An Overview of the Delaware Chancery Court
The Delaware Chancery Court has its beginnings in the late 18th century, where Chancellor James Kent issued rulings to bring equity to the court system in the colonies. In 1792, the Delaware Constitution established the Court of Chancery, which was mainly presided over by an individual Chancellor and three Masters until the mid-1980s, when it transitioned into a system with five Vice Chancellors. Since the 1980s, on-site Masters have been added to assist the court with its busy docket.
Today, the Delaware Chancery Court is the go-to forum for litigating corporate disputes. There are 65 million private-sector jobs in the United States, and out of these, nearly one million companies are incorporated in Delaware . As a result, our Court of Chancery hears more than one-third of the nation’s merger objections (making them a truly national forum), and at least 85 percent of the country’s large mergers have some connection to the Delaware Chancery Court.
The average time from complaint to trial in the Delaware Court of Chancery is about six months. This allows businesses to quickly adjudicate time-sensitive matters, particularly as compared to Courts in which an appeal from the Court of Chancery is taken to the Court of Appeals (where litigation tends to be moving considerably more slowly).
The Structure and Jurisdiction of the Delaware Chancery Court
The Delaware Chancery Court is part of the Delaware Court System, which is composed of six courts: the Delaware Supreme Court, the Court of Chancery, the Superior Court, the Family Court, the Court of Common Pleas, and the Justice of the Peace Court. The Court of Chancery has original jurisdiction over matters involving equities. This means that the Court of Chancery does not have equity appellate jurisdiction. However, Delaware Courts operate according to the "principle of right results" which means that the wrong appellate court need not rule on such an error provided that the right result was reached at the trial court level. The Court of Chancery has two judges and six vice chancellors, each of whom serves a fourteen year term. In addition to hearings, the Court of Chancery holds week-long trials that follow the same structure as jury trials held in Superior Court. The Court of Chancery enforces judicial injunctions, (ordinarily preserving the status quo until the merits of the underlying issue have been decided) and decrees specific performance of contractual obligations. The Court of Chancery has original jurisdiction over the interpretation of limited liability company ("LLC") operating agreements, foreign corporation bylaws, articles of incorporation, and equity securities of a corporation. Further, the Court of Chancery has original jurisdiction over shareholder disputes involving preemptive rights of shareholders, rights to inspect corporate books and records, and even oppression of minority shareholders.
Main Features of the Delaware Chancery Rules
The Delaware Court of Chancery is a court of equity, with the jurisdiction to provide fair and just remedies. The fundamental rules of procedure governing litigation in the Delaware Court of Chancery are to found in the Delaware Court of Chancery Rules. In 2015, the Court of Chancery in Wilmington published a new edition of its Rules, which included an extensive number of revisions and an improvement in the format to allow lawyers to more easily research and cite the rules and rule-compliant opinions issued by the Court. Numerous rules and time periods have been extensively modified as compared with prior versions of the Rules. Many of the revisions were made to streamline the Court’s procedures, particularly with regard to electronic discovery. A new Deadlines Tab has been added to the Court’s website to provide accurate information about all of the deadlines and scheduling associated with cases. The most important feature or topic relevant in practice are: 2 Del. C. § 1107, which authorizes the Court of Chancery to award damages; 2 Del. C. § 3906, which discusses fees in equity for counsel fees; 8 Del. C. § 242, which authorizes appraisal of cash-out mergers; and 10 Del. C. § 358, which governs injunctive relief in connection with a squeeze-out merger.
Chancellor and Vice Chancellors of the Delaware Chancery
A court of equity is defined as a court exercising jurisdiction in equity. A lead Judge is called the Chancellor of that court. In the Delaware Court of Chancery there is only one Chancellor and three Vice Chancellors for the entire court, presently. The Chancellor and the three Vice Chancellors are confirmed by the Delaware Senate. They are lawyers in good standing for at least 5 years, who have obtained a distinguished and recognized stature in the field of jurisprudence…. They serve until the age of 70. They are appointed by the governor and hold office during the pleasure of the governor. The Justice of the SCOTUS serve for life. The members of the Federal Circuit Courts serve on average for 17 years. They may also be nominated by the president of the U.S. but are required to go through the advice and consent process mandated by the U.S. Constitution. The Chancellor and Vice Chancellors of the Delaware Court of Chancery serve for an indefinate period of time. Some Chancellors have served for 15 years and longer. The judges are responsible for final and interlocutory decisions made by the court, its rules and procedure, initiating procedures, adopting and applying law and equity to cases before them, scheduling matters, and communicating with the public. They are landlord and mentor. Judicial decisions issued by the Chancellor or Vice Chancellors upon their confirmations are final decisions from which there are no appeals.
Notable Cases and Precedents in the Delaware Chancery
The history of corporate law in the United States is rife with cases that trace their roots to Chancery Court of the State of Delaware, a court which is unparalleled when it comes to its influence on the legal landscape. As far back as 1792, Delaware’s Court of Chancery had jurisdiction over matters ranging from estate disputes to corporate governance. In the early days, a litigant could come to the court seeking specific performance of a business contract or dissolution of a corporation, but could not ask for monetary damages to be paid from one litigant to another. Times have changed, however, and it is hard to think of a prominent corporate case today that did not originally begin its journey in the Chancery Court.
One of the most famous cases decided by the Delaware Chancery Court was eBay v. Newmark, a case which centered on the sale of the famous online auction site. The case brought Newmark and other Craigslist founders against eBay, and focused mainly on a provision in Craigslist’s charter which the Newmark had written to exclude eBay from having any control over the site’s "board of directors , shareholders’ voting rights, and board composition." Chancery Judge William B. Chandler III ruled that the restrictive language was allowed, and Newmark v. eBay was born.
Another high profile case which originated in the Delware Chancery was that of Scattered Corp. v. Chicago Stock Exchange Inc. This case helped to lay the groundwork for what a "going private" transaction should look like. Judge Chandler decided that a recent amendment to the rules was an actual improvement in the stock exchange market, and upheld the validity of the transaction in spite of opposition by shareholders and opposition from the funds of its directors.
The Chancery has been called upon time and time again by legislators and entrepreneurs to review the legality of contracts, mergers, and many other types of corporate activity. Many assert that a change in these decisions, even a small one, could throw corporate order into chaos and change the way in which businesses are run in this country. For this reason, the court’s decisions are usually followed and/or disliked by everyone.
Procedural Matters: Initiating and Proceeding with Trials
In the Delaware Court of Chancery, non-jury matters are initiated by a complaint (i.e. a pleading). When bringing an action before the Court, it is important to include all necessary components in the complaint for the Court to acquire jurisdiction. A complaint shall contain "a short and plain statement of the facts on which the pleader relies for a recovery, a demand for judgement for the relief to which the pleader claims to be entitled, and a jury demand if any of the claims is triable to a jury." In actions requesting equitable relief, the complaint must also set forth "the facts on which the pleader relies . . . and the relief sought." The Court also requires that answers, counterclaims, and replies follow a similar format. It is unclear exactly how specific a party must be in setting forth the facts, but the Court does not require that a jury trial be scheduled within a certain time period of the action being brought. Rather, it may be years before the Court sets a trial date. Once depositions of necessary witnesses and discovery are complete, a party may file a motion for summary judgment. A party defending against a motion for summary judgment is generally required to produce evidence stating genuine issues of material fact exist and that these issues of fact require a trial. After a motion for summary judgement is filed, the parties are expected to come together to discuss the possibility of settlement. If a settlement cannot be reached, the Court schedules the matter for trial. The Court prefers for the parties to pre-mark exhibits and agreed depositions to save time at trial. The party filing the action has the burden of proof and is responsible for going "first" in presenting its case to the Court, as issues are tried in the order presented.
The Impact of Decisions Made by the Delaware Chancery Court
The far-reaching implications of the Delaware Chancery Court’s decisions are felt beyond the borders of the First State. Its rulings are studied closely, and often followed, by judges in other jurisdictions. Notably, Delaware’s views on the fiduciary duties of directors and officers have been embraced by sister states like Pennsylvania and Massachusetts. These jurisdictions have stated that they adopt Delaware law on "point of first impression." The same is true for federal courts. Delaware’s views are particularly influential in claims brought under federal statutes such as the Securities Exchange Act of 1934 when those federal claims are coupled with state corporate law claims. When determining which state law to apply, federal courts typically choose Delaware law when the issuer or issuer’s parent company is incorporated in the First State. Some federal courts do so even when neither the issuer nor its parent company is incorporated in Delaware, but the alleged material misrepresentation or omission is said to involve an offering or purchase of stock registered under the Securities Act of 1933. In light of all this, it is no surprise that the Delaware judiciary and Supreme Court are constantly asked to adjudicate novel legal issues impacting capital markets.
Recent Changes to the Delaware Chancery Rules
With the recent upsurge in merger and acquisition filings, it is important to note that a recent Chancery decision regarding information provided in settlements in connection with such litigation has some bearing on the disclosure burden for prospective plaintiffs. The recent decision, In re Trados Inc. Shareholder Litigation, 2013 Del. Ch. LEXIS 122 (May 8, 2013) determines that in order for a plaintiff to recover attorney fees from the defendant in such a settlement, the Plaintiff’s counsel must prove the amount attributable to the actions of the defendants which led to the suit since Delaware does not award fees solely for obtaining a settlement, but rather for the benefits conferred by the litigation.
In a very recent decision, C. A. No. 6949-VCL (August 9, 2013), the Court has once again taken the position that demand futility has become an extremely difficult chore for plaintiffs.
By way of background, the Court in In re Citigroup Inc. Shareholder Derivative Litigation, C.A. No. 3961-VCS (Del. Ch. May 24, 2013), addressed allegations against directors that they were overly optimistic in the face of an impending financial collapse. The Court applied the reasonableness test set forth in Disney (2005) finding that because the board was provided with opposing views and made a series of decisions all of which bore indicia of reasonableness, and did not bury their heads in the sand when confronted with known adverse facts, the directors were protected by the business judgment rule.
The most current decision, C.A. No. 6949 VCL, however, is troubling from the standpoint of a shareholder given the Court’s application of a more stringent test. In this case , the Court emphasized that under the modified business judgment rule, plaintiff’s complaint must plead a sufficiently particularized set of facts that raise a reasonable doubt that the board properly informed itself of the merits of the process by which the company is being acquired. Therefore the Court dismissed the complaint, based on a supposed failure to investigate all the required information.
A perhaps more recognizable recent decision from the Delaware Court of Chancery is the recently rendered opinion of In re globoceann ca, No. 8432-VCP, 2013 Del. Ch. LEXIS 167 (July 26, 2013). Globicom was the first case to review and uphold the requirements of a complaint alleging demand futility. The Court provided the parameters of a plaintiff’s Complaint as having demonstrated a reasonable doubt that the directors were fully informed and acted reasonably. It also allowed for the "entire fairness" standard to be used if the "reasonableness" standard cannot be met. The Globicom decision as applied by the Delaware courts appears to be highly favorable to defendants and provides yet another decision demonstrating the Court’s inclination to find for defendants absent extreme circumstances.
The Court in a very recent decision has determined that the "entire fairness" standard was not applicable in transactions involving the opinion of experts as to the fairness of the transaction. The Delaware Chancery Court has upheld the business judgment rule requiring the presumption that directors of a corporation act independently, without conflicts and in the way that they think is in the best interest of the corporation. Decisions of the Board shall not be questioned when a proper business decision is made.