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.
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.
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.
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.
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.
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.
The court nullified Elon Musk's Tesla pay package not because of its size, but because it was a 'conflicted transaction' that wasn't properly 'cleansed.' The board members deciding the pay were not truly independent of Musk, and shareholders weren't fully informed, leaving no impartial decision-maker in the process.