Delaware Corporate Law Debate Feeds a Robust and Balanced System

Critics often see internal discord in opponents as a time to pounce. But in situations where intellectual debate is valuable, such discord is a strength. That’s certainly the case when Delaware’s corporate law establishment is seen as internally divided.

Delaware insiders differ sharply on one of the grandest debates the state’s business law engenders: One side argues that a Delaware court was correct earlier this year to disallow insider control of a corporate board, while the other says the legislature was right to overrule that opinion within four months of its publication.

Both sides have a point, and this debate, far from questioning Delaware’s leadership in corporate chartering and law, illustrates its appeal.

Delaware counts on all elements of its sovereignty and citizenry to produce the most attractive corporate law structure in the world, especially its judicial and legislative branches. Both branches rely on a pool of experienced corporate lawyers plying the complementary trades of legislation and adjudication. Neither dominates, but each checks the other.

Delaware courts have long been widely revered with good reason. The judges are pulled from among the best Delaware corporate lawyers and are required by the state constitution to be drawn equally from both major political parties.

They are sophisticated, work without juries, pay close attention to facts, and establish equitable jurisprudence that balances contending interests, particularly in shaping the norms that govern the relationships among corporate directors, officers, and shareholders.

Equally important, but less heralded, is the Delaware legislative process for corporate law. Since its enactment, the state’s corporate statute—the Delaware General Corporation Law—has been deliberately flexible, offering a menu of options to corporations rather than imposing legislative mandates by fiat. The state bar association crafts the legislation, not politicians, and that’s kept updated with regular annual revisions, often in response to judicial opinions.

This balance between judicial and legislative powers isn’t merely theoretical; it plays out in real time, where swift legislative responses and ongoing public debate reflect Delaware’s adaptive process.

Since 1967, the Delaware legislature has expressly altered judicial outcomes on at least 45 occasions. The speed of the legislative process varies—averaging 7.5 years after the triggering court case with a median response time of 1.75 years.

It’s often swift—on a dozen occasions, amendments were passed less than a year after an opinion appeared. These topics have stoked intense debate within and outside Delaware.

In 1985, the Delaware Supreme Court in Smith v. Van Gorkom held directors personally liable for staggering money damages for mere haplessness. Sixteen months later, Delaware’s general corporation law was amended to authorize corporate charters to exculpate directors for precisely such liability.

In 2009, the Delaware Supreme Court in CA, Inc. v. AFSCME held that a bylaw requiring the corporation to reimburse stockholder expenses for soliciting proxies in support of director nominees is invalid unless it permitted the board to refuse reimbursement if it determined that fiduciary duties so required. Eight months later, the state’s general corporation law was amended to explicitly authorize such bylaws without including the fiduciary out.

In 2014, the Delaware Supreme Court in ATP Tour, Inc. v. Deutscher Tennis Bund upheld fee-shifting bylaws of a nonstock membership corporation—requiring losing plaintiffs to pay all legal fees in a case. Thirteen months later, after extensive internal debate and changes of position, the corporation law was amended to prohibit any such fee shifting in stock corporations.

One of the latest examples of this dynamic occurred earlier this year. In February, the Delaware Chancery Court in West Palm Beach Firefighters v. Moelis invalidated terms in a corporation’s contract with its founding shareholder that delegated to the shareholder certain powers usually reserved to boards of directors, including the board’s size and composition. Within four months, the general corporation law was amended to validate such clauses.

Related debate, including public disputes among prominent sitting and retired judges and lawyers, was intense. This is partly because it arose in a perfect storm implicating the balance between three pairs of primary Delaware corporate values: freedom of contract versus fiduciary duty, the allocation of power between boards and shareholders, and the rights among different shareholders within a corporation.

It’s not surprising that passionate and convincing arguments are made for and against each of these positions in this multi-level debate.

What’s surprising is that so few stress that such debate intensity is healthy and reflects the value of Delaware corporate law. Such debates reflect the push and pull of the process of Delaware law production that struggles with polarities that are inherent, essential, and valuable, starting with the separation of powers and divisions of labor between branches of government.

Courts can’t promulgate rules in advance but only resolve disputes before them; legislators rarely resolve individual disputes but rather promulgate rules in advance. The inherent limitations in each role can prevent either branch from achieving the optimal balance.

The only way to approach optimal is the endless iteration between them. Many examples appear—from director exculpation to fee-shifting bylaws.

The tension between private ordering through freedom of contract and social control through fiduciary duty is often at the heart of these debates. Judges contend with that tension frequently, and the legislature is permitted to readjust it as well.

Whether this adjustment is optimal for Delaware corporate law can and should be debated—but the process of judicial and legislative balance of powers is central to the exercise.

As Delaware law evolves, it reflects the relationship between boards and shareholders, and the often-complex dynamics among different shareholder groups—such as common versus preferred or controllers and/or founders versus others. This tension is not only a matter of fiduciary duties owed to shareholders collectively, but also of the competing interests of those shareholders, each with different expectations and levels of influence.

Ultimately, debates over corporate governance in Delaware aren’t signs of dysfunction but markers of a dynamic, responsive legal system. All robust legal systems contain tensions, and Delaware’s are no exception.

The dialogue between judicial interpretation and legislative adjustment ensures the productive evolution of corporate law, balancing competing interests.

These debates, whether internal or external, are essential to Delaware’s process and demonstrate its unique capacity for adaptation. Corporate law is central to Delaware’s identity, and it receives unparalleled attention—both judicial and legislative—that no other jurisdiction provides. This responsiveness makes Delaware’s corporate law a model of strength and resilience.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lawrence A. Cunningham is director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

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