Is Delaware Losing its Cases?
- We thank Jessica Erickson for providing her derivative suits data; the law firms that provided us with information on option backdating suits; Douglas Campbell, Nathan Chuang, Mitch Fagen, Tim Gerheim, Jonell Goco, Caroline Hunter, Patrick Luff, Stephen McKay, Jose Mendoza, Alex Ruge, Cephas Sekhar, Li Weng, and, especially, Ji Min Park for excellent research assistance, and Columbia Law School, Oxford University, University of Texas Law School, and the Searle Center on Law, Regulation and Economic Growth at Northwestern University for financial support. We thank Keith Bishop, Jill Fisch, Jeff Gordon, Colin Mayer, Tom Noe, Delaware Vice-Chancellor Travis Laster, and three anonymous JELS referees for helpful comments. The article has benefited from feedback at the American Law and Economics Association (2011 annual meeting), Canadian Law and Economics Association (2010 annual meeting), Conference on Empirical Legal Studies (2010), Harvard Law School, Stanford Law School, University of Illinois Law School, University of Leeds Law School, University of Oxford Saïd Business School, University of San Diego Law School, USD Law Center on Corporate and Securities Law, Vanderbilt Law School Conference on Corporate Law (2010), and Columbia Law School Conference on the Delaware Court of Chancery: Change and Continuity (2011). We are grateful for helpful discussions with various corporate lawyers, including Randall Baron, Peter Carter, Travis Downs, Joel Friedlander, Stuart Grant, William Lafferty, Mark Lebovitch, Roger Magnuson, Joe Metzler, Ted Mirvis, Stephen Radin, Lee Rudy, and Bryn Valler.
Address correspondence to John Armour, University of Oxford, Faculty of Law, St Cross Bldg., St Cross Rd., Oxford OX1 3UL, UK; email: firstname.lastname@example.org.
Delaware's expert courts are seen as an integral part of the state's success in attracting incorporation by public companies. However, the benefit that Delaware companies derive from this expertise depends on whether corporate lawsuits against Delaware companies are brought before the Delaware courts. We report evidence that these suits are increasingly brought outside Delaware. We investigate changes in where suits are brought using four hand-collected data sets capturing different types of suits: class action lawsuits filed in (1) large M&A and (2) leveraged buyout transactions over 1994–2010; (3) derivative suits alleging option backdating; and (4) cases against public company directors that generate one or more publicly available opinions between 1995 and 2009. We find a secular increase in litigation rates for all companies in large M&A transactions and for Delaware companies in LBO transactions. We also see trends toward (1) suits being filed outside Delaware in both large M&A and LBO transactions and in cases generating opinions; and (2) suits being filed both in Delaware and elsewhere in large M&A transactions. Overall, Delaware courts are losing market share in lawsuits, and Delaware companies are gaining lawsuits, often filed elsewhere. We find some evidence that the timing of specific Delaware court decisions that affect plaintiffs' firms coincides with the movement of cases out of Delaware. Our evidence suggests that serious as well as nuisance cases are leaving Delaware. The trends we report potentially present a challenge to Delaware's competitiveness in the market for incorporations.