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The Delaware Court of Chancery has a long history deciding on equity and fairness between parties.
The tiny coastal state of Delaware is widely recognized as the best state in which to form a company, not only in the United States but throughout the world. More than half of the companies listed on the New York Stock Exchange and NASDAQ call Delaware home, as do 65% of the Fortune 500 companies. One of the most compelling reasons for this is the Delaware Court of Chancery.
The Delaware Court of Chancery is widely recognized as the preeminent forum in which to settle disputes that involve fairness decisions involving Delaware corporations, LLCs and other business entities.
The Delaware Court of Chancery is a non-jury trial court that serves as Delaware's court of original and exclusive equity jurisdiction, and adjudicates a wide variety of cases involving trusts, real property, guardianships, civil rights and commercial litigation.
The court was first established in 1792 and is based on the English model of a Chancery Court. In old English law the King was the final maker of laws, but the Chancellor would hear and decide cases where there was no existing law or legal remedy in place.
A noteworthy aspect of a Court of Chancery is the equitable expertise that is implemented by judges rather than a jury. One Chancellor will hear your case and make the rulings, unlike the U.S. Supreme Court where the case is heard by all nine sitting Justices and a decision is voted upon. This is a significant aspect, because the Chancellors are skilled and experienced in corporate law; thus there is no need to educate an uninformed jury on the intricacies of Delaware corporate law, which saves time and legal fees.
Therefore, litigants can rely on fair and unbiased decisions based on the law rather than public opinion. Chancellors rely on more than 200 years of case law (history) in making their rulings. This tends to make the decisions of the Chancellors more predictable than decisions made by juries, and makes businesses more confident of a decision based on law and precedent rather than emotions and prejudices.
Corporations of all sizes are formed in Delaware because business owners understand that the Chancellors on the Court of Chancery are using the business judgement rule.
The Delaware Business judgment rule directs the Court to respect the good-faith decisions of the company’s Directors, even when the outcome of their decision may not have been the best in hindsight. Directors are charged with making informed, independent decisions with care and loyalty and the absence of self-dealing. When the Directors shirk their duty to be loyal to the best interests of the company, or to take due care in making their decisions, or when they engage in self-dealing and fraudulent actions, the Court of Chancery has the power to punish them by levying personal fines and removing them from office.
When shareholders sue the Board of Directors, the case is called a “derivative suit.” This makes up the majority of the high-profile cases brought to the Court of Chancery.
The majority of the litigation heard in today’s Delaware Court of Chancery consists of corporate, trust and estate matters. The interest of the stockholder is the money the company makes. They want it to be distributed to the shareholders as dividends. The Directors, however, hold the power to dictate how the money will be spent, and they will often opt for buying out competitors, creating an expansion program or initiating huge salaries for company officers. When the two groups clash, the case goes to the Delaware Court of Chancery.
The most notable power of the Court is its ability to issue injunctions and temporary restraining orders, and is most frequently exercised in corporate differences over mergers or acquisitions. A typical merger dispute will see a plaintiff seek temporary relief to preserve the status quo until a trial can occur. If the need should arise, the Court of Chancery may order issues of fact to be tried by a jury in the Supreme Court of Delaware.
The Court also has jurisdiction over several other matters; it has the sole power to appoint guardians of the property and person for mentally and/or physically disabled Delaware residents and can also assign guardians for minors.
The Court of Chancery has earned the respect of both the domestic and international business world, and it is the wisdom and consistency of the Chancellor and Vice Chancellors that continues to motivate new entrepreneurs to incorporate their startup companies in Delaware.
The Delaware Court of Chancery consists of five justices; the head of the Court of Chancery is known as the Chancellor while the other four are called Vice Chancellors. The Chancellors must be extremely learned in the law, although there is no requirement to have practiced as a lawyer. They must be residents of the state of Delaware.
All Chancellors are nominated by the Governor of Delaware and confirmed by the Delaware Senate. They serve 12-year terms. In addition to the Chancellors, there are two Masters in Chancery that are chosen by the Chancellor. All Chancellors and Masters must be members of the Delaware Bar Association in good standing.
The current Delaware Court of Chancery is comprised of:
With more than 200 years of judicial precedent, the Delaware Court of Chancery is hailed as the nation’s leading forum for settling corporate disputes, and is one of the most important reasons why Delaware is the most favorable environment for the world’s commercial affairs.
THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.