Hamermesh, Lawrence

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Journal of Business & Technology LawVolume 2 | Issue 2 Article 11How We Make Law in Delaware, and What toExpect from Us in the FutureLawrence HamermeshFollow this and additional works at: http://digitalcommons.law.umaryland.edu/jbtlPart of the Business Organizations Law CommonsThis Articles & Essays is brought to you for free and open access by the Academic Journals at DigitalCommons@UM Carey Law. It has been acceptedfor inclusion in Journal of Business & Technology Law by an authorized editor of DigitalCommons@UM Carey Law. For more information, pleasecontact smccarty@law.umaryland.edu.Recommended CitationLawrence Hamermesh, How We Make Law in Delaware, and What to Expect from Us in the Future, 2 J. Bus. & Tech. L. 409 (2007)Available at: http://digitalcommons.law.umaryland.edu/jbtl/vol2/iss2/11LAWRENCE HAMERMESH*How We Make Law in Delaware, and What toExpect from Us in the FutureMY PAPER HAS NO THEORETICAL CONTENT WHATSOEVER. In fact, it is one of theseodd papers that is not normative, not theoretical, and barely even predictive. Mypaper is almost purely narrative. It is titled, as you see, "The Policy Foundations ofDelaware Corporate Law,"' which is a very high-sounding title, but one with a verysmall point. My paper is a product of having lived in Delaware for thirty years. Ispent eighteen of those years in practice, and taught the subsequent twelve years. Ihave also sat on the Council of the Delaware State Bar Association's CorporationLaw Section, which is the principal source of legislative drafting in the corporatelaw field.2During my career, I have listened to people in practice and in academia talkingabout Delaware. Unlike most of these commentators, I have been in Delaware,watching what goes on. From time to time I have thought, "Gee, you know, whatyou are saying is very interesting. I had not thought of that, but that is not quitewhat happens." So I want to offer a real-world view of how law is made inDelaware.Before I touch on the substance of the paper, let me offer a brief outline. First, Iwill introduce the major policymaking people in Delaware corporate law. Then, Iwill take a very brief look at the major scholarly pieces that address Delaware'smotivations, results, and theoretical impact. Lastly, I will try to fatten the discus-sion by suggesting some things about what actually happens in Delaware.The best-known of the principal policymakers in Delaware are the members ofthe judiciary. One of those major actors, Justice Jacobs, is participating in this con-ference.3 Academics tend to study the Delaware judiciary a lot because the Delawarejudges get out a lot, as evidenced by Justice Jacobs' participation. These Delawarejudges are particularly interesting because of their appointive, nonpolitical, nonpar-tisan character. They are also interesting because unlike us academics, they tend toRuby R. Vale Professor of Corporate & Business Law, Widener University School of Law, Wilmington,Delaware.1. Lawrence A. Hamermesh, The Policy Foundations of Delaware Corporate Law, 106 COLUM. L. REV. 1749(2006).2. Curtis Alva, Delaware and the Market for Corporate Charters: History and Agency, 15 DEL. J. CORP. L.885, 900-01 (1990).3. Jack B. Jacobs, The Fiduciary Duty of Disclosure After Dabit, 2 J. Bus. & TECH. L. 391 (2007).JOURNAL OF BUSINESS & TECHNOLOGY LAWHow WE MAKE LAW IN DELAWAREthoughtfully focus on specific cases, as opposed to broad topics.' These judges arereared in the common law tradition where they generally try not to say much morethan what a case requires them to say.This has led the Delaware courts into the "indeterminacy rap," which is the ideathat the world would be a better place if judges could spend a little more timethinking more theoretically and trying to draw brighter lines, instead of looserstandards.' Most of those judges, as do I, tend to say that this is not a fair way todescribe the world, nor a fair way to describe what they can realistically accomplish,but that is the rap, in any event.6The other major player in the Delaware corporate lawmaking system is the legis-lature. I do not mean to exaggerate the role of the legislature in formulating corpo-rate law. While a lot of legislators understand corporate law, most of the corporatelaw drafting is done by the Council of the Corporation Law Section of the DelawareState Bar Association (Council).' As one would expect, the Council is composedmostly of lawyers who meet monthly and talk about corporate law issues.8 Thelawyers in the Council are the principal players.Now, a lot of commentators talk about these players' behavior and motivations.9For example, Professor Cary has described Delaware as participating in a "race tothe bottom."' Professor Cary describes Delaware as a "pygmy among the 50 states[that] prescribes, interprets and indeed denigrates national corporate policy as anincentive to encourage incorporation" within the state." For the most part, Profes-sor Cary is correct. Delaware certainly does "prescribe" and "interpret" nationalcorporate policy, and has done so for quite a long time. I guess, two out of three isnot too bad.4. See id. (discussing the impact of Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71(2006)).5. See William 1. Carney, The Production of Corporate Law, 71 S. CAL. L. REV. 715, 727 (1998) ("Delawareincreases litigation costs through the adoption of open legal standards (rather than bright-line propertyrules)."); Jack B. Jacobs, The Uneasy Truce Between Law and Equity in Modern Business Enterprise Jurisprudence,8 DEL. L. REV. 1, 15 (2005) (suggesting the need for "bright line rule[s] ... [to] make the application of equitymore predictable"); Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98COLUm. L. REV. 1908, 1919 (1998) (arguing that "legal indeterminacy" in Delaware corporate law creates asuboptimal balance of legal standards).6. See, e.g., Leo E. Strine, Jr., The Delaware Way: How We do Corporate Law and Some of the New Chal-lenges We (and Europe) Face, 30 DEL. J. CORP. L. 673, 683 (2005) (noting that "indeterminacy" permits Dela-ware judges to pull back in future cases in the event that prior decisions were unwise).7. Marcel Kahan & Edward Rock, Symbiotic Federalism and the Structure of Corporate Law, 58 VAND. L.REV. 1573, 1599- 1600 (2005); see Alva, supra note 2, at 900-01.8. Alva, supra note 2, at 900; Hamermesh, supra note 1, at 1756.9. See, e.g., Lucian Arye Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsidering theCompetition over Corporate Charters, 112 YALE L.J. 553, 561-63 (2002) (discussing whether the alleged compe-tition among states for corporate charters is an incentive for states to adopt favorable corporate law); WilliamL. Cary, Federalism and Corporate Law: Reflections Upon Delaware, 83 YALE L.J. 663 (1974).10. Cary, supra note 9, at 705.11. Id. at 701.JOURNAL OF BUSINESS & TECHNOLOGY LAWLAWRENCE HAMERMESHProfessor Cary is also correct in describing Delaware's corporation law as anenabling statute. 2 This can either be a nice adjective or a nasty adjective, dependingon how you want to think about it. Professor Cary also correctly states that Dela-ware's motivation when creating corporate law is to generate revenue." It has beenenormously important. The revenue from corporate franchise taxes has averagedwell over 20 percent of the state's budget. 4Professor Cary has also been personally responsible for much of the evolution ofDelaware case law. Soon after his paper came out, there were a bunch of fairlyrestrictive cases dealing with freezeouts, 5 such as Singer v. Magnavox. 6 Even later,In re Caremark International Inc., Derivative Litigation,"7 the Court of Chanceryarticulated a notion of director responsibility for oversight that Professor Caryurged in his paper.'Even though we in Delaware are said to think of Professor Cary as a big, bad guy,I can agree with a lot of what he said. But, the real question is whether ProfessorCary was right in terms of his views about "race to the bottom?" Some people saythat Delaware has won the race, and there is no longer a race at all. 9 But, in Dela-ware we still care about the race, and we look over our shoulder at other states,including Maryland, all the time.The more important point about Professor Cary's paper is that the race, if thereever was one or still is one, is really not a downhill race. For example, section 203of the Delaware Takeover Statute0 is probably the most irrelevant and least deter-rent of all the state takeover statutes in this country. Historically, if it deters any-thing, it has been deterrent in more friendly deals than hostile deals.2'12. See id.13. Id. at 664.14. See id. at 669.15. Singer v. Magnovox, 367 A.2d 1349, 1354 (Del. Ch. 1976), affd in part, rev'd in part, 380 A.2d 969(Del. 1977), overruled by Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983); see Tanzer v. Int'l Gen. Indus.,Inc., 379 A.2d 1121, 1124 (Del. 1977), overruled by Weinberger, 457 A.2d 701; Young v. Valhi, Inc., 382 A.2d1372, 1378-79 (Del. Ch. 1978); Kemp v. Angel, 381 A.2d 241, 244 (Del. Ch. 1977).16. Singer, 367 A.2d at 1354-57.17. In re Caremark Int'l, Inc. Derivative Litig., 698 A.2d 959, 971 (Del. Ch. 1996).18. Cary, supra note 9, at 702.19. See Bebchuk & Hamdani, supra note 9, at 586 ("Delaware faces a very weak threat of a challenge byanother state."); Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588, 590 (2003) ("States ... are saidto use their corporate law to compete for corporate tax revenue ... Delaware has 'won' that race . .20. DEL. CODE. ANN. tit. 8, § 203 (2001).21. See Roe, supra note 19, at 625 (describing Delaware's takeover statute as "mild").VOL. 2 NO. 2 2007How WE MAKE LAW IN DELAWAREOn the other end of the spectrum, the "race to the top" folks love Delaware.Among these race to the top folks are Ralph Winter,22 Dan Fischel,2" and RobertaRomano.24 As they see it, Delaware is the epitome of how the federalist systemought to work and the way markets ought to work. We in Delaware like this sortof comment: as Adlai Stevenson once said, "[we] don't mind a little praise-as longas it's fulsome."26 The race to the top folks, however, are certainly capable of givingDelaware a lot of praise in areas where it may not be as deserved as they say.There are three problems with the race to the top theory. First, the market forcorporate chartering posited by them is not as efficient as one might think.27 Sec-ond, their theory does not really lead to the market-driven results that they posit.2"Third, from my standpoint, nobody told us in Delaware that we have been leadinga race to the top. Moreover, nobody ever told us how exactly we were supposed tocarry out this race to the top. How do we do it? Are we that smart? And the answeris "No, we are not."Along comes a recent paper by Mark Roe called "Delaware's Competition."29 Inmy view, this paper advanced the ball enormously. As Roe says, it is really the fearof federal incursion that keeps us in Delaware from racing to the bottom. ° Becauseof the federal folks down in Washington, we can never know how a purely inter-state race for corporate chartering would come out."' The federal government keepsus honest, or at least keeps us in Delaware from going too far in one direction orthe other.2Even though I think that Roe's theory is much better than the pure "race to thetop" or pure "race to the bottom" theories, I still have some problems with it. Oneproblem is that Roe fails to explain the daily happenings in Delaware corporate22. See Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J.LEGAL STUD. 251, 254-62 (1977) (explaining that competition has been critical in allowing corporations tocompete freely).23. See Daniel R. Fischel, The "Race to the Bottom" Revisited: Reflections on Recent Developments in Dela-ware's Corporation Law, 76 Nw. U. L. REV. 913 (1982) (stating that no empirical evidence supports the viewthat Delaware's corporate law has failed to provide adequate protection to shareholders).24. See Roberta Romano, The State Competition Debate in Corporate Law, 8 CARDOZO L. REV. 709, 709(1987) (arguing that shareholders benefit from state competition, but competition occasionally produces lawsthat shareholders would have created within their firms anyway).25. See id. at 720-25; Winter, supra note 22, at 292; see also E. Norman Veasey with Christine T. DiGuglielmo, What Happened in Delaware Corporate Law and Governance from 1992-2004? A Retrospective onSome Key Developments, 153 U. PA. L. REV. 1399, 1412 (2005) (comparing advantages of Delaware corporatelaw with other states' corporate law and claiming that the "genius" of Delaware's corporate law is its flexibility).26. The Quotations Page, http://www.quotationspage.com/quote/2232l.html (last visited Sept. 17, 2007).27. See Bebchuk & Hamdani, supra note 9, at 608-10 (arguing that Delaware state law rules are not asefficient as "race-to-the-top" advocates suggest).28. Id. at 609.29. Roe, supra note 19.30. See id. at 601-02.31. Id. at 600.32. See id. at 601 (noting "the federal government replaces those state rules that it finds despicable, and itmodifies those that it dislikes strongly").JOURNAL OF BUSINESS & TECHNOLOGY LAWLAWRENCE HAMERMESHlawmaking. In Roe's view of the world, there is a lot of room for movement withinthe broad orbital sphere that federal authority allows Delaware.33 For example, Roebelieves that Delaware simply tries to head off federal incursion when making cor-porate law.34 Roe's theory, however, does not explain why Delaware has not beenmore proactive in heading-off threats of federal involvement. For example, Dela-ware's statutory response to Sarbanes-Oxley was very, very small.3 There was noteven a huge movement in the case law. The whole ongoing controversy about proxyaccess and majority voting has not even elicited any enormous changes in the Dela-ware statute.I like Kahan and Rock's symbiotic federalism theory. 6 Their key notion is thatthe federal government can step in and help in areas beyond Delaware's compe-tence. 7 In other words, the federal government's involvement in corporate lawmak-ing allows us in Delaware to continue to do what we do well and to cede the otherareas of law to the federal government. The areas that the federal government han-dles much better than we do at the state level include market-oriented disclosureregulation, audit and accounting regulation, and insider trading enforcement.3"There is no way that the State of Delaware could ever systematically monitor andenforce an insider trading regime. 9 Delaware, on the other hand, has a systemprimarily based on private enforcement, meaning that it is much better able to dealwith insider conflict transactions, and merger and acquisition transactions.4"Now, I can get to the point of this paper: what principles govern what we inDelaware actually do when it comes to corporate lawmaking?First, the key principle is the idea to "do no harm."'" This idea explains why theresponses to Sarbanes-Oxley were so mild. 2 Also, this idea explains things like thepeculiar phenomenon of why Delaware has not just resolved the whole controversyabout what bylaws can do. 3 To be frank, this unwillingness is a question of notwanting to screw up, and not knowing the best solution. The "do no harm" idea33. See id. at 601 (arguing that in corporate rule making, Delaware "gets to make, or keep, only the rulesthat the federal authorities do not make themselves").34. Id. at 601-02.35. Kahan & Rock, supra note 7, at 1617-19.36. Id.37. Id. at 1578.38. Id. at 1620.39. Id.40. See id. at 1605-09 (noting that "Delaware has taken great care in developing a first-rate system forprivate enforcement" and describing the scope of Delaware law within this system).41. E. Norman Veasey & Michael P. Dooley, The Role of Corporate Litigation in the Twenty-First Century,25 DEL. J. CORP. L. 131, 136 (2000); see also Kahan & Rock, supra note 7, at 1601-02 (noting that most ofDelaware's corporate law amendments address minor or technical issues).42. Kahan & Rock, supra note 7, at 1617.43. See, e.g., Lawrence A. Hamermesh, Corporate Democracy and Stockholder-Adopted By-Laws: TakingBack the Street?, 73 TOL. L. REV. 409, 428-29 (1998); Edward B. Rock, Controlling the Dark Side of RelationalInvesting, 15 CARDOZO L. REV. 987, 1025 (1994) ("[Tlhere is so little Delaware law on stockholder adoptedbylaws that one cannot draw anything more than the most tentative conclusions .... ).VOL. 2 NO. 2 2007How WE MAKE LAW IN DELAWAREalso explains the relatively muted response to the whole controversy over majorityvoting.4In Delaware, we also are cautious because the statute45 is full of live ammunition.The statute applies to many people all over the world, and we have a concern that ifyou tinker with it, you are going to upset somebody's expectations.46 Specifically,this concern is manifested in our refusal to mess around with a statute in a way thataffects a matter currently in litigation. In fact, this is an explicit rule when we draftstatutes.47 We do not legislate on matters currently in litigation because we view thecourts as the first line of defense, the first responders in dealing with complexsituations. When drafting legislation, we abstain from addressing complicated mat-ters that are hard to figure out, allowing them to develop through the common law.We resist the use of "bright-line" rules. Instead, we prefer flexibility.4" Ultimately,we are dependent on the courts to curb the opportunistic misuse of the flexibilitythat the enabling statute provides.49Where is this going to take us? Well, it is very simple. Do not expect detailedregulatory prescriptions from future Delaware lawmaking. Do not expect to seeanything involving criminal or regulatory enforcement. Do not look for active at-tempts by the state legislature to head-off further federal activity. Federal activity isgoing to come or it is not going to come, according to political factors that we inDelaware are not going to have much to say about. Nevertheless, you should expectus in Delaware to make every effort to maintain the stability and continuity of theexisting balance of authority among managers and shareholders.44. See generally INST. S'HOLDER SERVS. INSTITUTE FOR CORP. GOVERNANCE, MAJORITY VOTING IN DIR.ELECTIONS: FROM THE SYMBOLIC TO THE DEMOCRATIC 2 (2005), available at http://www.issproxy.com/pdf/MVwhitepaper.pdf (discussing majority voting in director elections).45. DEL. CODE. ANN. tit. 8, § 216(3) (2001).46. See David C. McBride, Delaware Considers Majority Voting for Directors: Proposed Amendments to theDelaware General Corporation Law, in WHAT ALL BUSINESS LAWYERS & LITIGATORS MUST KNOW ABOUT DELA-WARE LAW DEVELOPMENTS 2006, 289, 308 (2006) (noting that caution should be taken "before 'majority voting'[is] imposed upon all Delaware corporations as a default rule . . ").47. See Kahan & Rock, supra note 7, at 1610-11 (describing Delaware law as expressing a preferencetowards common law development and incremental legislation).48. Hamermesh, supra note 1, at 1783-86.49. Id. at 1749.JOURNAL OF BUSINESS & TECHNOLOGY LAW

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