Does Delaware Corporate Law Make Delaware Corporations More Powerful and More Successful in Legal Litigations?

Before addressing this question directly, it is important to note that the following is my professional opinion, and other legal experts may have different views.

Why Delaware Incorporation Is Not About Litigation

Incorporating a company in Delaware is primarily about internal matters, particularly related to the governance and protection of corporate officers and directors. While some companies choose to incorporate in Delaware, this decision is not primarily driven by the desire to engage in more successful legal litigation but rather by the advantageous legal framework for corporate governance.

Internal Governance and Board Power

Delaware corporate law is known for its board-centric structure, which aims to maximize board power and flexibility in decision-making relative to shareholders' rights. This legal framework significantly minimizes the board's liability for decisions they make, thereby providing a level of protection that can be highly beneficial for corporate directors.

Case Study: Directors' Fiduciary Obligations in Delaware and California

Several years ago, I blogged about the differences between Delaware and California corporate law regarding directors' fiduciary obligations—a concept crucial to understanding the advantages of Delaware incorporation. Here’s a brief comparison:

Fiduciary Duties: Both states have the same duty of loyalty. Directors must act in good faith and believe that their decisions are in the best interest of the corporation and its shareholders. Duty of Care: The legal standards for fulfilling the duty of care vary. In California, a director can face liability if they act negligently or fail to conduct reasonable inquiry. In contrast, Delaware’s standard focuses on gross negligence, making it much more lenient.

DelaCo v. Disney: An Example of Delaware's Leniency

For example, consider Walt Disney Company's approval of a 130 million severance package for CEO Michael Ovitz after only 14 months. In 2006, the Delaware Supreme Court ruled that the board's actions, despite their potentially questionable judgment, did not amount to gross negligence. This case underscores the leniency of Delaware corporate law in protecting board decisions from litigation.

The Practical Implications for Corporate Directors

If you are a corporate director, the significant benefit of incorporating in Delaware is the reduced exposure to litigation risk. Delaware law does not shield directors from all forms of liability but does make it more challenging to successfully sue them for breaches of fiduciary duty. This advantage can be particularly appealing for directors who wish to minimize their obligations to shareholders.

Conclusion

While Delaware incorporation can indeed provide a legal framework that protects corporate directors and minimizes liability, it is essential to recognize that this decision is primarily about internal governance and not about winning legal battles. Companies choose to incorporate in Delaware to benefit from its robust corporate law environment, which is designed to support the flexibility and power of the board in making business decisions.

Legal Disclaimer

This answer is not a substitute for professional legal advice. If you are considering incorporating a company in Delaware or have any concerns about your legal rights, it is advisable to seek the advice of a licensed attorney in the appropriate jurisdiction. Ignoring this warning and providing confidential information without proper representation can be risky.