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Never mind moving to Texas or Nevada, what if companies just agreed to governance related contracts with mandatory arbitration and bypass these pesky unpredictable Delaware judges and Chancery Court?
A provocative paper by our friends Eric Talley and Dorothy Lund of Columbia Law School, which calls for “privatizing” corporate law, was the subject of a great discussion with some of corporate law’s leading thinkers at last week’s Ira M. Millstein Memorial Conference set in leafy Morningside Heights.
Amid ongoing debate in board rooms, at law firms and among academics about “D’Exit” and the move by Texas and Nevada to compete with Delaware for the incorporation business, the authors suggest instead of Chancery Court, issuers could “opt out of courts and adopt a fully privatized law” that could ultimately bolster and strengthen its competitiveness.
We all followed the SB 21 passage last year. With less fanfare, Delaware passed DGCL 122(18) in 2024 which authorized shareholder agreements broadly and exempted them from requirements under DGCL 115. This appears to allow issuers to bypass the courts altogether. The nut of the idea: Enact governance agreements contractually and adjudicate through mandatory arbitration.
Chancery Shmancery: No more decisions out of left field, no more appeals to Delaware Supreme Court. Instead, former judges and lawyers would constitute a court-like “Delaware Arbitration Board,” or the DAB, which would be the judges of last resort (and maybe ex-Delaware judges). “It’s a swing for the fences type of approach,” said Professor Talley.
Reactions:
J. Travis Laster, a Delaware Chancery Vice-Chancellor, said in response, “It’s a challenging and ambitious idea.”
Ed Rock of NYU School of Law reviewed the paper’s ideas and acknowledged there is much debate about how broad or narrow existing Delaware law allows for mandatory arbitration. “It would pave the way for companies to go public as long as governance agreements” are included, Professor Rock said. He admitted: “I’m hoping it doesn’t succeed.”
Professor Rock goes on to note that the Delaware franchise on state incorporations “is the lifeblood of the Delaware Bar” and the state and its legal apparatus would be greatly opposed.
Cathy Hwang of the University of Virginia School of Law called the idea a “real solution, provocative and bold,” creating competition within the state of Delaware.
If passed, it would “be the end game to the shenanigans we have been witnessing,” said Sarath Sanga of Yale Law School. He pointed out that all the players in Delaware have acted “in good faith” but the net result is undermining trust. “This would be the next or final step in this sequence,” he added.
Sanga concluded by pointing out that the Delaware “standard,” a set of conventions that together created an immense amount of trust, has been eroded, and therefore the threat of this idea should be “to re-create the standards, rebuild trust” and restore its conventions.
Harvard Law’s Lucian Bebchuk got the last word, calling it the “last” act of Delaware. “This is a warning call,” he said.
Have a great weekend,
GPP Team
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