictional competition"-though maybe the
Delaware legislature does from time to time. The kind of
things that motivate people on a regular basis are doing
one's job well, self-respect that comes from doing one's job
well, respect of peers, and so on.

There is an aspect to the old style-"race to the top, race
to the bottom"-that in some ways, is demeaning to the
legislature, the law council, and the Delaware courts that
make Delaware law. If I were sitting there inside Delaware,
I would think, "What do you mean? I can't do my job well
unless there's a competitive framework standing around me
that is driving a race to the top?" I think since this is not
really the kind of thing that motivates people day-to-day, it

t Excerpts taken from panel discussion at the Columbia University
School of Law Symposium: The Delaware Court of Chancery: Change and
Continuity (Nov. 11, 2011). The editors of the Columbia Business Law
Review have added explanatory footnotes where deemed appropriate.

' David Berg Professor of Law, Harvard Law School.



is appropriate that this competitive model has worn down
somewhat.

Nevertheless, we do hit constraints from time to time.
Sometimes the constraints can affect behavior, and
sometimes the constraints do not affect behavior directly, but
shift lawmaking from one place to another even if never
changing what we would do with the lawmaking that is left.

Three points that I want to make. The first is that U.S.
corporate law is-and I think we also recognize this-made
in Washington, and it is made in Delaware.

Second point-which maybe we do not all agree with-is
that some portion of Delaware actions are reactions to U.S.
actions. They may be slight. They are always embedded in
lots of motivations, but some of that is often there. I think it
is possible that there is some of that that could be detected in
shareholder access Sections 112 and 113.2 That does not
mean that people in Delaware did not have shareholder
access on their agenda at some point. Many people had that
on their agenda beforehand. But the fact that it went
through at the time it went through is at least consistent
with a reaction to what is happening in Washington.

The third point, which is what I would like to emphasize,
is that where Delaware comes out can sometimes-and
sometimes on important matters-affect what happens in
Washington. I think the post-Section 112 history in
shareholder access has at least an element of that. My
intuition is that it is not likely that little Delaware can do
something that affects the American economy in a way that
is not at least acceptable to the national players in the
American economy. I think we probably recognize this. It
cannot drift really far from the way national players in the
polity want things to be.

2 See DEL. CODE. ANN. tit. 8, § 112 (2012) (providing that a
corporation's bylaws may require the inclusion of shareholder nominees in
proxy solicitation materials relating to the election of directors); id. § 113
(providing that a corporation's bylaws may permit the reimbursement by
the corporation of expenses incurred by a stockholder in soliciting proxies
in connection with an election of directors).

PANEL: DELA WARE AND ITS COMPETITORS 641No. 2:6401



A better way to think of the jurisdictional structure in
which Delaware is embedded is not just the old style of state-
to-state competition, but rather to think of Delaware as also
interacting with Washington on many levels: with the SEC,
with Congress, with courts interpreting the Securities Acts,
and so on. This makes for a corporate lawmaking structure
in the United States that looks a little bit more like the
following: two parallel corporate lawmaking entities, a
federal one and a Delaware one, giving us two major
legislatures for making corporate law-the Delaware
legislature, with the assistance of the Corporate Law
Council' and the United States Congress. It also gives us
two major non-legislative institutions impacting corporate
law: the Securities and Exchange Commission and the
Delaware Chancery Court. This has been on our minds from
Sarbanes Oxley and repeated in some things that happened
in Dodd-Frank but it has really been there to a greater or
lesser extent for a long time-for a significant period of time,
a significant amount of merger law was being decided by the
federal courts interpreting the Williams Act.'

We can think of corporate law now in Delaware as divided
into a couple of different subcategories in terms of
jurisdictional influence. Part of it is discretionary in the
sense that there is just no interjurisdictional influence.
Another bit, mostly around the edges, was impacted by old-
style state competition in the past and conceivably still is
today in some places-Airgas," maybe. Then there is a

' The Corporate Law Council of the Corporation Law Section of the
Delaware State Bar Association is responsible for the annual review and
modernization of the Delaware General Corporation Law.

4 See Williams Act, 15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f) (2012). The
Williams Act, which provided for disclosure requirements in the tender
offer context, was enacted in 1968, in response to perceived abuses. See,
e.g., William C. Tyson, The Proper Relationship Between Federal and State
Law in the Regulation of Tender Offers, 66 NOTRE DAME L. REv. 241
(1990). The Act amended the Securities and Exchange Act of 1934 by
adding Sections 13(d) and (e) and Sections 14(d) through (f).

' See Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch.
2011). In Airgas, Air Products made several hostile offers for Airgas, the
last of which valued the company at $70 per share. Id. at 55. The Airgas

642 COLUAMIA B USINESS LA W RE VIE W [Vol. 2012



potential third dimension of not just federal authorities
making some corporate law directly, but of Delaware results
being affected by what people think is happening in
Washington and what the impact of Washington could be-to
the extent that corporate players, legislators or others, have
what is going on in Washington in mind when something
become a national issue.

There is a political economy contrast that could be on the
plate too. The kinds of influences that are going to be
important in Delaware are affiliated with a board-centric
view. Delaware corporate law is going to be particularly
board oriented. Influences on Delaware, such as managers,
boards, and investors, are going to be very important in
making federal legislation as well, although the relative
balance might be slightly different.

The really big difference between Delaware and the feds
is that when the feds make corporate law, there are just a
whole lot of other players and other ideas that come into the
mix. So while Delaware philosophy is more likely than not
going to focus on the importance of the boardroom and
making sure the boardroom works very nicely, there are
going to be some federal policy makers who have a different
emphasis-a capital markets orientation at the U.S.
Treasury or at the SEC, for instance. If something gets on
the agenda in Congress there are just a whole lot of other
players that are going to be influential in what the output
will be. Public opinion, which is often populist and
sometimes anti-corporate, consumer groups who want to get
something out of corporate America, and probably employees
and the AFL-CIO have a little bit more muscle at the federal

board maintained that the company was worth at least $78 per share and
kept in place a number of defensive measures, including both a staggered
board and a poison pill, during a year-long battle for control of the
company. Id. at 55-56. The chancery court upheld the Airgas defensive
measures based on Delaware Supreme Court precedent that the
combination of a staggered board and poison pill are note preclusive. See
id. at 181-82 (citing Versata Enters. v. Selectica, Inc., 5 A.3d 586, 604
(Del. 2010)).

No. 2:640]1 PANEL: DELA WA RE AND ITS COMPETITORS 643



level than at the state level. There are just a whole bunch of
other interests that are in play at the federal level that are
going to be much less in play at the Delaware level. And so
some portion of what Delaware does from time to time could
be done in reaction to what is going on in Washington.

There is another channel which is worth thinking about.
The other channel is that some things that Delaware is going
to do, its decisions on what the best way to handle the
problem is, can have an impact on what the federal
authorities end up doing. There could be some aspect of
federal-made corporate law that is effectively influenced by
what is happening in Delaware. Some players on the federal
level may withdraw because they think what is happening in
Delaware is to their liking or satisfactory to their way of
thinking. In other places, they may decide to act because
they take a look at what is happening in Delaware.

Run through shareholder access for a couple of minutes
and see how at least there are some questions that could
map onto these considerations. One question is, "Would
Delaware have acted on shareholder access in Section 112
without the recurrent U.S. activity on shareholder access
during the prior decade?" In particular, what seems to have
changed circa 2008, 2009, was an election. Due to change of
composition at the SEC, it became much more likely in 2008
and 2009 that the SEC would really do something on
shareholder access.

Look at the statute. Section 112 says that the bylaws
"may provide" for inclusion of shareholder nominees in a
proxy.6 And so there seems to have been some drift from the
decade before Section 112, as many Delaware lawyers were
opining that this was not the proper action, i.e., that
shareholder access was not something that was part of
Delaware law subject to this or this proviso.I

So Section 112 says that the bylaws may provide. But
because this is an elective activity, there is almost something

6 See DEL. CODE ANN. tit. 8, § 112; supra note 3.
' See, e.g., Bernard S. Sharfman, Why Proxy Access is Harmful to

Corporate Governance, 37 J. CORP. L. 387, 391 n.32 (2012).

[Vol. 2012644 COL UMBIA B USINESS LA W RE VIE W



circular in how Section 112 works. It is the standard
structure for Delaware corporate lawmaking: enabling, but
the board is left with the first shot at deciding what the rules
should be, i.e., what the bylaws should be. When you think
about it, under Section 112, shareholders, who would like to
get access to the company's proxy statement to do something
or contest something with the board, have a different sort of
barrier or a barrier that has a different meaning in this
context. Either they convince the board to concede and adopt
a Section 112 shareholder access bylaw, or, if they cannot get
board approval for the bylaw, they have to run a proxy
contest of some sort in order to be able to get shareholder
access to avoid a proxy contest in the future. So there is a
circular quality to Section 112 for the shareholders-a
potential catch-22. A lot of the muscle that comes from
shareholder access going forward probably is coming from
the interaction of Section 112 with Rule 14a-11,1 as opposed
to Section 112 alone.

So, what are the possible explanations as to why Section
112 was passed in 2009? There are several reasons. One is:
people decide it was a good idea, and its time had come.'
Another variation is: if it looks like proxy access is coming,
Delaware could quite frankly think they will do a much
better job managing it over time-i.e., that once something is

' See Securities and Exchange Commission Rule 14a-11, 17 C.F.R. §
240.14a-11, invalidated by Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C.
Cir. 2011). Rule 14a-11 would have required public companies to include
shareholder-proposed nominees to the board of directors in their proxy
materials in certain circumstances. See also David B.H. Martin,
Implications of the Proxy Access Case, HARV. L. SCH. F. ON CORP.
GOVERNANCE & FIN. REG. (Aug. 23, 2011, 9:15 AM),
http://blogs.law.harvard.edulcorpgov/2011/08/23/implications-of-the-proxy-
access-case/#more-20347.

' See, e.g., William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., The
Great Takeover Debate: A Meditation on Bridging the Conceptual Divide,
69 U. CHI. L. REV. 1067, 1087 (2002) ("[Mlandating courts to issue
injunctions that require boards to permit stockholders to choose between
competing transactions in any and all circumstances would prevent
informed, well-motivated boards from opposing transactions that they
believe would injure the welfare of the corporations they serve.").

No. 2:640]1 PANEL: DELA WARE AND ITS COMPETITORS 645



COLUMBIA BUSINESS LAW REVIEW

in place at the federal level, whether its congressional or
whether it comes from the Securities and Exchange
Commission, it moves slowly, and does not adapt as well as
Delaware to changing circumstances. Another possibility,
less favorable, is: stay relevant and make sure we are still in
the game by doing something on one of the major issues at
the time. Another possibility is: to follow up on-or maybe
even clean up-some of the aspects of Computer
Associates'o-I have heard it said that the fiduciary out in
Computer Associates seemed a little weird to some people
when the conflicts just did not seem to be moving in the
standard direction. Whatever the reason, the potential
impact was that if Delaware allows some moderate access in
Section 112, there was some significant possibility that
federal authorities would say, "We don't need [Rule] 14a-11,"
maybe conceivably "we don't need any proxy access rules at
all at the federal level."

Enacting proxy access could have an impact in several
different ways. One is, to the extent Congress is in play,
there is some doubt as whether the SEC has authority to do
proxy access. If Delaware enacts proxy access, you can
imagine some people in Congress saying, "We've got so many
things on our plate just leave it alone; we don't need to do
anything to validate SEC authority." If there is a lawsuit,
once a major corporate law state has spoken on proxy access
it becomes just a little bit harder for a federal court to wreck
the state corporate statute. Another impact of a Delaware
access statute on the books is that it provides ammunition
for an "arbitrary and capricious" challenge to the SEC rule.
The D.C. Circuit went off in a different direction,n but prior

"o See CA, Inc. v. AFSCME Emps. Pension Plan (Computer
Associates), 953 A.2d 227 (Del. 2008). In Computer Associates,
shareholder AFSCME proposed a bylaw that would have required the
company to reimburse shareholders for reasonable expenses incurred in
conducting successful proxy contests. Id. at 230. The Delaware Supreme
Court held the bylaw invalid because "the [b]ylaw mandates
reimbursement of election expenses in circumstances that a proper
application of fiduciary principles could preclude." Id. at 240.

n See Bus. Roundtable v. SEC, 647 F.3d 1144, 1148-49 (D.C. Cir.
2011) (invalidating Rule 14a-11 and holding that the SEC acted

646 [Vol. 2012



PANEL: DELAWARE AND ITS COMPETITORS

to its decision these are the types of impact that the
Delaware statute could have had.12

So if you think all the way on our left as being the board
deference view, and all the way on the right is access for
every little thing, some financial investors who would like
access now and then for really important things fall
somewhere in the middle. And if you looked at, on the array,
where the different players were at different times, I think it
is fair to say that Delaware moved from limited access at the
beginning of the decade to Section 112-type access at the end
of the decade.

How do we partly explain what went on in Delaware? I
think we can partly explain it by looking to what was
happening in Washington. Congress moved on access, from
being inert on the issue. Pieces of access found their way
into Dodd-Frank. The SEC was acting and thinking about
access as it had been for a decade and it looked very likely
that access was going to go through in some form at the SEC.
So at least one possibility is that, as Congress moves along,
there is a little bit of a gravitational pull, vis-a-vis Delaware.
One of the considerations that might have run through
peoples' minds in Delaware was, "Now that Congress has
moved, and the SEC has moved there, we can't be over here;
we've got to be a little bit over there."

And then there is an additional impact. Once Delaware
acts and moves to the center on proxy access, then there are
reasons why Congress could lose interest in shareholder
access and not push any further towards providing
shareholder access. Possibly, there could be a reason for the
SEC to move to other things on its agenda. And while the

"arbitrarily and capriciously" in failing to adequately assess the economic
impact of the rule).

12 See Brief for Investment Co. Institute & Independent Directors
Council as Amici Curiae Supporting Petitioners, Bus. Roundtable v. SEC,
647 F.3d 1144 (2011) (No. 10-1305), 2011 WL 2014798 (arguing that the
SEC acted arbitrarily and capriciously); Brief for State of Delaware as
Amicus Curiae Supporting Petitioners, Bus. Roundtable v. SEC, 647 F.3d
1144 (2011) (No. 10-1305), 2011 WL 2014797 (arguing that Rule 14a-11
would compromise the Delaware statutory scheme).

No. 2:640] 647



D.C. Circuit did not base its decision on this, it could have
been part of the basis for a circuit court decision condemning
SEC action. 3 It was not, but it could have been.

In conclusion, what I have is not all that different from
the idea that I started out with: that corporate law in the
United States partly results from the interaction between
Washington and Delaware. There are differences in
influences and philosophy between Delaware and
Washington. There are more general public influences on
lawmaking, corporate lawmaking, in Delaware. Public
opinions, which are sometimes populist, then anti-corporate;
sometimes policy-makers with different ideals make their
way into Deleware decision making. And then, there is the
additional idea that that a lot of the influence can be two-
way. Delaware's positioning can end up affecting where
Washington comes out. I do not purport that this explains
everything, but I think it explains some of American
corporate lawmaking at both levels. And I think it is
underplayed in our understanding of U.S. corporate
lawmaking.

BERNARD BLACK": Delaware dominates the market for
out-of-state incorporations. It has about 65% of all U.S.
public companies and 80% of those who incorporate out of
state. There has been a long discussion among academics as
to why-is it substantive law? Not so clear. It is more likely
to be judicial quality and developed precedent.

But to have the precedent, Delaware needs case flow. So
the competitive advantage, the ability to charge a premium
price, is going to depend partly on having the case flow and
having the precedent. And all the academic debate-as long
as I have been in the corporate law academy-has assumed
that Delaware gets the cases. But increasingly, they do not.

13 See supra note 11.
" Chabraja Professor, Northwestern University School of Law and

Kellogg School of Management.

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PANEL: DELA WARE AND ITS COMPETITORS

I am going to show you that. Delaware is increasingly losing
corporate law cases involving Delaware companies. It is just
going elsewhere. Less provable, but likely, is that some of
those lost cases are important cases that Delaware ought to
care about losing.

So let me show some data first. But to set it up, I want
you to think about the balancing act that Delaware has to
engage in, that it was doing successfully for a long time, but
that it is not doing successfully now. Some more thought
needs to be given to the question: how do you balance? You
want to attract companies, but you also want to attract
plaintiffs' lawyers. Because if do not attract the plaintiffs'
lawyers, they are going to file suit somewhere else. But if
you are too friendly to the plaintiffs' lawyers, you may annoy
the companies who may decide not to incorporate in
Delaware.

So Delaware has to balance those competing objectives. I
think today the judges are going to have to do so consciously
in a way they have not before. And they are facing
competition from other states not in the form of an explicit
effort to get incorporations, the traditional competition for
incorporations-whether it exists or not. What Delaware is
doing is facing a nuisance suit on every deal case. So the
Delaware judges say, "I don't want to hear this." But it can
be a nice important case to a local judge. So the local judge
may be more friendly to those cases than Delaware in a
variety of ways, and the plaintiffs' lawyers will respond.

First, some evidence. No perfect piece of evidence. What
I am going to do is show you very quickly four data sets.
Each of them are flawed, but they tell a consistent, and I
think overall convincing, picture.

First data set: cases with reported decisions that we can
find somewhere on the web-Westlaw, LEXIS, or the
Delaware chancery website. We go through a massive
search from 1995 on for all cases with one or more opinions
of some kind on some kind of motion that shows up in
writing. These are probably the more important cases
because there exists at least one written decision. But
maybe not, maybe some of them are unimportant. It is

No. 2:640] 649



probably correlated though. There we find 729 cases; 554
involve Delaware companies. About half of those decisions
are written in Delaware.

But, the time trend is interesting. Delaware's market
share of reported decisions used to be 80%. It is now in the
thirties.

Well, it is a biased sample. But it is biased pro-Delaware,
because the Delaware judges write opinions. So do federal
judges, but other state courts rarely write opinions. They
are probably underrepresented. So you would really want to
look for filed cases rather than cases with opinions. But that
is hard, because there is no comprehensive source.

So what we are going to do is study three slices. We are
going to look at large takeovers, mostly arms-length
negotiations where the suits are the class action suits you
heard about earlier. We are going to look at LBOs, which
are interesting because they involve a conflict of interest-
also class actions. Then we are going to take a slice of the
options backdating cases, which are derivative cases, and see
what we find.

Here are the top twenty-five M&A cases each year from
1994 on. The blue is Delaware, the yellow is not much
bigger-that represents the other states. And the green is
federal-a pretty small because it's hard to bring these class
actions in federal court.

You see something similar. Delaware's share is not today
what it once was. The number of cases is going up. But
share is going down.

Another way to look at the data is to say, does Delaware
see the case at all? So here the dark blue represents where
Delaware is the only place where a suit was filed. The light
blue represents where Delaware was one place where a suit
was filed but not the only place. And red represents cases
Delaware never saw at all. Basically, through 2001,
Delaware always sees the case and is often the only place.
Today, it often does not see the case at all, and it is never the
only place. In four years, there is one case that was filed
only in Delaware, and not somewhere else besides. So there
is always this competition over case management.

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PANEL: DELA WARE AND ITS COMPETITORS

Let us turn to LBOs. They are interesting because,
unlike cases arising out of arms-length mergers, which many
people think are junk cases, these are often good cases.
There is a conflict. There are real damages awarded. There
is sometimes real misbehavior, and Delaware is actually
pretty tough on conflict of interest. This is not people
running away from Delaware because they do not think they
are going to get a fair hearing. Delaware is tough on conflict
of interest. Yet the plaintiffs' lawyers are moving away from
Delaware in the LBO cases as well. The blue line is going
down-the cases are going to other state courts. Again, you
cannot bring these cases in federal court very easily. Once
again, Delaware used to always see the case-or almost
always. Increasingly, it does not see the case at all, and it is
rarely the only forum.

Okay, let me turn to derivative suits-options backdating
cases; a big wave of cases that hit around 2005, 2006. Many
of them were seen as strong cases with a good potential for
damages-an opportunity for Delaware maybe to develop
some case law on what the board should do to review
compensation practices. A few of the cases end up in
Delaware. There is a decision in 2007 that excuses demand15

and lets the suit proceed. This is a plaintiff-friendly
decision, but it is too late. The cases have all been filed
elsewhere already.

Here is the data: there were 164 companies that we found
that faced derivative suits; 126 were Delaware companies.
We found 235 suits, 11% in Delaware. The rest split
between federal and other states. They are derivative; you
can bring these in federal court. In 3% of the cases,

" See In re infoUSA, Inc. S'holders Litig., 953 A.2d 963 (Del. Ch.
2007). Prior to commencing a derivative suit, a shareholder is required to
make a "demand" on the board of directors to bring the action on behalf of
the company. See DEL. CH. CT. R. 23.1. Demand will be excused as "futile"
if the shareholder plaintiff can raise a reasonable doubt that the directors
are disinterested or independent with regard to either the demand
decision or the challenged transaction, or that the transaction was the
product of a valid exercise of business judgment. Aronson v. Lewis, 473
A.2d 805, 814 (Del. 1984).

No. 2:640] 651



Delaware is the only place the suit is seen. In another 17%,
Delaware sees only a piece of the action; 80% bypass
Delaware entirely. No case law gets developed. Not that it
gets developed somewhere else really-it just does not get
developed.

Okay, next question, is Delaware losing just junk cases?
Or is it losing good cases, too? We think-this is more
speculation-that Delaware is losing some good cases. So
remember: written opinion is proxy for a good case. LBOs
are often good cases. We see cases with serious damages
awarded or in settlement outside Delaware now. The
options-backdating cases were often good cases; the board
lack-of-good-faith cases also-the two principal decisions
that are out there now are Abbott" and Pfizer," both in
federal court. Plus logically, if you are going to cut fees in
good cases and bad, which Delaware is now doing, you are
going to lose good cases and bad.

We have interviewed lots of plaintiffs' lawyers and
defense lawyers about this. We talked to more than one
Delaware judge-I am not going to tell you which ones. Part
of the response was, "As long as we don't lose good cases,
who cares? Junk cases-let them go somewhere else."
Right. I do not think it is just the junk cases.

From now on, no data, just speculation-again, we talked
to people and read a lot of cases. I do not think the trend is
being driven by Delaware being less plaintiff friendly on the
substantive law. Maybe a little bit-it is awfully hard at this

" See In re Abbott Labs. Derivative S'holders Litig., 325 F.3d 795 (7th
Cir. 2003) (holding that directors' conscious and intentional disregard of
known risks indicated a lack of good faith and that their actions were not
protected by the business judgment rule or the exculpatory clauses in the
corporate charter).

17 See In re Pfizer Inc. S'holder Derivative Litig., 722 F. Supp. 2d 453
(S.D.N.Y. 2012) (settling shareholder derivative actions against various
senior executives and board members of Pfizer Inc. for breach of fiduciary
duty by allowing unlawful promotion of drugs to continue despite
numerous "red flags" of widespread and systemic improper drug
marketing).

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PANEL: DELA WARE AND ITS COMPETITORS

point to succeed on a Revlon" claim. But mostly, the trend is
driven by things that just hit plaintiffs' lawyers, rather than
substantive law. First, the fee cuts in both good cases and
bad-bad being the disclosure-only, arms-length, third-party
merger cases Second, a weakening of the first-to-file custom
among the plaintiffs bar-that if you are first to file, you get
a slice of the lead counsel action. Third, the PSLRA1' is
killing off discovery in securities cases. Plaintiffs' lawyers
respond by trying to get the discovery in parallel corporate
cases. You cannot get fast discovery in Delaware. You can
somewhere else, though, so you file somewhere else. Fourth,
there has been the emergence of some anti-plaintiff rhetoric
from at least the more colorful of the Delaware chancellors, if
I can call them that. And maybe that matters. Plaintiffs'
lawyers do not like judges to say nasty things about them-
or about their brethren. If it is not about you just yet, it
might be the next time.

So a little bit more. During the 1990s, I think, not that
long ago, the Delaware courts really favored plaintiff

18 See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 501 A.2d
1239 (Del. Ch. 1985), affd, 506 A.2d 173 (Del. 1986). Revlon rebuffed a
series of hostile offers from a company controlled by Ron Perelman and
adopted a variety of defensive measures. At the same time, the Revlon
board entered into exclusive negotiations with a "white knight" acquirer,
private equity firm Forstmann Little & Co., and ultimately entered into an
agreement with Forstmann that prevented an active auction of the
company. The chancery court found that the board had breached its
fiduciary duty in foreclosing other potentially higher bids. The court noted
that, once the board decided to sell the company, even as a defensive
measure, "[tihe directors' role changed from that of a board fending off a
hostile acquiror bent on a breakup of the corporation to that of an
auctioneer attempting to secure the highest price for the pieces of the
Revlon enterprise." Id. at 1248.

19 Private Securities Litigation Reform Act ("PSLRA"), Pub. L. 104-67,
109 Stat. 737 (1995) (codified as amended in scattered sections of 15
U.S.C.). The PSLRA was intended to limit frivolous lawsuits brought
under federal securities laws. It imposes new rules related to pleading,
discovery, liability, and class representation, and awards fees and
expenses. Prior to the PSLRA, plaintiffs could proceed past the pleading
stage with minimal evidence of fraud and then use discovery to seek
further evidence. Under the PSLRA, plaintiffs must present evidence of
fraud before any discovery has taken place.

No. 2:640] 653



COLUMBIA BUSINESS LAW REVIEW

attorneys as private enforcers. They were relatively
generous on fees-they moved toward percent of damages.
You see articles by Bill Chandler and Carolyn Berger, in
effect touting Delaware as friendly to plaintiffs' lawyers.
"We award fees; come to Delaware"-that was the basic
message. But we see a retrenchment in the last ten years.
We see cutbacks. Yes, we see them in disclosure-only
settlements. But we also see them in cases with real dollars
awarded, where the judge looks and says, "I don't want to
give 15%; I'll give 8%." More than once.

What else? The first-to-file presumption.20 Delaware
moves toward the PSLRA model of "let us find somebody who
can actually do a good job with the litigation."2 1 Now, there
is a lot to be said for that, if you do not face competition from
someone else. But if you are a plaintiffs' lawyer who might
win on first-to-file, but who is not going to have the largest
institutional client and who probably is not going to win in
Delaware, what do you do? You go somewhere else.

Tag-along corporate suits. The issue there is access to
expedited discovery, pure and simple. Delaware does not
normally provide it, most other states do. This type of case
did not used to exist. Now it is quite common. You almost
have to go somewhere else.

Finally, some rhetoric. There is a tone of, "We just see all
these junk cases. These are not good for anybody, except
plaintiffs' lawyers." That is probably right. They may not be

20 Prior to the 1995 passage of the PSLRA, courts usually selected the
attorneys who were first to file a securities fraud complaint as the lead
counsel for the plaintiff class in a securities class action suit. See James
D. Cox & Randall S. Thomas, Does the Plaintiff Matter? An Empirical
Analysis of Lead Plaintiffs in Securities Class Actions, 106 COLUM. L. REV.
1587, 1597-98 (2006).

2 See 15 U.S.C. § 77z-1(a)(3)(B)(i) (2011) ("[T]he court . . . shall
appoint as lead plaintiff the member or members of the purported plaintiff
class that the court determines to be most capable of adequately
representing the interests of class members . . . ."); see also In re Revlon,
Inc. S'holders Litig., 990 A.2d 940 (Del. Ch. 2010) (replacing lead counsel
who had provided inadequate representation to owners of common stock in
previous actions with new counsel to ensure the class was adequately
represented).

654 [Vol. 2012



good for anybody except plaintiffs' lawyers. But the
plaintiffs' lawyers do not like the judges to say this in public.

So, what can Delaware and Delaware companies do if
they would rather have the cases in Delaware-and whether
they do is an open question. Maybe rethink the posture on
fees in cases where there are real dollar recoveries. Do
whatever you want on the disclosure-only settlements. But
if there is a real dollar recovery, maybe we have to move
back towards the more generous position of the 1990s. How
do you choose lead counsel? It is perfectly sensible to say,
"We want good counsel, not just first-to-file counsel with a
boilerplate complaint." The question is: how do you get there
without chasing the good cases away entirely? Expedited
discovery would be a rule change. You could do it if you
wanted to-if the courts wanted to. Finally, rhetoric is
optional. I do not think it actually changes the substance.

What can companies do? Well, the big issue out there is
forum selection provisions. Those can go in the charter. My
guess is, if you put it in your charter, and the shareholders
vote for it-that litigation against your directors shall be
brought in Delaware-it will probably be valid and will be
upheld by the federal courts and respected by the other state
courts. You put it in the bylaws, much less certain-this is
the directors deciding for themselves where they will be
sued. Some court somewhere else might be skeptical about
enforcing that, and at least one court refused to do so.22

Even worse, a lot of the bylaw provisions out there are not,
"You have to sue in Delaware," but rather, "You get to sue
wherever you want, but we get to bring it to Delaware, we
the board, if we want to." It is even less likely that a court
somewhere else is going to accept that sort of ex post look of,
"We'll bring it to Delaware if it's to our advantage to do so."

So far, the forum selection trend has been limited. It
might not stay that way-we do not know. Why? Well, the
defense lawyers tell us it is not so clear that it is a good idea.
Everybody agrees that if you have a good suit, have good

" See, e.g., Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011)
(holding that a board-approved bylaw mandating that shareholder
derivative suits be brought solely in Delaware was not enforceable).

655No. 2:640] PANEL: DELA WARE AND ITS COMPfETITORS



facts, you would rather be in Delaware. So, now I am a
defense lawyer. What if the plaintiffs have good facts?
Where do I want to be? Not in Delaware. So they kind of
like having the ability sometimes to say, "You know what?
We will not file a motion to stay. We will push the litigation
out of Delaware. We think we can settle it on better terms."
So the defense counsel are not so keen-at least the ones we
have talked to. Some like forum selection provisions, and
some do not.

So back to my title, "The Balancing Act." Delaware has
lost litigation market share. If it does not change, things
may get worse, may stay the same. It is losing some good
cases, we believe. It is losing some opportunity to shape law.
If it changes too much, will you lose incorporations? We do
not know.

Is this competition for market share in litigation good or
bad from a policy perspective? I am an academic; I like to
ask those questions. I do not know. I like competition, but
this is a weird kind of competition. On the one hand, it can
keep Delaware honest. On the other hand, nobody thinks
that plaintiffs' lawyers are out to maximize social welfare.
We give them a set of incentives, and they follow those
incentives. And those might improve social welfare. But
that is not necessarily what the incentives were for. You
guys will have your own views.

KATE LITVAK2 3: I want to talk about some empirical
evidence that we have about Delaware, and the impact of
Delaware on Delaware companies subject to Delaware law
and the economy as a whole. I am an empiricist, I do
empirical work in corporate law, in corporate finance, and in
financial accounting.

The big question is: is Delaware somehow different? And
we have a lot of theoretical reasons to believe that it is
different. You have heard some of these reasons: the

23 Professor, Northwestern University School of Law.

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PANEL: DELA WARE AND ITS COMPETITORS

substantive law might be better, the judges might be
significantly better, the lawyers might be significantly
better. Lots of good reasons to think Delaware is different.
But this is, of course, highly debatable. There are good
reasons to believe that Delaware may be different not by so
much, or if it is different, then the impact of the difference is
not significant enough. This is where the empirical people
like me come in-we want to measure things.

A state of the art on the empirical evidence is as follows.
We now know that Delaware firms have higher market
valuations, loosely speaking. And there was a very famous
paper published in 2001 about this.24 However, these results
were recently challenged by showing that this is not true in
all years.25 In some years, Delaware firms are doing better
than the rest, and sometimes they are not doing better than
the rest. There is also evidence in a recent paper that
Nevada seems to be doing worst based on some of the
accounting characteristics-they have more accounting risk
statements. We also have some evidence that Delaware
firms have higher institutional ownership and they have
more forced turnover. So there is a ton of evidence
suggesting that there is something good going on in
Delaware and something good/bad going on in Nevada. And

24 See Robert M. Daines, Does Delaware Law Improve Firm Value?, 62
J. FIN. ECON. 525 (2001) (arguing that Delaware corporate law improves
firm value and facilitates the sale of public firms, and concluding that
Delaware firms are worth more than similar firms incorporated elsewhere
and are more likely to receive takeover offers).

25 See Guhan Subramanian, The Disappearing Delaware Effect, 20
J.L. ECON. & ORG. 32 (2004) (finding that small Delaware firms were
worth more than small non-Delaware firms during the period 1991-1996
but not afterwards, and that larger firms exhibit no "Delaware effect" for
any year during the period 1991-2002).

2 See Michal Barzuza and David C. Smith, What Happens in Nevada?
Self-Selecting into Lax Law (Virginia Law and Econ. Research, Working
Paper No. 2011-08, 2011), available at http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=1644974## (finding that Nevada attracts
firms that have a significant likelihood of reporting financial results that
later require restatement).

No. 2:640] 657



COLUMBIA BUSINESS LAW REVIEW

so you may see all these papers and make conclusions about
this.

My bottom line is: all empirical results on the impact of
Delaware on anything that you have seen are spurious.
They are all results of mis-specified empirical tests. And the
same is true for the Nevada results.

I will proceed in two ways. First, I will explain to you
very intuitively-this is not a technical audience; I will not
go into econometrics, but I will give you an intuition-why
this is so. And then I will show you that not only are they
wrong econometrically, but the error is not harmless, that it
in fact produces wrong results. So if you remember anything
from this talk, that is what you should remember.

What is wrong in the current studies of the impact of
Delaware? It is the selection problem. The selection
problem is as follows: firms choose to incorporate in
Delaware. And firms also have a variety of unobserved
characteristics that we cannot measure. And it is possible
that those unobserved characteristics drive both the choice of
incorporation state and the outcome variable that we are
trying to measure-the market valuation, or accounting
restatements, etc.

This is a very bad combination. When you have a
combination of a selection by the objects of your study and
the unobserved characteristics of that object, then you
basically cannot make any meaningful conclusions about
what you find unless you can do very tricky econometrics
that none of the prior studies have done.

So let me show you something. Here is a very intuitive
example that everybody can relate to. Suppose you want to
study hospital deaths, and you want to ask whether big
teaching hospitals, that have a lot of machinery and fancy
doctors, but also have a lot of residents who are very tired,
have higher death rates. The problem in those kinds of
studies is that we cannot directly measure the health of
underlying patients. We have some proxies for health, but
we do not really have a good measure of health. And it is
possible that big teaching hospitals get the sickest patients.

658 [Vol. 20 12



So suppose you find that big teaching hospitals have the
highest death rates. Well, you can interpret that whatever
way you want. You can say, well, they kill people, and they
kill people because they have all these residents who are
overworked and under-slept. Or you can say, no, they save
lives; it is just they do not save enough lives to overcome the
underlying sickness of patients that they get. Which is also
plausible if they in fact get the sickest patients. It is also
possible that all of this is irrelevant; they are not any better
or worse than any other hospital. They just get sick
patients.

And the point is this: you cannot conclude anything about
the quality of the hospital by looking at this kind of study
unless you can directly measure the underlying health
characteristics of people, which you cannot. So, if you would
not believe that kind of hospital study, then you should not
believe the studies of the effect of Delaware law on company
characteristics. Okay? That is the underlying intuition
behind it.

And notice that it does not help to say, as some people,
"I'm not claiming causation-I just want to show correlation.
If I want to show correlation, I don't have to deal with any of
the really fancy mathematics that are involved in these
studies." This does not help because, as I just showed you in
the hospital example, your correlation can be completely
spurious. The true correlation could have the reverse sign.
Or it could be nonexistent. Or it could have a correct sign.
We just do not know. It is not that all prior studies of the
effect of Delaware have incorrect results. It is just that we
do not know if they have a correct result or not, in the same
way that we cannot know the stuff about hospital impacts.

So next question. So far what I have said,
econometrically, is right. You know, there is math and it
is-[Audience Laughter]-you know, in math you are right or
wrong, and I am right. There is just no way to debate this.

The big debate question is: is it a harmless error?
Sometimes people say, "Well I'm right, you know, it doesn't
really affect the outcome so much." And what I am going to
show you is some evidence that the error is not harmless. It

No. 2:640]1 PANEL: DELA WARE AND ITS COMPETITORS 659



is not just that the people did not go through every trick. It
is that they, in fact, got results that we cannot believe.
Again, it is not that what they have got is wrong. It is just
that they have found results that we cannot believe.

For example, there are possible compounding factors. It
is possible that maybe instead of studying the effect of
Delaware, we are studying the effect of out-of-state
incorporation in general. Maybe firms that incorporate out
of state are just different. Maybe their management is more
sophisticated, or maybe they have fewer local political
connections, so they do not care about local incorporation.
Or maybe-who knows-maybe when we study the Delaware
effect, we in fact study an out-of-stateness effect.

So let us see. Here is what I did. The first part of this
project is to start to poke holes in existing results and see
whether existing results are robust. That is, if you slightly
change a specification, and you get a completely different
result, something must be wrong with the result.

So here is what I did. I get a large sample of all U.S.
publicly-traded companies from 1987 through 2010, and they
have got lots of measures of performance. And this is my
contribution to the world. Prior studies only used one
measure; I use about fifteen. And so I use financial
measures of performance, an accounting measure of
performance, and I use liquidity and correlation of stock
prices-all kinds of things, just basically whatever people
have come up with. And I ask, "Does the fact of out-of-state
incorporation predict all those other measures?" And then I
ask, "Does the fact of Delaware incorporation predict those
measures? Or Nevada incorporation?" And so then I say,
"Let me control for out-of-stateness and see whether
Delaware is still important." It is a very simple research
design.

And here it is briefly. You see that the fact of out-of-state
incorporation predicts corporate goodness in a whole bunch
of different ways. So clearly, firms incorporated out of state
are just better than the rest in various measures. And then I
said, "Well, let me see whether being in Delaware also
predicts corporate goodness." And it does. And you know, in

[Vol. 2012660 COLUMIA BUSINESS LA WREVIEW



PANEL: DELA WARE AND ITS COMPETITORS

most measures, it predicts corporate goodness. And then I
said, "Well, let me control for out-of-stateness and see
whether Delawareness predicts corporate goodness." And all
of a sudden, most of these results disappear. And then I say,
"Well, let me come up with a different control for out-of-
stateness." And now we see the Delawareness completely
disappear.

So when you properly control for the fact of out-of-state
incorporation, the Delaware result is gone, in every one of
these measures. It is not just one measure-in every one of
them. So summary: Delaware predicts goodness in a whole
bunch of different measures-financial measures, accounting
measures. However, when you account for out-of-stateness,
Delaware does not predict anything anymore. So you cannot
really attribute stuff to Delaware law.

Here is another very celebrated result. This is basically a
measure of market valuation, the premium the market
places on companies and corporations in Delaware. And in
separate years, in basically every year, I find a very
significant premium put on Delaware companies. Delaware
is always good. However, Nevada is also always good,
almost. Well, this has got to be wrong, right, because
Nevada is not good. Delaware is good. Nevada is bad.
[Audience Laughter] So something is wrong. Again, you see
the point of the story. When you trick the specification by
just a little bit, and you get vastly inconsistent results, the
specification cannot continue. So then I say, "Well, let me
then account for out-of-stateness." So I ask whether
Delaware still predicts excess market valuation, controlling
for out-of-stateness, and the answer is "no." However,
Nevada does. So Nevada's good-right? And Delaware is
not good?

Again, the point is: all of this stuff is spurious.
Everything here just should not be done. The bottom line is:
we cannot tell whether Delaware improves anything. It is
possible that it does. We just cannot tell. And we should be
really careful when we hear the sort of claims that we have
found that Delaware really is great. We do not know. We

No. 2:640] 661



found Nevada is bad. We do not know. It is possible; we just
cannot tell. Okay, thanks.

LAWRENCE A. HAMERMESH 7 : I will try to keep that
in mind. Thanks, Bill. Kate, Bernie, Mark-I love your
work, you know. Great stuff, especially when you are talking
about Delaware. Now hardly any "buts" at all. But,
[Audience Laughter] Bernie, I am not going to comment
much about your paper because I am anxious to hear more
about what Stuart has to say about that, for obvious reasons.
But Mark and Kate, I do have a few things to raise with you
folks.

Mark, you posed the question early on about whether
Delaware would have amended or enacted Section 112
without impetus from Washington. And I checked with my
mentor here, Stuart, and we both agreed the answer is
clearly "no." So you can bank that one. But my take on why
that is so is a little more elaborate, perhaps, and I thought I
would just mention some of the salient points.

I think the importance of another D.C.-Delaware
interaction needs to be brought out some more. And that is
the very curious interaction between the SEC and the
Delaware Supreme Court, and the Constitutional
amendment that was the precursor to all that.

As most everybody here knows, there was an amendment
of the Delaware Constitution that kind of emerged, as I
understand it, from discussions between the Chief Justice of
the Delaware Supreme Court and the General Counsel at the
SEC about, "Hey, wouldn't it be a great idea since we have
all these state law issues that are, in effect, dispositive of
some our Rule 14a-828 decisions, why don't we just get a

" Ruby R. Vale Professor of Corporate and Business Law, Widener
University School of Law.

28 Securities and Exchange Commission Rule 14a-8, 17 C.F.R. §
240.14a-8 (2012). Rule 14a-8 requires companies to include shareholder
proposals in their proxy materials for a vote at an annual or special
meeting of the shareholders, unless the shareholder has failed to comply

[Vol. 2012662 COL UMBIA B USINESS LA W RE VIE W



PANEL: DELA WARE AND ITS COMPETITORS

direct pipeline to the Delaware Supreme Court, and then ask
them to ask Justice Jacobs what he thinks about a particular
state law issue?"

So the Delaware Constitution gets amended.29 And lo and
behold, a year later there is a case that comes from the SEC
to the Delaware Supreme Court on what had been a long-
festering issue about the relationship between bylaws doing
certain things and the exclusive power of directors. That
issue, to my mind, was a long barrier to development of a lot
of corporate techniques in the area, particularly bylaws. And
when the Computer Associatesso opinion came out, what had
been uncertain about the legal viability of proxy access
bylaws or proxy reimbursement bylaws, in my mind at
least-and I am only speaking for myself here-completely
changed the picture. To my mind there was no longer any
serious uncertainty about the validity of a proxy access
bylaw.

That being the case-at least if you accept my take of it-
when you get to the 2008 elections-and as you point out, the
fairly obvious shift in the politics in Washington, and the
certainty that the SEC would revisit proxy access-I mean, it
was almost promised by the predecessor-it did not seem
like much of a move for Delaware to say, "Gee, this is already
the law; the most we're going to do is address the 'fiduciary
out' aspect that came out in the Computer Associates
opinion," for whatever that was worth. And that was played
out on a hypothetical stage, at best.

And so, I did not think of it as much of a move, except for
the fact that it had what we in Delaware thought might be a
useful signaling function in the political battle that we knew

with certain procedural requirements or the proposal falls into thirteen
substantive bases for exclusion.

29 In 2007, Delaware amended its Constitution to allow the Delaware
Supreme Court "to hear and determine questions of law certified to it
by ... the United States Securities and Exchange Commission ... where it
appears to the Supreme Court that there are important and urgent
reasons for an immediate determination of such questions by it." DEL.
CONST. art. IV, § 11, cl. 8.

30 Computer Associates, 953 A.2d 227 (Del. 2008); see also supra note
10.

No. 2:640]1 663



COLUMBIA BUSINESS LAW REVIEW

was coming down the line. To be able to say to the world,
"Look, Delaware law actually does deal with this, and if
there was any doubt about it, here are Sections 112 and 113,
and it is perfectly clear." Not a big give, maybe not much of
a get, but my bottom line out of all this is that the story does
play perfectly into your take about the fact that corporate
governance issues do get played out on a state versus, or
state and federal stage. And so I was just trying to see if I
could elaborate on that a little bit, and then hope you will
accept that as a very friendly amendment.

There is a point in your paper that I want to mention. I
do not think you touched on it much. And that is the
question of the relative weakness of Section 112. And
certainly when Section 112 was enacted, at that moment, it
did not really do much. It did not do much because, as you
pointed out, in order to put the bylaw into place against
management's will, you needed a proxy contest, in effect.
But for the same reason that we knew that there was going
to be ferment in Washington about proxy access, we also
suspected there would be ferment on Rule 14a-8 and the
election exclusion.

So, in enacting Section 112, there was not in any way a
realistic hope on anybody's part in Delaware that this was
all just going away because nobody is going to adopt these
bylaws-because management will not, and the stockholders
will not because it is too expensive. I think the expectation
was that there was going to be serious ammunition that can
be spent in this context. And it is only now, finally, after
mandatory access was adopted, and then struck down, that
the SEC ultimately decided to proceed-it was not a foregone
conclusion-and let Rule 14a-8's election exclusion
liberalization go on its own. So only now do we have a
regime in which Section 112 can play out the way I think
people thought it originally might. But, as I said, for me the
salient point is that it is not a big give.

Kate, I am going to talk just a bit about your paper, ask
you some questions about it. Do not answer them yet. You
can do it offline if you want. But first of all, this was a very
disturbing paper to me, in two ways-[Audience Laughter]-

664 [Vol. 2012



PANEL: DELA WARE AND ITS COMPETITORS

well, three. You know, trying to understand it is always
more than I can do.

But in substance, two disturbing aspects of it. The
firmness with which you demonstrate the spuriousness of
earlier studies is disturbing to me because, as someone who
sometimes has to wear a policy hat, as much as I said, "Yay!"
when Rob Daines came out with his study"-"Gee, we're
doing things right; this is great!"-I never really quite
believed that. And so you have proved me right. And on the
other hand, I did not believe Guhan32 either when he said,
"Oh, Delaware's bad." And so when you say, "We cannot
tell," I kind of believe you.

But that does not do much for me as a policymaking
matter. And that gets to my second area of disturbance.
There is a strong undertone in your paper of "law doesn't
matter"-or if it does, we cannot tell how it does. And that
gives me, again, in my policymaking role, a little bit of
discomfort, and probably gives people like Bill Chandler a
little discomfort.

Is there a lesson in the paper for anything about the way
policy ought to get shaped? I guess that is the core of my
question. More specifically-and I will end with this-you
have this interesting variable that you tease out about
out-of-stateness. And as your study seemed to demonstrate,
it is a pretty powerful factor. I would like to capture that
factor and bottle it, and convince people that they really
ought to be more about out-of-stateness themselves, because
Delaware has done very well in the competition for out-of-
state incorporation.

Part of me says, yeah, go ahead and build that up,
because we want to persuade people that they ought to get
out of their home towns and go out on the road and raise
their "Tobin Q."33 And that is a good thing. I am not sure

a1 See Daines, supra note 25.
32 See Subramanian, supra note 26.

"Tobin's Q," developed by James Tobin, is the ratio between the
market value and the replacement value of the same physical asset. See
generally James Tobin & William C. Brainard, Asset Markets and the Cost

No. 2:640] 665



that would work. I guess the real question I am posing is:
can we understand more about this out-of-stateness factor?
You identify the chromosome. You identify some of the
characteristics that might map under that chromosome. But
I am not sure I am getting a clear story about why those
characteristics really belong on the same chromosome. It
seems to be important, but I am not sure why. That is all I
have. I will let Stuart and Bernie talk for a while.

STUART M. GRANT34 : Bernie, I was asked to comment
on your paper about Delaware losing cash flow. And I think
some of it is-cash flow-close enough-case flow. [Audience
Laughter] But of course, you know, losing case flow is to
Delaware losing cash flow, and that is actually important. I
would say for those of you who are Delaware judges, really
the only important takeaway you need from Bernie's paper
is: raise plaintiff fees, and everything will be solved!
[Audience Laughter]

But for the rest of you who need to take away more than
that, you know, multi-jurisdictional litigation is a significant
problem, I think not only for the Delaware courts. When I
talk to my friends in the defense bar, it is the biggest
challenge that they have now. How do you deal with a
situation where you have a deal, and it is being challenged in
Delaware-it is being challenged in the home state court-
and it is also being challenged in one or possibly two federal
courts?

So I think when we look at the problem, it is not just
about what is happening to the development of Delaware
law. Really it is about what is happening in the marketplace
for transactions. And I think your work really carries over
beyond just Delaware law. But it is fair to say that
Delaware clearly is losing its opportunity to develop
Delaware law.

of Capital (Cowles Foundation Paper 440, 1977), available at
http://cowles.econ.yale.edu/P/cp/p04a/p0440.pdf.

" Managing Director, Grant & Eisenhofer P.A.

[Vol. 2012666 COL UMIA B USINESS LA W RE VIE W



Now Delaware has seemed to, or Delaware and its allies
have seemed to, try two ways to change this. The first is our
new Chancellor has his "stay in your own lane" approach,
where he has spoken frequently, be it in transcript or in
opportunities like that, encouraging other over-burdened
courts to say, "Why do you want to take on Delaware cases
when we have our own expertise in our court, and this is
what we do? Do you really need to reach out and grab
something?"

The second has been championed by the Wachtell Lipton
firm, our sponsors here, to contractually bind shareholders to
litigate in Delaware exclusively. And while those both seem
to be interesting methods, I think the Madisonian view of a
federalist system is really going to ultimately lead to neither
of those being highly successful.

Now, no doubt some cases are filed outside of Delaware
for less than noble goals of angling for fees. But I think
there are a lot of really legitimate challenges as to why folks
file outside of Delaware. And if our theme is: who are
Delaware's competitors, I think it goes back to the old adage:
"we have met the enemy and he is us." Because I think the
court itself is creating opportunities for others to go
elsewhere. And I would like to share some of these
opportunities.

Interestingly enough, when we say "elsewhere," Delaware
is, you know, almost like the Mitt Romney. Elsewhere is not
anyone very specific. It is anyone other than Delaware
sometimes. And so I think one of the things we can do is
really look at the Delaware Chancery Court. And I would
like to stress a few of the things that you said, and add to
that list, about the perception. And it is really important to
talk about perception, because I think often we are what we
are perceived to be. And, Kate, I really appreciated your
work which shows that we really are what we are perceived
to be, because we cannot empirically prove what we really
are.

So if we are only left to, "We are what we're perceived to
be," let me share some of the perceptions that are floating
around some of the plaintiffs bar. Now, I do not necessarily

667No. 2:640] PANEL: DELAWARE AND ITS COMPETITORS



668 COLUMBIA BUSINESS LA WREVIEW [Vol. 2012

hold all or even any of these perceptions. I may-I am not
disclosing which I do or do not. But I think there are
perceptions out there that cause people to file elsewhere.

The first of which-and I think you mentioned it in your
paper-is there appears to be an unwillingness to order
expedited discovery early in certain cases. And I think this
is causing people to go elsewhere. And I think we have seen
it often in Texas, which seems to be willing to schedule
things very quickly on an ex parte basis-there is not
necessarily a challenge to the entry of an expedited discovery
order. And this was, as I remember, Delaware, two decades
ago. If you filed a case, you got an expedited discovery order.
You did not have to have a hearing, i.e., set up to have an
argument over whether expedited discovery was going to be
ordered. And I think that is a significant factor in causing
people to say, "I need to go elsewhere." And even when
expedited discovery is ordered, the order may not expedite
things as much as one would like, at least on the plaintiff
side, prior to the proxy or the preliminary proxy coming out.

Which leads into point two-that there seems to be often
an unwillingness in Delaware to schedule a preliminary
injunction before a proxy is out. And I understand the
argument against that to say, "Well, we are not going to have
serial preliminary injunctions because you are not going to
challenge what you know now and then next Thursday
challenge something else, and the Thursday after challenge
something else." And you are going to have challenges to the
disclosures. But for a state that prides itself on really hating
disclosure-only settlements, to say that before you bring your
preliminary injunction, "We really want you to have all the
disclosures out there," seems counterproductive. And I think
it leads to plaintiffs saying that there may be better
jurisdictions.

Third, there seems to be an unwillingness to enjoin a
transaction if there is no other bidder. Now, I get that. Do
you really want to be the judge who takes the decision away
from the shareholders and says, "Yeah, there's something
wrong here. But am I going to not let the stockholders vote
and say, well, do I really want that premium transaction,



when really there's nothing else to offer?" And there has
been a lot of discussions on whether Revlon" really means
anything in the context of where there are not at least two
bidders.

Now, I am pleased to say that there have been
transactions that have been enjoined. The Del Monte" case
was certainly one where there was a premium offer, the
transaction was enjoined to go push a "go-shop," and the deal
protections were struck down. But it seems to be a rare
situation in which the courts are willing to enjoin a
transaction. And there are published opinions where the
court has said, "You know, I'm troubled by this, but I'm not
going to prevent the shareholders from deciding for
themselves."

Two other points. Bernie, you tend to say that in the good
cases there is not a belief that the balance is tipped in favor
of management. I think that is not necessarily the
perception throughout the field. I think that plaintiffs feel it
is extremely difficult to win a plaintiffs case in Delaware.
And so substantively they are looking elsewhere, particularly
on issues where you may be able to get a jury. For example,
option backdating. The idea of putting that in front of a New
York jury as opposed to having it heard in the chancery court
is very, very palatable to a plaintiff, and probably very
unpalatable to a defendant, despite the fact that former
Chancellor Chandler and former Vice Chancellor Lamb have
very, very strong views about the impropriety of backdating,
spring-loading, all that. The message was loud and clear
and yet lots of folks still felt that they were better off to go
elsewhere.

* See supra note 18.
3 See In re Del Monte Foods Co. S'holders Litig., 25 A.3d 813 (Del. Ch.

2011). Del Monte concerned the acquisition of Del Monte Foods Co. by a
group of private equity funds. The court of chancery enjoined a vote on the
merger for twenty days, finding that collusion between the sell-side
advisor and the private equity funds led to a flawed process to seek other
potentially higher offers (a "go-shop") before the private equity transaction
was finalized. Id. at 840.

PANEL: DELA WARE AND ITS COMPETITORS 669No. 2:640]



Finally, the issue about determining who is lead plaintiff
and lead counsel still is a problem in Delaware. Delaware
has, in its view of self-organization, basically stepped back
and said, "Plaintiffs, you all figure out, you know, what to do
here." And that often takes up a month of time in a case that
may only be two or two-and-a-half months. This gets to be a
real problem. Other jurisdictions seem to have been more
willing to step in and pick folks to lead litigation.

I just wanted to emphasize a lot of the points that you
made, which I think really present a challenge to the
Delaware courts in being able to develop Delaware law as
fully as it ought to be. Because, to some extent, they are
pushing litigation into other courts. And really, it is the
Delaware courts that I think are going to have to make the
adjustment to, as you say, attract folks to want to come back
in and litigate in Delaware.

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