The current threat of companies leaving Delaware is not new. In the 1980s, after court rulings increased director liability and limited hostile takeover defenses, boards threatened to leave. This pressure forced Delaware's legislature to amend its corporate code, making it significantly more protective of managers and directors.
Related Insights
A board member's role includes flagging strategic risks, including geopolitical exposure that could drastically limit future acquirers or prevent an IPO. Advising a CEO to relocate teams from a high-risk country is not operational meddling, but a core governance duty.
When facing government pressure for deals that border on state capitalism, a single CEO gains little by taking a principled stand. Resisting alone will likely lead to their company being punished while competitors comply. The pragmatic move is to play along to ensure long-term survival, despite potential negative effects for the broader economy.
The financial benefit of many shareholder lawsuits is illusory. Payouts for breaches of duty typically come from Directors & Officers (D&O) insurance policies, which the corporation itself pays for. This circular flow of funds means shareholders are indirectly paying for their own settlement, questioning the efficacy of such litigation.
Corporate statutes in Delaware are not primarily created by legislators, who often lack expertise. Instead, the Delaware State Bar Association's corporate law section drafts proposed statutes in a technocratic manner, which the legislature then typically rubber-stamps, further shielding the process from partisan politics.
Aggressive Liability Management Exercises (LMEs), common in the US, are rarer in Europe. This isn't due to a gentler culture but stricter laws where board directors can face criminal charges for insolvency. This incentivizes collaborative restructuring over contentious, US-style creditor battles.
Competition from states like Nevada and Texas, which market themselves as having higher barriers to shareholder lawsuits, is forcing Delaware's hand. To avoid losing its corporate charter business, Delaware has also weakened its own laws, contributing to an overall erosion of shareholder rights across jurisdictions.
Delaware's status as a corporate haven is no accident. In the late 1800s, it strategically designed its legal system to be pro-business by constitutionally mandating political balance on its courts and requiring a two-thirds legislative vote to change corporate code, insulating corporate law from political pressure.
Investment research suggests the significant performance signal in governance isn't achieving a perfect score, but rather avoiding companies in the worst decile. The key is to steer clear of clear red flags—like misaligned boards or poor capital allocation—as this is where underperformance is most clearly correlated.
After the problematic Bowwater acquisition, Home Depot's founders realized their growth ambitions were outpacing operational capacity. In an act of self-regulation, they asked their board to pass a resolution capping annual growth at 25%, using their governance structure to enforce discipline and prevent future mistakes.
The Delaware Court of Chancery is a specialized 'Court of Equity' that operates without a jury. This structure, a holdover from English law, allows expert judges to rule on corporate disputes based on principles of fairness and justice, rather than being bound by rigid technical rules of law.