Delaware Can’t Regulate Corporate Governance With a Calculator

Delaware became the world’s corporate capital with a simple yet powerful idea: Corporate law develops, evolves, and works best when expert judges exercise their judgment and discretion on a case-by-case basis, rather than a system tied to predetermined formulas and rigid rules.

That’s why a quiet proposal now under consideration in Delaware’s capital city of Dover deserves careful attention. State lawmakers are weighing whether to apply a so-called “lodestar cap” when awarding attorneys’ fees in contingent stockholder litigation.

Adopting a rule tied to lodestar would mean that courts pay contingency lawyers based primarily on their hours worked times the hourly rate they would charge if working on a non-contingency basis, rather than awarding fees based on the value the case at issue creates.

In today’s (and especially tomorrow’s) legal economy, adopting a lodestar cap would not only reflect poor policy, doing so would make the Delaware legislature anachronistic.

Delaware Senate Concurrent Resolution 17 seeks to prevent “windfall” fees. That concern isn’t frivolous. But the solution being discussed relies on an assumption that no longer holds—that hours worked are a reliable measure of productive effort or contribution and value creation, for the affected stockholders and the broader Delaware law ecosystem alike.

In today’s increasingly AI-driven legal economy, hours worked represents an input insufficiently correlated with the matter being measured, which is value created through legal skill and ingenuity. Maybe hours were a good proxy for legal value in the past. Not anymore.

Beyond Billable Hours

Anyone who works with lawyers today knows that lesson. AI has reshaped legal practice at a speed few anticipated. Tasks that once took teams of associates and partners weeks can now be done in days or hours. Research, document review, even early drafting have been compressed dramatically, and technological improvements are only accelerating.

Corporate clients see it clearly. They’re pushing for fixed fees, value-based billing, and efficiency. Defense firms are adapting in real time, altering their compensation terms to veer away from the billable hour alone.

If Delaware adopts the suggested lodestar cap, plaintiffs’ lawyers who work smarter and invest in technology to operate efficiently would receive lower total compensation than lawyers who rack up hours and achieve the same final result inefficiently.

With a lodestar cap, a better outcome achieved with fewer hours could result in a lower fee. That’s not discipline or improved incentives. It’s distortion and dislocation of objectives.

Doctrinally Evolving Ecosystem

Stockholder litigation isn’t a sideshow in the Delaware corporate governance law and practice ecosystem. In many respects, it is its backbone.

Delaware doesn’t have (and doesn’t want) a government regulatory body policing fiduciary misconduct. There’s no Securities and Exchange Commission for conflicts of interest or boardroom failures.

And while investors sometimes use market powers to influence governance practices, most practices are borne in the creative minds of corporate transactional lawyers and bankers and then approved (or rejected) through the courts.

Private stockholder lawsuits do the work of regulators by surfacing problematic practices, forcing accountability, and providing the judiciary with the opportunity to produce the case law that makes Delaware corporate law evolve while remaining predictable and credible.

If the Delaware legislature made those cases stop making economic sense, the cases that test governance practices won’t be brought. If they aren’t brought, the law won’t just stagnate—it will erode.

We’ve seen what happens when scrutiny comes too late. From WorldCom and Enron to Theranos and FTX, corporate disasters tend to grow in the absence of timely stockholder challenge to poor governance practices. Delaware’s sustained success requires that smart challenges remain viable.

Wrong Question Asked

Right now, the discussion about attorneys’ fees focuses on whether a handful of attorneys’ fee awards look high in hindsight (or relative to awards in the very different world of securities litigation). That’s the wrong question on which to focus.

The harder— but correct—question is what incentives Delaware is setting for the future. Tying compensation to hours assumes that time is still a meaningful proxy for value in legal services. In an AI-driven legal economy, billable hours are becoming less and less relevant.

Delaware’s courts are trusted around the world because the Court of Chancery judges exhibit unparalleled sophistication and exercise exceptional judgment about business risk, conflicts, transactional complexity and structure, behavioral deterrence, and inherent fairness.

The judges don’t rely on rigid formulas and they never should. That flexibility is what allows the corporate system to evolve intelligently without breaking. Replacing that judgment with a calculator would lock Delaware into an outdated model at precisely the moment the legal profession is evolving away from the billable hour.

Delaware’s advantage has never been about math. It’s judicial wisdom. State lawmakers must embrace and trust their judges.

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

Author Information

Anat Alon-Beck is a professor of law at Case Western Reserve University Law School and a visiting scholar at Harvard Law School.

Mark Lebovitch is a lecturer at Columbia Law School and previously led the corporate governance litigation practice at Bernstein Litowitz Berger & Grossmann.

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