WSJ article outlines 26% of Delaware’s budget at risk

By James DeChene

In a front page Wall Street Journal article, Delaware’s continued status as the premier corporate friendly location is called into question.  The article highlights two specific provisions, fee-shifting and appraisal arbitrage, as the primary stumbling blocks to Delaware’s long standing reputation.  Legislation on fee-shifting, authorized by a state Supreme Court decision last year, was passed in order to reverse the Court’s decision that would have curtailed shareholder derivative litigation in the state by requiring the losing party to cover the attorney’s fees and costs for both sides. In addition, the article outlined the proposal of new language that would change the rate of interest paid to shareholders until their appraisal case is decided. Shareholders now accrue 5.75 percent in annual interest on the deal price while waiting the years it takes to decide an appraisal case. There are those that feel that the rate is too high and limits the downside for hedge funds, encouraging them to exercise appraisal rights. Currently, if the court decides that the amount paid in the merger was fair and the hedge fund receives nothing extra, it still receives the interest. The proposed language permits companies to pay the amount of the merger price they do not dispute and then pay interest only on the amount of any difference if the court determines a higher value, but again, this language is not expected to be voted on by the General Assembly until 2016.At the end of the day, the takeaway from the article is that:

1. Other states are working to enact provisions making them more business friendly in an attempt to lure companies away from Delaware
2. The General Assembly needs to work to protect Delaware’s brand—corporate fees make up 26% of the state’s budget.  After all, as quoted in the article on how other’s states are ramping up their efforts to attract businesses, “You look at Delaware and say, ‘why does it have to be that way’? We have 50 states,” said state Rep. Jon Echols, the Oklahoma Republican who co-sponsored that state’s bill.
3. Delaware’s judicial system will become more and more important as time goes on.  As a practical matter only our judges can decide whether the referenced Dole and Ancestry cases come down on the side of “wheat” or “chaff”.    What I can say is that the below examples seem to show that our Courts are clearly sensitized to the issues and are demonstrating that they tread carefully on a case by case basis based on the facts of the case.

Here’s a blog posting (via Reuters) highlighting two cases last week where Vice Chancellors Laster and Noble sent pretty clear messages around so-called “disclosure only” settlements. These rulings are illustrative of the Delaware judiciary’s deep concerns about awarding legal fees in cases where little to nothing of substance is achieved for either the corporation or its shareholders.  Two other recent cases further illustrate the Court of Chancery’s ability to sort out cases on their merits:

• Last week’s dismissal (via National Law Journal) of a derivative lawsuit against GM’s directors related to faulty ignition switches (Vice Chancellor Glasscock)

• The Ramtron Int’l appraisal case (via Mondaq) where the appraised price came in below the deal price (Vice Chancellor Parsons)
  

The referenced bill on fee-shifting/forum selection created a vehicle allowing companies to ensure that Delaware is the venue for their internal corporate disputes and it’s altogether appropriate that the business world watch carefully to see if the State’s judges fairly and actively filter out weak cases brought to Delaware. No doubt there will be many strong cases where litigants (and their counsel) will be well rewarded  — but each of the above rulings show that Delaware’s courts are well equipped to combat meritless litigation and mindful of a responsibility to separate the wheat from the chaff.