As I noted in a recent post, when the Wall Street Journal has a front-page article asking the question whether Delaware’s claim as the preferred home jurisdiction for many U.S. corporations continues to be warranted, it might be time to wonder whether Delaware’s preeminence might actually be under serious challenge. And if a recent article on Law 360 is any indication, the good citizens of Nevada – or at least one member of its legal bar in particular – are quite sure where U.S. companies should turn next, at least for the resolution of corporate disputes. That is, Nevada.
That’s right, Nevada.
In an August 11, 2015 article entitled “Strike Suit Certainty Remains the Status Quo in Nevada” (here, subscription required), Jeffrey S. Rugg of the Browstein Hyatt Farber Schreck law firm in Las Vegas argues that Nevada provides an advantageous forum compared to Delaware because of the expeditiousness with which Nevada courts resolve M&A-related strike suits. In Delaware, Rugg argues, “the consideration and resolution of strike suits … has become increasingly uncertain and, as a result, expensive,” whereas Nevada “continues to provide all parties with the certainty of consistent application of law and efficient resolution of motions.”
In support of his contention, Rugg cites as examples several recent M&A-related lawsuits that were resolved expeditiously in Nevada, noting that this expeditiousness is the product of Nevada’s statutory scheme and court procedures that, among other things, codify the business judgment rule and set a high bar for director and officer liability. He also cites Nevada’s legislative rejection of the Delaware’s Revlon standard, which, he asserts “often supplants the business judgment rule and turns directors into auctioneers when confronted with a change in control.” Moreover, Nevada’s courts “do not parse these clear statutes or question the public policy,” and its courts, Rugg asserts, rule quickly on substantive motions.
In comparison to this this idyllic picture of speedy, rational justice in Nevada’s courts, Rugg contrasts Delaware’s legal system, where, he says, “cases are hitting roadblocks as judges debate public policy relate to strike suits and question whether disclosure-only settlements can be accompanied by negotiated attorneys’ fees for plaintiffs and/or complete releases for defendants.” Rugg cites as examples several cases where Delaware chancellors have expressed reluctance to approve (or to approve fee awards in) disclosure-only settlements in M&A-related suits.
The “legal uncertainty” these courts’ action present “is exacerbated by Delaware’s accommodation and encouragement of appraisal proceedings,” which, Rugg asserts, “adds price and legal costs uncertainty to any merger with or acquisition of a Delaware corporation.” Moreover, Delaware’s judges “are inserting their individual public policy concerns and new legal questions into appraisal proceedings.
In Nevada, by contrast, Rugg asserts, “none of this uncertainty exists.” For an exchange listed Nevada corporation without a controlling stockholder “there is no post-merger cause of action for an appraisal.” Instead, he asserts, “the public market determines the value of the stock and a strike suit is the proper (and only) cause of action to challenge the transaction.” And strike suits, he reiterates, are handled quickly and efficiently in Nevada’s courts.
In short, Rugg summarizes, while Delaware “provides an increasingly uncertain forum for all parties in strike suit and merger/acquisition-related litigation,” Nevada continues to provide “the certainty of clear statutes, respect for public markets and experienced business court judges who apply the law efficiently.” In Nevada, the parties “usually find mutually beneficial business solutions to strike suit litigation without the law or the courts rebalancing or tipping the scales of justice on a case-by-case basis.”
In case you missed it, the message from Nevada is – game on, Delaware. Interestingly, in attempting to make the case for Nevada, Rugg is going right for the very things that are usually cited as the most preeminent advantages that Delaware offers, which is the quality of its judiciary and the certainty of its laws. Ironically, as the state’s courts have found themselves compelled to wrestle with the problems associated with a world in which virtually every merger transaction is challenged, Delaware’s courts are now (at least according to Rugg) subject to challenge for their uncertainty and unpredictability.
It is, as I have recently noted, clear that Delaware’s courts are indeed troubled by disclosure-only settlements in M&A-related cases and by the incentives that these settlements provide the plaintiffs’ attorneys to bring yet more of these cases that seemingly produce no value for anyone except the plaintiffs’ lawyers themselves. Moreover, the process that results in these “mere peppercorn” settlements has been the target of attacks from academics such as Fordham Law School’s Sean Griffith. As discussed in a July 28, 2015 Wall Street Journal article (here), Professor Griffith is mounting legal challenges to settlements of merger objection strike suits on the grounds that the disclosure-only settlements that usually result “do shareholders absolutely no good.” Indeed, one of the cases Rugg cites in his article as an example of how Delaware has become “an increasingly uncertain forum” is one of the cases in which Professor Griffith has intervened as an objector to the proposed disclosure-only settlement.
Perhaps it is due to its historical preeminence, but Delaware is taking it from all sides these days. Its legislature’s recent action barring stock corporation’s use of fee-shifting bylaws has been criticized, by UCLA Law Professor Stephen Bainbridge in a recent article, for example, as contrary to sound public policy as well as the state’s own financial interest, on the grounds that in the face of this legislative action companies may look elsewhere to locate their corporate domicile. Indeed, the recent Wall Street Journal front page article to which I linked at the top of this post made that very point.
As Rugg’s article inferentially suggests, at many levels, the accelerating contest between the states may actually be a reflection of a scramble between the states’ respective legal bars for the lucrative corporate and securities business. One of Professor Bainbridge’s criticisms of the recent Delaware legislation barring fee-shifting by laws is that the legislation reflects the legislature’s capture by the state’s legal bar, eager as it is to maintain a legal system that is highly remunerative for the local bar but not necessarily in the interests of corporations domiciled in the state or the corporations’ shareholders. Rugg, clearly relishing the possibility that legal business in Nevada will boom if confidence in Delaware flags further, senses the business opportunities that might arise if the rest of the world can somehow be convinced that Delaware’s legal system is becoming a shambles.
It may be as Rugg contends that in Nevada litigants can get rid of the troublesome merger objection lawsuits without a lot of fuss and bother. And there is absolutely no doubt that Nevada’s lawyers would benefit if more corporate disputes found their way to Nevada’s courts. However, if these disputes were to move to Nevada because the litigants don’t want to be bothered with a bunch of pesky judges who insist on asking a lot of questions, you do have to wonder if that would be in the long run interests of companies or their shareholders. The fact is that there are very good reasons why the judges in Delaware are asking a lot of questions about the disclosure-only merger objection lawsuit settlements. The settlements only encourage further spurious litigation and the cases themselves in far too many instances impose costs far out of proportion to the limited value they deliver.
There is no doubt that there is a legitimate debate as to whether or not Nevada or Delaware or another state should be the preferred forum. But whether or not there is a legitimate debate, it is clear that a very real contest between the states is already underway, driven at least in part interests of the various local legal bars eager to attract legal business.
However, if there is to be a contest, can we at least insist that the focus of the debate be around the long-run best interests of corporations and their shareholders, rather than merely what is most expeditious?