Markkula Center of Applied Ethics

History and Role of the Delaware Court of Chancery

Debating whether or not corporations are people may fuel a presidential contest, but it's of little consequence to the state of Delaware. What's key to the tiny Atlantic state is that there are more corporations in Delaware -upwards of 1 million – than there are people living there, and regardless of how you define them, taxes and related revenues from those companies provide 40 percent of the state's budget.

The state's popularity in the corporate world is partly a nod to the Delaware Court of Chancery, the arbiter of corporate conflicts and fiduciary disputes and equity matters, all under the mantle of "institutionalized fairness," said Sam Glasscock, the court's vice chancellor. At a recent meeting of the Markkula Center for Applied Ethics Business and Organizational Ethics Partnership, Glasscock walked his listeners through the court's history and the role and record that has made it the premiere corporate trial court in the country.

More than half the companies traded on the New York Stock Exchange and NASDAQ, as well as 60 percent of Fortune 500 companies, have chosen to officially set up shop in the 90-mile long state on the Delaware River, Glasscock said. Seventy-five percent of the U.S. initial public offerings involve Delaware corporations.

Part of the "Delaware advantage" revolves around the Chancery court, whose appeal, Glasscock said, lies not just in the no-jury system and the corporate law skills of its five judges—avoiding the need to educate an uninformed jury – but in the state's law itself. Under its guiding business judgment rule, the court tends not to second-guess business decisions that company leaders determine to be in the best interest of the stockholders, he said. The court often ends up dismissing plaintiffs' complaints in keeping with this primacy of company directors' discretion on business judgments.

"Looked at in this way, the directors have a broad arena within which to operate, free of court interference, and subject only to the yearly exercise by the stockholders of their right to elect the board," Glasscock said. "When acting as a disinterested and informed board, they can take whatever actions they believe are in the corporate interest. That includes good, but risky decisions. Note that it also includes poor decisions. It even includes what appear in hindsight to be downright boneheaded decisions, so long as they were taken by disinterested and informed directors."

The court finds itself increasingly asked to rule on issues around the nation's avalanche of merger and acquisition cases. The cases often center on whether boards of directors supplied inadequate information or misinformation to shareholders when seeking approval for a merger or related actions. The court may find a breach of duty if misrepresentations were significant enough to have affected a shareholder's decision on how to vote. Without sufficient information, the stockholders are not able to knowledgeably exercise their franchise, making the vote a sham, Glasscock said.

Glasscock also talked about lawyers' fees, how the court views questions on directors' compensation, and whether the business rule has room for "corporate responsibility" activities that don't obviously maximize shareholder profits as fiduciary responsibility requires.

Asked about the court's view on "enlightened self interest" rationales to justify corporate expenditures that boost the community but not necessarily profits, Glasscock said such cases generally would fall under the business judgment rule. Notwithstanding the high-profile Craigslist case in which company founders were faulted for putting their community-friendly culture above the profit motive, Glasscock said the business judgment rule would generally support companies that justify their good deeds as a way to enhance the company's reputation, increase good will in the community, or provide other benefits to the company long term. "We treat this broadly," he said, the key being that the directors need to articulate a rationale that their actions that serve the interests of the company, and thus the stockholders.

Glasscock said his court's defining characteristic is that its jurisdiction is limited to matters in equity. "What is equity? The word of course means simply fairness," he said.

November 2012


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