In In re The Topps Company Shareholders Litigation, previously noted and linked by Francis Pileggi and Rob Jackson, Vice Chancellor Strine denied defendant’s motion to dismiss or stay an action to enjoin a merger. The defendant was concerned that a NY court would enter a motion in a case pending there arising out of the same merger, thus presenting defendant with dual proceedings and, possibly, rulings. However, VC Strine was concerned with something more important than party convenience: the need to have Delaware corporate cases decided by Delaware judges.
Strine first noted that, in the context of a derivative action, the court need not defer to the first-filed action per McWane Cast Iron Pipe Corp v. McDowell-Wellman Eng’ing Co., 263 A. 2d 281 (Del. 1970). What matters in these cases is the welfare of the shareholders rather than the rights of the first-filing nominal plaintiff.
Moreover, the first-filer's equities are weak given what VC Strine called the “unseemly filing Olympiad” characteristic of shareholder litigation, where numerous actions are filed in a short time. (By the way, this isn’t the first time Strine has used this image to describe a shareholder suit. In Cox Communications, which I analyzed here, Strine said: "[The suit] is exemplary of hastily-filed, first-day complaints that serve no purpose other than for a particular law firm and its client to get into the medal round of the filing speed (also formerly known as the lead counsel selection) Olympics.)
Perhaps most importantly, Strine emphasized Delaware’s need to interpret its own law. Here he lines up with Chancellor Chandler’s recent Ryan opinion, discussed here. Both judges stressed the novelty and importance of the issue – a private equity buyout in Topps, backdating in Ryan – and Delaware’s interest and expertise in developing coherent corporate case law.
I’m sympathetic with this reasoning, but wonder about its implications. Strine implies that what matters here is Delaware’s interests. But what really matters is what the contracting parties – i.e, the shareholders -- want. They would likely want Delaware adjudication, for the reasons Strine suggests. So why don’t they contract for it, by inserting a provision in the corporate charter? Or why doesn't Delaware clarify the issue by mandating a Delaware forum in the Delaware corporation statute? That wouldn’t bind New York if the case is filed there, anymore than would any other choice of forum clause. But it would give Delaware a more solid basis for insisting on hearing the case than simply resting on the “state’s” interest.
Maybe all Strine meant is that, where there are dueling courts, the likely shareholder preference should be at least a marginal consideration in favor of Delaware deciding the case. But then what if a Delaware corporation explicitly contracts for a New York forum? Should a Delaware court then defer, or should it still insist on Delaware's interest in making corporate law?
Perhaps given Delaware’s interest in maintaining the coherence of its corporate law, it might require use of its courts as a condition of using its law. Delaware would then have to balance its reputation for enforcing contracts against its need to protect its corporate franchise. It’s interesting that the Delaware Supreme Court, when directly confronted by a similar issue, held in favor of contract. In Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999) the court relied on the freedom-of-contract provision in the Delaware LLC act in enforcing an LLC agreement requiring all disputes to be resolved by arbitration or by court proceeding in California. The court did so despite a Delaware statutory provision that might have been read as permitting suit in Delaware notwithstanding the agreement.
Finally, maybe one could argue that the courts -- whether New York or Delaware -- should respect the parties' choice of a non-Delaware forum to adjudicate a Delaware corporation case. After all, such a clause would subject Delaware courts to some market discipline.
Of course this is quite speculative: Since Delaware's courts likely are a big factor in the success of its law, it's difficult to imagine why a firm would choose the law and not the courts. My point is simply to articulate what is going on in cases like Topps -- that is, whether it's contract or regulation.
In general, it’s important to emphasize that a corporation is really no different from any other contract with respect to choice of forum and law. Corporate law and the internal affairs doctrine is best understood in the general context of the market for law. See my article with Erin O’Hara, Corporations and the Market for Law. Thus, the principle articulated in Topps also should apply to non-corporate cases. Indeed, Strine recognized this when he noted (n.43) that the state interests he relied on regarding Delaware’s interest and expertise in corporate matters could equally be asserted by New York or any other state which sought to compete on non-corporate law just as Delaware does for corporate law.
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