Delaware Loses Top Spot in Chamber Legal Climate Survey

Stay current on changes and developments in corporate law with a wide variety of resources and tools.

By Leslie A. Pappas

South Dakota has replaced Delaware as the state with the best overall litigation environment for companies, according to a U.S. Chamber of Commerce survey.

The poll of in-house counsel and business executives ranked Delaware—home to more than half of all U.S. public companies, and over 60 percent of Fortune 500 companies—eleventh. This is the first time since the survey began in 2002 that Delaware wasn’t in first place.

“The reason for the change in rank is very simple,” Chamber spokesman Justin Hakes told Bloomberg BNA in a phone call Sept. 14. “Other states are improving their lawsuit climates and passing Delaware by.”

In response to the Chamber survey, Delaware Secretary of State Jeffrey W. Bullock told Bloomberg BNA that the “Delaware franchise has never been stronger.”

“In Delaware, we value results—not just ratings,” Bullock said in a Sept. 13 email. He added that the state continues to make annual updates to its business laws, and recently reformed its unclaimed property statute to address concerns raised by corporate representatives.

“I am confident that the world understands what Delaware’s courts, legal community and our business services industry have to offer,” Bullock said. “That’s why our share of this highly specialized business, from Fortune 500 companies to IPOs, remains at record highs.”

Some attorneys contacted by Bloomberg BNA from both the plaintiffs’ and defense bar defended the state. Others said that a state court ruling ordering the sale of TransPerfect Inc. may have contributed to its lower ranking.

The Chamber survey itself didn’t elaborate on why Delaware took such a sudden, precipitous fall after 15 years in the No. 1 spot. However, it did note that both criteria and survey mode had changed, and the 2017 survey “should be considered a new benchmark.” It also said that an all-time high of 85 percent of senior executives surveyed said a state’s lawsuit climate is likely to impact decisions about where they will locate or expand their businesses.

`Orwellian’

“This survey is Orwellian,” said Mark Lebovitch, a New York-based partner at Bernstein Litowitz Berger & Grossmann LLP who heads his firm’s corporate governance litigation practice.

“The same people who called unilateral fee shifting a ‘fair policy’ are now trying to bully the Delaware judiciary to work harder to win a ‘race to the bottom’ of appeasing the corporate world at the expense of investors,” Lebovitch said in a Sept. 14 email. “Delaware should show the same leadership it has in the past by ignoring this noise and focusing only on a proper balance between the core rights of the investors who make our economy function and the corporate executives entrusted to manage that capital.”

Delaware drew some criticism after it banned so-called “fee-shifting” bylaw and charter provisions in stock corporations in August 2015. These clauses allow the companies to make the shareholder plaintiff pay for litigation expenses if it files an unsuccessful “intracorporate claim”—one that involves the company’s internal affairs, such as directors’ fiduciary duties.

Mike P. Kelly, chairman at McCarter & English LLP in Wilmington, Del., also took issue with the survey’s findings. “As one who tries cases across the U.S., I can say with confidence that the Delaware Courts remain among the finest,” he told Bloomberg BNA in an email Sept. 13.

However, the Delaware bench is increasingly overworked and underpaid, Kelly said.

“When I joined the Bar in 1984, a Delaware state court judge’s salary was twice that of a first year associate at a premier local firm,” Kelly said. “Today, it is barely above it.” As a result, fewer and fewer private practitioners are applying for judgeships. “This is a problem common to most states,” he added.

Unclaimed Property

Delaware’s push to collect unclaimed property and a recent decision to raise the franchise tax may be part of the reason for the state’s downgrade, according to Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Elson said Delaware also may be seeing some fallout from the TransPerfect case. In August 2015, the Delaware Chancery Court ordered the sale of the profitable New York-based translations company under a state law provision more commonly used for nonsolvent entities, because its two owners can’t get along.

A group of employees supporting one of TransPerfect’s two main shareholders has pushed the Delaware Legislature to change the state’s laws to stop the sale or prevent similar actions in the future. The group has run a nationwide ad campaign about the case.

The attempts in the TransPerfect case to use political means to overturn a court ruling raises the question of, “Are we susceptible to political influence?” Elson told Bloomberg BNA in a phone call Sept. 13. “That’s why it’s so important that Delaware doesn’t respond to the pressure and continues to make its corporate laws in a rational, reasonable, and neutral way.”

Wake-Up Call

Harvard Law School professor emeritus and famed constitutional attorney Alan Dershowitz told Bloomberg BNA that the survey results are a “wake-up call” for the state’s courts. The Delaware legal system “has gotten lethargic about its number one place,” he said.

Dershowitz represents one of the litigants in the TransPerfect case. He is asking the U.S. Supreme Court to review the Delaware Supreme Court’s upholding of the chancery court ruling.

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at LPappas@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The survey is at http://src.bna.com/svk

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Corporate on Bloomberg Law