Delaware’s Shifting Judicial Role in Business Governance

III. The Rise of Statutory and Contract Governance Litigation

A. Overview

In this section, we discuss the cases that we have classified as either “statutory governance” or “contract governance” cases—cases where the parties are calling on the Chancery Court to resolve a dispute related to ownership, control, or governance of the entity but not primarily making a fiduciary duty claim. As mentioned earlier, these cases usually primarily involve claims under statutory provisions in the DGCL (or comparable provisions in Delaware’s LLC or LP statutes) or claims relating to the entity’s governance or control that are based on contracts entered into between the parties, in most cases LLC or LP agreements.

The number of cases in each of these subcategories has grown significantly since 1999/2000 (as the number of fiduciary duty suits has shrunk) and their mix has changed. The most notable change is the appearance in the 2018 cases of a significant number of contract governance cases. At least 70 cases filed in 2018 raised such an issue—over 10 percent of the Chancery Court’s overall 2018 business (entity governance and commercial) caseload—demonstrating the growth of this relatively new area. In contrast, the 1999/2000 data shows a far smaller number of such cases.

Table 3A
Statutory Governance and Contract Governance Claims (Lead Cases Only)

Table 3B
Breakdown of the Statutory and Contract Governance Claims (Lead Cases Only)

Table 3A summarizes the contract and statutory governance cases while Table 3B provides a more detailed breakdown. A number of cases involved multiple claims, but when this occurred, each case was assigned to a single category based on the authors’ judgment as to the claim that was most important or that lay at the heart of the parties’ disagreement.

B. Statutory/Governance Claims by Entity Type

For each statutory governance and contract governance case—272 in total—we identified the entity over which a dispute was fought. While in many cases, the entity was also the plaintiff, nominal plaintiff, defendant, or nominal defendant, in some cases, the entity being fought over was not itself a party to the case, which was instead waged between different owners of the entity. All the entities were corporations, LLCs, or LPs, except for one case dealing with an alleged general partnership. The number of cases involving entities other than corporations, the traditional subject of Delaware business litigation, was striking.

Neither LPs nor LLCs are completely new to the Chancery Court, but their prominence in cases compared to twenty years ago is notable. Cases involving either LPs or LLCs were sufficiently rare among the 1999/2000 cases that they did not merit separate mention at that time. In 2018, cases centered on LPs or LLCs were much more frequent, comprising more than one-third of the statutory and contract governance cases (98 out of 272 (36%)), with the bulk of those (88 out of the 98 (90%)) dealing with LLCs. All these LLCs and LPs are privately held. Indeed, the large majority of all the statutory and contract governance cases involve privately held entities; out of the 272 cases, only 61 (22.4%) involved publicly traded entities, all corporations.

Table 3C
Entity Type in Statutory and Contract Governance Cases from 2018

Table 3D
Public Versus Private Entities in Statutory and Contract Governance Cases from 2018

C. Statutory/Governance Cases: Changes Over Time in Traditional Areas

While the most striking development between 1999/2000 and 2018 was the growth of contractual governance cases, our study also reveals changes in the mix of statutory cases, where courts were called upon to apply statutory provisions to corporate or entity disputes. A few areas deserve special mention.

1. Appraisal

Appraisal has attracted significant attention over the past two decades. Under the law of Delaware and other states, in a limited set of transactions (usually mergers), dissenting shareholders have the right to demand their shares be redeemed at a judicially determined fair price. Earlier this century, this right led sophisticated financial parties, notably hedge funds, to buy shares in target companies after announcement of a merger or consolidation, then file petitions for appraisal once the deal closed, hoping for payment above the deal price. Delaware statutory and case law during this period made this attractive for a group of investors, which produced a rise in appraisal petitions, reaching a high in 2016 when 76 petitions were filed. Following statutory changes and, most important, several 2017 decisions likely limiting the value of appraisal judgments, that number dropped and, in 2018, we found only 26 petitions filed (4 were consolidated, leaving the 22 lead cases in our count). This story has been told elsewhere; an additional point to be drawn here is that our study relies on snapshots of cases taken in 1999/2000 and 2018, and thus might have missed developments that occurred solely between those dates.

2. Indemnification and Advancement

One area where our study does show significant change is in indemnification and advancement for corporate directors and officers. In 1999/2000, there were only 6 cases annually demanding indemnification or advancement; in 2018, there were 30, a fivefold increase. Section 145 of the DGCL allows a corporation to indemnify any person who “is or was a director, officer, employee or agent of the corporation” for a range of expenses and payments related to litigation concerning that person’s service to the corporation, and requires indemnification when that person has been successful in defending such an “action, suit, or proceeding.” Section 145 also allows the corporation to advance funds to those persons to pay expenses related to defending against such claims. Many corporations, and almost all public ones, have adopted bylaws or charter provisions mandating indemnification and advancement to the maximum extent allowed by the law. Delaware’s LLC Act also provides for indemnification and advancement, but is purely discretionary; while neither indemnification nor advancement is required, an LLC may provide for indemnification and advancement in its operating agreement.

Why indemnification and advancement cases rose between 1999/2000 and 2018 is not completely clear, though one likely contributing factor is that, before 2002, officers and directors suing a corporation for indemnification could not recover legal fees in that litigation. That year, the Delaware Supreme Court decided Stifel Financial Corp. v Cochran, and ruled that “officers and directors can recover the cost of forcing the company to pay their legal bills” (so-called “fees for fees”). As one justice noted during oral argument, “It’s not much good to have indemnification if the officer’s going to be out of pocket for the money to prove [she deserves indemnification].” For whatever reason, by 2018, indemnification and advancement had become, in the eyes of one experienced practitioner, a “frequent subject of Delaware corporate and commercial litigation.”

3. Inspection Cases

One of the most important developments in Delaware corporate law in recent years has been the explosive growth in the number of inspection cases filed by plaintiffs—shareholders, LLC members, or limited partners—in an effort to get books and records from potential defendant entities. The Delaware courts have been generally willing to provide plaintiffs with access to these documents so long as they comply with the statutory requirements under section 220 of the DGCL, or its equivalent under the LLC or LP statutes. Combined with the recent Corwin and MFW cases, which urge inspection requests to uncover potential disclosure violations, investor inspection actions have become routine pre-filing investigation efforts for plaintiffs.

Table 3E
Overview of 2018 Books and Records Cases

As the first column shows, 85 lead cases were filed in 2018, 62 (73%) against corporations and the remaining 23 (27%) against LLCs (20) and LPs (3). Moving on, we see that, of the 62 corporate cases, 27 (43.5%) were against public corporations and 35 (56.5%) against private corporations, whereas none of the LLC or LP cases were against public companies. Moving to the final two columns, we see that, while all of the inspection cases request books and records, a minority of cases (24.7%) also request the defendant’s stock or ownership list. No case asked solely for a stock list.

Table 3F
Outcome and Duration of 2018 Books and Records Cases

The first important finding here is that most of these cases are dismissed without a disclosed result. This could mean that the defendant provided the plaintiff with sufficient information to satisfy it and so the plaintiff dismissed the case, or it could be that the plaintiff received no information and just decided to dismiss its case unilaterally. Without further information, we cannot be sure of which explanation is more likely.

Of the cases in which a result is known, the plaintiff either wins the case, or settles with a favorable outcome, in 19 out of 27 cases. This is consistent with the claim that inspection suits are summary proceedings that are relatively easy for plaintiffs to win in most circumstances. In the remaining 8 cases, the defendant either wins outright at trial or has the case dismissed without providing the plaintiff with information. In terms of the duration of these cases, as we noted earlier in our discussion of Table 2G, inspection cases are relatively fast compared to the other cases on the Chancery Court’s docket. The corporate inspection cases tend to be resolved on average in approximately 10 months (307 days), whereas the LLC/LP cases drag on longer with an average resolution of roughly 13 months (395 days).

A final question remains. We have connected the increased number of inspection cases to the Delaware courts’ strong recommendations that plaintiffs seek to inspect corporate records before filing suits alleging breaches of fiduciary duty. How frequently then do plaintiffs mention in those fiduciary duty suits that they previously made an inspection demand or filed an inspection case? The table below, drawn from the fiduciary duty cases discussed in Part II, sheds light on this question.

Table 3G
Breach-of-Fiduciary-Duty Cases Mentioning Prior Inspection Demand or Inspection Suit

Given the Chancery Court’s recent push for plaintiffs to make inspection requests or file inspection suits, we anticipate that plaintiffs would disclose all such requests or suits in their fiduciary duty suits. This means that our data should provide a good indication of how widespread inspection request or suits are in practice. The data show 29 complaints mentioned a prior inspection demand, while 6 complaints discussed a prior inspection action being filed. Derivative suits compose the overwhelming number of the cases with a prior inspection demand (25), whereas only a small number of class actions (4) have such statements in them. This is consistent with the faster pace for class action complaint filing that we discussed in the Original Study, which makes it difficult for class action plaintiffs to credibly threaten to file an inspection action if the defendants reject the inspection demand. Similarly, in the Derivative Suits Study, we saw that plaintiffs took longer in filing their complaints because they generally did not need to seek injunctive relief to stop a transaction. This would also explain the greater use by plaintiffs of their inspection rights in derivative suits.

IV. The New World of Commercial (Nongovernance) Litigation in the Delaware Courts

One segment of Chancery litigation barely noticeable in 1999/2000 now merits its own category. Commercial litigation involving business entities, but not raising governance questions, now makes up more than 13 percent of the Chancery Court’s docket. In contrast, at the turn of the century, it merited only footnote mention as a “small but potentially very important part of the Chancery Court’s caseload.” Even then, there was no separate count of these cases recorded; rather this group was combined with contract cases centered on governance issues (such as shareholders’ agreements), another category that has grown substantially and is reported in Part III. Together these cases averaged only 16.5 cases per year out of an average of 640 total corporate cases per year on the Chancery’s docket.

A. Breakdown of the Cases

In 2018, there were 130 such commercial cases (129 lead cases given one consolidation of two filings). These cases fall into a few distinct categories as set forth in Table 4. The largest block (71 of the 129 cases or about 55 percent) are post-acquisition disputes arising under merger agreements or similar contracts involving sale of stock, LLC units, or assets. Most frequently, these cases arise from an “earnout” or other clause where the parties tie a portion of the sales price to information that will only become available after closing. The agreement will often provide a method of calculation, the party to make that determination, and perhaps even steps for dispute resolution. Litigation follows when the parties cannot reach agreement on the amount to be paid or on one of the other specified terms.

Table 4
Breakdown of 2018 Commercial Cases

Alternatively, this post-acquisition set of disputes also arises from alleged breaches of representations and warranties contained in the merger/acquisition agreement, or claims arising under indemnity provisions in the agreement, or situations when one party or the other has failed to close. Some of the most intense litigation in this space involved breaches alleged to have been triggered by a MAC (materially adverse change) or MAE (materially adverse effect) clause. The parties to these merger agreements typically have bargained at arm’s length about the purchase and the purchase price, which distinguishes them from fiduciary duty suits or many governance claims by shareholders or others against the directors of one of the parties based on statute. A MAC or MAE clause gives one party the right to walk away from the deal if an event has occurred since the signing of the merger agreement by the boards of the two firms that has (or could be expected to have) a materially adverse impact on business, assets, or liabilities of the firm.

Commercial cases also arise outside of the acquisition context. We have sorted these remaining cases into two other buckets. The Intellectual Property category includes mostly noncompete agreements that parties entered to govern an employee’s obligations, particularly post-employment, and other promises to keep information confidential. Another bucket of claims in the commercial space involves arm’s-length bargaining outside of an acquisition or intellectual property setting that led to a dispute.

B. Notable Trends

1. Key Takeover Issues Are Arising Outside of the Fiduciary Duty Context: MACs & MAEs and Termination Fees

The 2018 data show that several of the most visible acquisition–related issues under Delaware law have arisen outside of the fiduciary duty space (e.g., Unocal; Revlon; Weinberger) that dominated the Chancery’s caseload for decades. Indeed, the most notable takeover case of 2018 likely was the Chancery Court’s opinion in Akorn v. Fresenius, later affirmed by the Delaware Supreme Court, finding a MAC or MAE had occurred, thereby permitting the other party to walk away from the merger.

MAC or MAE clause are regular provisions in merger agreements but have rarely been found by a court to actually permit one party to walk away. A 2001 Chancery case, In re IBP, Inc. Shareholders Litigation, reflects the traditional approach where the court held no breach despite a 64 percent drop in quarterly earnings and a write down of the value of a key division after the signing of the merger agreement. Then Vice Chancellor Strine held that even a contract provision as broadly written as the one in the case “is best read as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.” Against that backdrop, the Akorn court’s greater willingness to interpret the contract as permitting judicial interference with the deal to protect the buyer stands out. What is relevant for this discussion is that the pronouncement arose not as a breach of the directors’ fiduciary duty to shareholders but as a breach of contract that the buyer and seller had negotiated in an arm’s-length agreement, which the court interpreted to permit the buyer to walk away. Another of the 2018 commercial cases arose in the same way, albeit producing a more traditional finding of insufficient facts to trigger the clause. Deals that had been signed but not closed before the onset of the 2020 COVID-19 pandemic generated an increased number of similar settings and new examples of the court in a commercial case, permitting the termination of merger agreements.

There were other commercial cases in our 2018 data set raising high-profile acquisition disputes based on contract terms between arm’s-length counterparties, rather than on fiduciary duties owed by directors to shareholders in a takeover. One prominent case of the 2018 data set, Vintage Rodeo Parent, LLC v Rent-A-Center, Inc., involved a very large termination fee, a type of claim that typically has arisen in the context of a fiduciary duty–based challenge to director–enacted deal protection devices. The usual question posed to a court asks whether the directors can invoke a large termination fee to protect a friendly deal and fend off their shareholders’ preference for another bid. Typically, this claim would be tested against the Unocal standard within a fiduciary duty context. The same issue, however, can arise under a commercial case turning on contract interpretations between parties negotiating at arm’s length. In Vintage Rodeo, the parties were worried about whether their deal would be challenged by federal antitrust regulators and thus negotiated an elaborate provision permitting either party to end the contract if such a review dragged on too long. The contract established a complex decision-tree that gave either party a three-headed option in the eventuality that the government approval had not occurred by a particular date—(i) terminate immediately, (ii) extend, or (iii) do nothing (in which case each party remained bound to the contract, but could unliterally terminate later by giving notice). When both sides did nothing at the midnight deadline, the target surprised the acquirer by terminating the agreement at 6 a.m. the following morning.

The Chancery Court rejected the buyer’s argument that the seller’s continuing efforts to move toward closing right up until the deadline counted as a choice to extend under the contract. The court saw this as a straight-forward interpretation of the language of the complex contract that permitted the party to terminate if neither party had elected to extend. The buyer saw opportunistic behavior by the seller in not electing on its own to terminate by the deadline, but pouncing when the counterparty failed to affirmatively elect to extend and then to exercise the follow-on termination right available if neither party opted to terminate by the midnight deadline. This last act triggered another clause of the agreement, an unusually large reverse termination fee that obligated the buyer’s side to pay a $126.5 million termination fee, almost 16 percent of the deal price. In the usual fiduciary duty claims brought against termination fees, the Chancery Court has looked with suspicion on termination fees over 3 or 4 percent as satisfying fiduciary duty. Vice Chancellor Glasscock deferred a decision as to whether such a large termination fee was a breach of duty under the agreement while suggesting he doubted the parties intended such a clause in this situation. Leaving aside the merits of the contract decision, the case is another illustration of important takeover issues now being decided under a commercial contract umbrella, rather than the more open-ended fiduciary duty claims of a generation ago.

2. The Commercial Cases Reinforce the Modern Trend Toward Private Company Cases on the Chancery Docket

These commercial cases mostly involve privately held companies, paralleling the shift toward private firms in the statutory governance and contract governance cases discussed in the previous part. Of the 129 commercial cases in the 2018 Study, only 16 involve publicly traded companies (12.4%). The publicly held entities are concentrated in the “Failure to Close” subcategory and the “MAC/MAE” subcategories (4 of 8 of the former category and 1 of 2 of the latter category). The remainder are scattered among the other categories. Mergers-and-acquisitions scholars have observed that earnouts, the largest single segment of the commercial cases in our data set with 36 of 129 cases (28%), and similar categories of deal provisions, such as indemnification, are far less common in public company deals. The data here reflects those conclusions with 32 of 36 earnout cases (89%) occurring in private firms. Also consistent with the conclusion of Part III, the commercial cases mostly involve LLCs.

3. Jurisdictional Challenges to Chancery Review of Claims Arising in a Commercial Context

The large increase in commercial cases shown in Table 1A masks a less-appreciated counter-trend. In 10 of the 129 cases, or about 8% of the cases, a jurisdictional question led to the case being transferred from, or stayed by, the Chancery Court. The Chancery Court is an equity court with jurisdiction as that of the English Chancery Court at the time of American independence. Claims that do not fit those criteria (e.g., typical claims for damages) would be heard in a law court—in Delaware, as in many other states, the Superior Court. Fiduciary duty claims easily come within the traditional equity jurisdiction. The Delaware legislature has, by statute, extended the Chancery Court’s jurisdiction to take in various statutory claims arising under the DGCL (e.g., inspection and dissolution). Injunctive claims or similar pleas for relief where damages would be inadequate can also open the way to Chancery.

Lawyers litigating corporate transactions, who have gotten used to the expertise and predictability of the Chancery Court, have added contract provisions to their merger agreements providing that any disputes arising out of the deal (i.e., the type of litigation in the “Commercial” category) will be heard in the Chancery Court. Some litigants have been surprised to learn that the agreement by itself does not provide jurisdiction. In several cases in the 2018 data set, the suit was transferred from the Chancery Court to the Superior Court, more specifically the Complex Commercial Litigation Division of the Superior Court (“CCLD”), because the Chancery Court lacked jurisdiction. A member of the bench described out-of-state counsel as dumbfounded when their answer that “the contract provided for jurisdiction” was insufficient. In other cases, jurists have crafted other solutions in similar contexts, for example naming a superior court judge as temporary vice chancellor or staying the chancery case pending the outcome of a related matter in the Superior Court. Chancery filings have also been stayed pending outcomes of litigation in other states, part of a genre of cases that sometimes raise questions of the permissible reach of forum section clauses. A 2016 statutory amendment partially addressed such commercial corporate cases by expanding chancery jurisdiction to include sale of assets transactions that require shareholder approval. The phrasing of the amendment as covering a requirement of approval by one of more shareholders has the potential to take in some of the commercial law cases in the 2018 docket. The acquisitions portion of the 2018 commercial docket covered merger agreements, sales of stock, and sales of LLC interests more often than sales of assets by corporations, but even the expanded language of the statute will leave multiple acquisitions outside of the jurisdiction of the Chancery Court.

4. The Emergence of the Complex Commercial Litigation Division of the Superior Court as a New Element for the Delaware Courts’ “Menu” to Address Corporate Commercial Claims

The long-recognized contribution of the Chancery Court to Delaware’s dominance of corporate law has helped spur a business court movement across the country, with half the states now having their own specialized courts devoted to business litigation. Delaware, of course, already has the ultimate business court in the Chancery Court, but the jurisdictional gaps just discussed contributed to the establishment of the CCLD of the Superior Court in 2010. The Chancery Daily, a publication that chronicles developments in the Chancery Court, notes the “hockey stick” trend line in the growth of cases in the CCLD, with 24 cases referred to it in 2012, 51 by 2017, and 86 by 2020. This long-time observer notes “a concomitant increase in what might be termed … ‘sophistication.’ By this we mean that amounts in dispute have generally been increasing, household-name counsel … increasingly appear, and novel, non-routine, or nuance-y legal issues are increasingly addressed . . . .” Appeals from the CCLD go to the Delaware Supreme Court, as do the Chancery Court appeals, so that allocation of cases between the two trial courts likely does not change the Supreme Court’s docket, but the shift does impact the range of cases heard by the chancellors themselves.

Having shown the changes in the Chancery Court’s docket over the past twenty years and identified its most notable features—the decline in fiduciary duty litigation, the growth of statutory and contract governance cases, the shift toward private company parties, the new prominence of LLCs, the appearance of nongovernance commercial litigation—we now turn to two additional areas where our data can shed some light: the question of where the chancellors actually direct their time, and the persistent issue of state competition for business organizations and litigation.

V. The Changing Judicial Workload

The change in the Chancery Court’s docket over the past twenty years reveals shifts in the kinds of cases the chancellors have been called on to decide. To supplement the data showing changing composition of cases, we develop several measures that we believe give some insight into the different demands that the evolving caseload described above make on both judges and litigants regarding amount of time they spend on a case. We recognize that the relationship between different cases and the time spent on them is complex, and that our measures are imperfect. It is remarkably difficult to tell how much time and effort a particular lawsuit demands from either the judges hearing it or from the lawyers litigating it. To state what may be obvious, the amount of time judges devote to cases is rarely tracked, particularly at the state level. While in private litigation, lawyers’ time often is tracked, usually so the time can be billed to the client, those records are rarely available outside of settlements in representative litigation where plaintiffs’ fees require judicial approval. In this part, we make a preliminary attempt at such a measure, hoping to spur further work in the future.

When judges’ workload is tracked at all, it is typically measured simply by the number of cases on each judge’s docket, but this data does not provide detailed information about the demands different kinds of cases make on judges’ time. There is one significant exception (albeit for a group that does not decide that many corporate cases): The federal judiciary has adopted more detailed means of tracking judicial workload, which do attempt to quantify the different amounts of work demanded by different kinds of cases—itself an important acknowledgment that different cases do tend to take up different amounts of time. All cases filed in federal courts must initially be classified with a Nature of Suit (NOS) code, information gathered by the Administrative Office of the U.S. Courts and then used by both courts and scholars to track the changing nature of federal courts’ workloads. By itself, this simply categorizes cases by type (e.g., “Civil Rights: Voting” or “Real Property: Torts to Land”). However, the Federal Judicial Center (FJC) has performed extensive studies, including judicial surveys, to determine how much judicial work different kinds of cases require. As the FJC explained, its studies reveal that different types of cases tend, on average, to take different amounts of time—“a judge is likely to spend more time processing a newly filed patent case than a newly filed student loan case.” Based on these studies, the FJC assigns different weights to different kinds of cases; “Civil Rights: Other” cases, for instance, receive a weight of 1.92, while “Labor: ERISA” cases receive .84. These weights are then used to produce a measure of judicial workload that takes into account both the overall number of cases a judge has and the relative demands the cases make on that judge. This weighted workload data is then used “to make important resource allocation determinations about the federal district courts. For example, the Judicial Conference’s determination that a district court needs additional judges is based on the court’s current weighted filings per authorized judgeship.” Federal researchers also track other data, including how long cases remain open. Since the 1990s, for instance, U.S. district courts have generated a “Six-Month List” measuring judges by the number of motions pending that have been open longer than six months—a measure intended to target judges who were not promptly handling their caseloads.

As to lawyers’ time, studies attempting to measure how much time different kinds of cases take are rare. Studies of public defender caseloads have occasionally attempted to quantify how much time a certain kind of case should take, or the maximum number of cases a defender should handle (e.g., no more than 150 felonies per year), drawing on both measures of how a sample of public defenders spend their times and how much time experienced attorneys believe a case should receive to be properly handled. One area where data are available about lawyer billing is chapter 11 bankruptcy cases, where professionals retained by the estate must submit billing records to the court that become publicly available, and scholars have empirically studied those records, most often attempting to determine what factors determine the bills’ size and whether they can be characterized as excessive.

We conclude from these studies that it is reasonable to assume that different kinds of cases demand, on average, different amounts of judges’ and lawyers’ time, and that it is not easy to quantify these differences. In this part, we examine four different measures that, taken together, provide some insight into how much work a particular case consumes. Each measure aims to estimate either the judicial resources or the litigants’ resources devoted to a particular case. These measures, discussed further below, are: (1) the number of docket entries for a case; (2) how many days a case remained open; (3) whether the court decided any significant motions in a case, and if so, how many; and (4) whether there was a trial and/or an appeal. We acknowledge that each of these measures has its drawbacks, but believe that using them together allows us roughly to estimate the resources a particular case consumed, and to draw some distinctions between the different kinds of cases. We believe our measures prove their worth when we apply them to understand an issue raised in our study and ancillary research: how different kinds of cases make different demands on judges, more specifically whether cases involving LLCs and LPs take more time.

A. Different Skill Sets that Chancellors Employ in Entity Governance Settings

While the Chancery Court judges have been resolving statutory governance and fiduciary duty disputes over many decades, resolving the new contractual governance cases has required them to engage in a different kind of activity, and develop a different skill set, than those to which they had become accustomed. They have been quite clear about this. In 2003, then Vice Chancellor Leo Strine described the Chancery Court’s work as broadly falling into two areas, the resolution of corporation law problems, where judges “deploy[] the more contextual, standards-based tool of fiduciary duty review to keep corporate managers faithful,” and the resolution of problems in “another significant area of law important to business entities—contract law,” where the court is called upon to resolve commercial disputes between businesses by filling in gaps left by the parties’ incomplete contracting.

That same year, Justice Jack Jacobs, transitioning to the Delaware Supreme Court after eighteen years on the chancery bench, observed that the recent rise of “entirely new entity forms—LPs, LLPs, LLCs, and business trusts” required the Chancery Court “to develop a new legal epistemology . . . of thinking.” When the actions of a corporation’s managers were challenged, a court would usually ask first if the actions violated the statute or the corporation’s charter, and if not, “the substantive question would normally be resolved by application of [well-settled] fiduciary duty principles.” This was not the case with LLCs, LPs, and other novel forms. They were intended “to be governed by contract rules, customized in the organizational instrument . . . and limited only by the express prohibitions” of the entity statute. A court examining their governance had to follow a more complicated series of steps, to “start all over again” by first determining “what principles—contract law, fiduciary law, or some combination of both—will be the source of law for deciding the substantive issue for the entity in question,” before applying those principles to resolve the particular dispute. Cases involving new entities, such as LLCs and LPs, could demand additional analytic steps and could require courts to settle disputes not by applying statute or fiduciary duty, tasks to which they had long been accustomed, but by engaging in contract interpretation of lengthy and complex agreements over governance, which then-Chief Justice Leo Strine and Vice Chancellor Travis Laster described in a 2015 essay as a “head-hurting task.”

Resolving a governance dispute through contract interpretation could be more complicated and time-consuming than resolving a governance question through traditional means, due in part to the convoluted nature of these contracts. In that same essay, Strine and Laster complained that many of the governance agreements the Delaware courts were increasingly being called upon to interpret contained “unique provisions that lead to ad hoc judicial decisions interpreting specific provisions” and were “often poorly drafted and unclear, leading to increased litigation costs and inefficiencies for all parties.” While LP and LLC agreements were not, of course, created from scratch, the use of subtly different terms and clauses from one agreement to the next created “opportunities for litigation that otherwise might not exist.” In particular, the two jurists noted that attempts to limit or eliminate fiduciary duties through contract “often result[ed] in a need for discovery and thus larger litigation costs.”

These observations, and curiosity about the difference between more traditional cases looking to statute or fiduciary duty and the new contract governance cases, led us to the questions we address below, most importantly, the question of whether cases involving LPs and LLCs indeed take more of judges’ time and energy, and litigants’ resources, than do cases involving corporations. If they do, it will be another important way in which the Chancery Court’s work has changed over the past two decades.

B. Mapping Different Intensity as to Judicial Resources Consumed by Each Type of Case

In this section, we first present data using the intensity measures identified at the beginning of Part V for each type of case discussed in Parts II–IV and make some general observations. Subsequent sections expand this discussion to focus on a trio of more specific questions as to differences regarding LLCs and LPs (we find they seem to be more demanding), the specific pattern of fiduciary duty suits (we find they appear at the top of most of our measures), and some observations about commercial cases (we find they continue for a relatively long duration but entail relatively less intense activity, which may allow the parties time to work out their differences, which may be more important than the substantive judgment of a chancellor).

1. Intensity Measures Across All Governance and Commercial Cases

Table 5A presents results for five key intensity measures for nine kinds of cases: each of the three kinds of fiduciary duty cases (class, derivative, and direct), the statutory governance and contract governance cases, and the three kinds of commercial cases (acquisition-related, intellectual property, and other). We have also separately broken out the results for inspection cases as they are statutory governance cases but practically are most often tied into fiduciary duty governance.

Table 5A
Judicial Intensity Measures Regarding 2018 Lead Cases

* For cases still open, days between initial filing and 11/14/2020

These intensity results deepen our understanding of the five basic judicial functions that we have seen in the first four parts of this article. Four results attracted our attention.

First, the fiduciary duty cases (separately presented as class actions, derivative, and direct suits) take the first three spots in two of our intensity measures (docket entries and days case pending) and take three of the top five positions on substantive motions. They clearly are at the intense end of the litigation pattern. When one takes into account the inspection cases that are often tied to subsequent fiduciary duty suits, the intensity disparity increases further. At the same time, untabulated data show that each of these numbers are higher for private entities than for public entities in the fiduciary duty space. This suggests the peculiar nature of representative litigation against American corporations, with class actions the most prominent against publicly traded corporations and derivative suits at the top of claims against private corporations. The intense litigation seems to be more characteristic in private company litigation.

Second, the statutory governance cases are higher for trials and appeals, but low on docket entries, days case pending, and substantive motions. Such a pattern suggests these issues may be more focused and less complex in the statutory spaces than the other categories.

Third, in contrast to statutory governance cases, contract governance cases are second in substantive motions (first as a percentage), fourth in days open (whether mean or median), and fifth in docket entries (median). They also are second in terms of percentages of cases that have trials proceed to judgment and first in percentage of cases with appeals. Overall, these measures suggest a greater demand on the court’s time and resources for contract governance cases.

Finally, inspections are a bit sui generis. They have the highest trial ratio but are low on substantive motions and docket filings and second from the bottom on days open. They surely are the most focused set of cases that the judges are asked to consider.

2. Comparing LLCs and LPs with Corporations in Statutory and Contractual Governance Cases

In this section, we focus on a subset of our overall pool of cases, the 2018 statutory and contract governance cases, to see whether cases involving entities chiefly governed by contract, LPs and LLCs, consume more of litigants’ and judges’ resources than do cases involving corporations, which are less likely to be governed through contract. We chose not to include the inspection cases in this subset, as they typically invoke statute and move at a swifter pace, leaving 187 cases for our analysis (272 statutory and contract governance cases minus 85 inspection cases), as shown in Table 5A above. Because we are exploring the comments of Jacobs, Strine, and Laster that LLC and LP cases may be more demanding than corporate cases, we classify the 187 cases by type of entity they involve. These entities also tend to cluster on opposite sides of the statutory/contract governance divide. The LLC and LP cases tend to be contract governance cases, likely reflecting those entities’ greater use of individualized agreements to set out their internal governance rules; conversely, most of the statutory governance cases involve corporations. Of the 70 contractual governance cases, 51 center on an LP or LLC (73%), while, of the 117 statutory cases, only 24 involve an LP or LLC (21%).

Table 5B
2018 Lead, Statutory and Contract Governance Cases (Minus Inspection Cases)

To test our hypothesis, we deploy four different measures to gauge the amount of time cases involving different kinds of entities tend to demand of judges and litigants. As mentioned earlier, each of these measures has its drawbacks, but we believe that using them together allows us to construct a rough estimate of the resources a particular case consumed, and to draw some distinctions between the different kinds of cases.

As shown below, our several measures provide evidence that cases involving LLCs and LPs do consume more of litigants’ resources and judicial attention than do cases involving corporations. This would support our hypothesis that cases involving LLCs and LPs often require the court to engage in an activity, interpreting individually tailored contracts involving governance, that is more arduous than applying longstanding statutory provisions to corporate actions.

a. Measure 1: Number of Docket Entries

One measure of the amount of lawyers’ time a case consumes is the number of filings the litigants make with the court (number of docket entries). Certainly, not all filings consume equal amounts of lawyers’ time—a verified complaint should take more time than a verification—nor are all filings equally significant—for instance, in Chancery Court, an admission pro hac vice requires four separate filings. That said, it is a fair working assumption that the more docket entries for a case, the more time lawyers have spent on that case. The 187 statutory and contract governance cases discussed in this section had between 6 and 620 docket entries. We then sought to examine more closely the subset of cases that took the most time, so we identified the top quarter of cases by number of filings and focused on them. These 47 cases in the top quartile had from 117 to 620 filings. Below is the breakdown of those 47 cases by entity:

Table 5C
Docket Entries by Entity Type (Top Quartile of 2018 Cases)

LLCs and LPs are disproportionately represented among cases with the most docket entries, compared to their representation in the overall 187 cases. LLCs comprise 36.4 percent of the overall statutory and contract governance cases (68/187), but 51 percent of the top cases measured by docket entries, while LPs comprise 3.7 percent of the statutory and contract governance cases (7/187), but 10.6 percent of the top cases measured by docket entries.

b. Measure 2: Days Open

Another way to measure the resources consumed by a case is to ask how many days the case remained open, reasoning that the longer a case remained open the more resources it likely consumed. Again, the measure is imperfect; an occasional case may be open for a long period with little apparent activity. The 187 cases were open between 3 and 1,045 days. We again separate out the top quartile to focus on cases open the longest, resulting in 47 cases that were open between 725 and 1,045 days. Of these cases, 19 involved an LLC, 4 an LP, and 24 a corporation.

Table 5D
Cases Open the Longest by Entity Type (Top Quartile of 2018 Cases)

In this group of cases, LLCs were only slightly overrepresented (40.4 percent of these cases as opposed to 36.4 percent of cases overall), but LPs were again significantly overrepresented (8.5 percent, as opposed to being 3.7 percent of cases overall), while corporations were slightly underrepresented (51.1 percent, as opposed to being 59.4 percent of cases overall).

c. Measure 3: Substantive Motions

We then considered judicial resources expended on a case. One plausible way to measure how much judicial time and attention a case consumes is by the number of substantive motions a court decides in that case. We counted motions (i) to dismiss, (ii) for summary judgment, and (iii) for injunctive relief as “substantive motions.” For this measure, there is a narrower range, with no cases having more than 4 substantive motions decided. One case had 4 substantive motions decided, four had 3 substantive motions decided, seventeen had 2 decided, and forty-five had 1 substantive motion decided. Almost two-thirds of all the statutory and contract governance cases, 120 out of 187 (64.2%), had no substantive motions decided.

Once more we focus on the cases with the most activity, looking at the 22 cases with 2 or more substantive motions decided. Table 5E is the breakdown of those 22 cases by entity type.

Table 5E
Substantive Motions Decided by Entity Type in 2018 Cases

LLCs and LPs are again disproportionately represented among the cases with the most activity. LLCs comprise 36.4 percent of the statutory/governance cases, but 50 percent of the top cases measured by number of substantive motions decided, and LPs comprise 3.7 percent of statutory/governance cases, but 13.6 percent of the top cases by this measure.

d. Measure 4: Trials

Finally, the most obvious events consuming judicial time, trials, were infrequent, occurring in only 13 out of the 187 statutory/governance cases. Of these, 6 involved corporations and 7 LLCs, the 53.8 percent of LLC cases with trials (7/13) again exceeds the 36.4 percent of LLCs in the entire sample.

e. Conclusion: Time/Resources for Statutory and Contract Governance Cases

Based on our survey of all the statutory and contractual governance cases, and on the measures developed and explored above, we conclude that: (i) cases involving LLCs and LPs, which were not notable in the 1999/2000 study, had become a significant part in the Chancery Court’s workload in 2018; (ii) these cases have led the court to engage in an activity, interpretation of contracts concerning entity governance, which appeared rarely two decades ago; and (iii) evidence supports the hypothesis that these cases tend to consume more litigants’ resources and judicial attention than do traditional cases involving statutory interpretation. While LLCs comprise the bulk of these cases, we note that the handful of LPs were also overrepresented among the cases consuming the most resources, trials excepted.

3. Comparing Fiduciary Duty Cases to Other Governance and Commercial Cases in the Chancery Court

Table 5F deploys several of the measures of judicial effort discussed in Part V to examine the question of how much judicial time and effort are required by the different forms of litigation. For the breach of fiduciary duty cases, it displays the number of substantive motions decided by the court, a count of the procedural motions where the court ruled, and the number of trials and appeals litigated. In addition, Table 5F provides the mean and median for each of (i) the number of days the cases were pending and (ii) the number of docket entries for the different types of cases.

Table 5F
Judicial Intensity Measures for Lead, Breach-of-Fiduciary-Duty Cases from 2018 (Lead complaints may include multiple types of claims.)

We can make several general observations based on these data. First, many of the fiduciary duty cases have at least one substantive motion decided by the court. Direct cases appear to have more such motions, on average, than derivative suits or class actions. Also, breach of fiduciary duty cases overall are more likely to have substantive motions than any of the other categories of Chancery Court litigation. This suggests significant judicial involvement in the litigation process for these matters.

Second, procedural motion decisions generally are much less common as they do not appear in even half of these cases. In untabulated data, we find that motions to stay are particularly common in derivative suits, almost three times more common than in class actions and roughly twice as frequent as in direct suits. When we delve into the details for the derivative suits, we find that over half of these stays are issued in cases where there is a pending federal securities fraud class action and the derivative suit is paused until the completion of the federal case.

Total docket entries vary widely with fiduciary duty cases ranging from 103–144 entries on average. The highest level of filings seems to occur with direct actions, perhaps reflecting the greater number of substantive motions that are litigated in these cases. As we saw above, overall breach of fiduciary duty cases lead to the greatest number of docket filings per case of any form of litigation in the Chancery Court.

Third, the data on average number of days for a case to be pending range from a low of 525.6 for class actions to a high of 586.6 for derivative suits alleging breach of fiduciary duties, although the median value is highest for direct actions (678). Again, if viewed in combination with all of the other forms of Chancery Court litigation, the breach of fiduciary duty cases last substantially longer.

Finally, we see that there are relatively few trials in any of the breach of fiduciary duty categories as a percentage of cases filed. Finally, appeals appear uncommon with none of the categories recording a 10 percent appeal rate.

4. Intensity of the Commercial Cases

Turning to the commercial cases, we again find that different types of cases make different demands on the court. Table 5A reflects various intensity measures for which we collected data, not just for the commercial cases, but for all the cases on the Chancery docket related to business entities. Looking only at the commercial cases in this part, the post-acquisition merger disputes are the most numerous of the commercial cases, stay on the docket the longest (measured by cases that have been completed), but have the fewest docket entries. The only three trials in the commercial cases, and the only two appeals, are found in this category. The MAC/MAE cases, one of the subdivisions of the acquisition category, feature the longest average time on the court’s docket and the greatest number of docket entries per case of any subcategory of cases across all of the docket.

In contrast, the intellectual property cases spend the least time on the court’s docket among the commercial cases, but generate the greatest number of docket entries. They also give rise to the great majority of injunctive motions among the commercial cases, but a smaller average number of motions to dismiss. (Motions for an injunction, not reported in the earlier table, are set forth in Table 5G as to the commercial cases.)

Table 5G
Commercial Cases—# Motions Decided

VI. The Changing Nature of State Competition

A. The Question of Competition: Evidence from Delaware Budget Numbers

The growing prominence of privately held firms and of noncorporate entities, such as LLCs, in the Chancery Court’s caseload, as described in Parts III and IV, led us to consider possible implications of this data on the perennial scholarly debate over whether Delaware competes for incorporations and entity organizations. As documented in Part I, over the past twenty years, the Chancery Court’s docket has moved away from publicly held corporations and toward privately held firms, with notable changes, including: the shifting composition of fiduciary duty suits, so that a much larger percentage of these suits involve privately held firms in 2018 than in 1999/2000 (24 percent in the Original Study, 63 percent in 2018); the growth of statutory and contract governance cases, the large majority of which involve private entities (over 77 percent, 211 out of 272); LLCs’ new place in the caseload; and the new prominence of commercial cases, mostly involving private entities.

This change in the underlying characteristics of the companies subject to litigation suggests a seemingly surprising shift in the nature of competition over business entities. The conventional wisdom at the time of the Original Study was, and may still be, that Delaware has chiefly been interested in the incorporation business of—and the Chancery Court has preeminently been a venue for litigation concerning—publicly held corporations. That Delaware is the favored incorporation site for publicly held firms (meaning almost always corporations) is obvious; as of 2019, for instance, 67.8 percent of the Fortune 500 companies were incorporated in Delaware, as were almost 90 percent of all firms going public that year. Exactly how Delaware has attracted these incorporations, and who benefits, have been subject to seemingly interminable debate, but as discussed further below, most would agree that among the legal and institutional features Delaware offers corporations is an up-to-date corporate statute, a thoroughly developed body of corporate caselaw, a commitment to maintaining optimal corporate law, and an efficient court system staffed by judges sophisticated in corporate law. What the state gets in return is also obvious: revenue. For 2021, 28 percent of Delaware’s state budget was estimated to be provided by corporate franchise tax and business entity fees deriving from corporations, LLCs, LPs, and other business entities organized under its laws. Additional benefits accrue to groups within Delaware, such as the Delaware bar, which profits from the legal and organizational work spun off by firms organizing in Delaware, and the judges of the Chancery Court, whose service on the nation’s preeminent business court gives them unusual prominence for state judges and unusual employment opportunities after they leave the bench. Thus, not only the state as a whole, but also influential constituencies within the state, gain from Delaware’s unique position.

Delaware targeted public corporations “because [for a long time] that’s where the money was.” In contrast, as Ian Ayres explained almost thirty years ago, little income was to be gained from seeking the incorporation business of smaller closely held corporations, the most common privately held form in the twentieth century. Delaware’s corporate franchise tax, then and now, has been tiered in a way that required a far larger payment from a large corporation than a small one. While the lowest tax currently levied on a corporation is only $175, it rises with the size of the firm, and the largest corporations can pay an annual tax of up to $250,000, which makes large corporations especially desirable for the state. Delaware also did not actively seek closely held corporations because some aspects of its corporation law that were attractive for publicly held firms were undesirable for many closely held ones; it could not have a corporation code that was optimal for both, and it chose the approach more attractive for public corporations. Prime examples are that the DGCL does not include any remedy for oppression in the closely held firm, in contrast to the MBCA, and the Delaware Supreme Court refused to impose any special fiduciary duties in close corporations in its famous decision in Nixon v Blackwell. This is not to say that closely held corporations never incorporated in Delaware, only that the state did not pursue them as avidly as it did public corporations. Today, Delaware still depends heavily on large, usually public, corporations for most state revenue arising from incorporation fees. While there is some evidence that large closely held corporations also tend to incorporate in Delaware, the state still emphasizes its draw for public corporations; a recent state report noted that, in 2015, “90% of [Delaware’s] corporate franchise taxes c[a]me from just 9,300 of the largest franchise taxpayers—many of them publicly traded entities.”

Given this history, the prominence of closely held firms (corporations but also LLCs and LPs) in the 2018 Chancery caseload may be surprising. It does though fit with other recent evidence showing that Delaware is becoming an attractive legal home for the new dominant form for closely held firms, the LLC. Despite the fact they are almost always privately held, significant numbers of LLCs with principal places of business elsewhere choose to organize in Delaware. In a 2011 study of LLCs with over 50 employees, Bruce Kobayashi and Larry Ribstein found that over 60 percent organized in Delaware if they did not organize in their home jurisdiction, while a 2012 study by Jens Dammann and Matthias Schundeln of much larger LLCs, those with 5,000 or more employees, found “62 percent are formed outside their home state, and of th[at group], more than 95 percent are formed in Delaware,” meaning that 58.9 percent of the largest LLCs organized in Delaware, a number approaching the 67.8 percent of Fortune 500 companies organized in the state.

Both numbers and financial data support the claim that LLCs now favor Delaware, and show this is largely a twenty-first century phenomenon. LLCs were rare until the mid-1990s, when changes in federal tax law and adoption of new LLC statutes nationwide encouraged their formation. This is when the number of LLCs organized in Delaware began to rise. In 1995, only 6,933 LLCs were organized in Delaware, compared to 48,168 corporations; by 1998, the numbers were 30,793 LLCs and 48,885 corporations. As early as 2003, the number of LLCs organized in the state surpassed the number of corporations, and the imbalance in numerical terms has only grown since then. Between 2003 and 2019, incorporations in Delaware increased by about 40 percent, while LLC organizations in the state increased by almost 300 percent. LLCs, in sum, are now a vital slice of Delaware’s entity organization business.

Chart 6A

Entities Formed in Delaware, 2003–2019

Table 6A
Entities Formed in Delaware, 2003–2019

Revenue has followed. While Delaware’s LLC–derived revenue was negligible before the turn of the century, starting in the early 2000s, it grew rapidly. In 2000, less than 1 percent of the state’s revenue came from LLC and LP fees and taxes, but by 2013, 5 percent of the state’s revenue derived from such fees, and in 2020, the state estimated that 7.4 percent of its total revenues, $338.2 million, would come from fees paid by LPs and LLCs. The below table shows the income provided by corporate fees (the corporate franchise tax, “CFT”) and comparable LLC/LP taxes and fees since the year 2000. Equally significant, revenue from LLCs and LPs has grown over the past two decades even as income from corporations remained flat (by percentage). Income from the CFT has remained at about 20 percent of state revenues since 2000, dipping lower in periods of economic distress, while LLC/LP–derived income has grown almost every year, until it now constitutes nearly one-third of Delaware’s income from business organizations, as shown in Chart 6B.

Chart 6B

LLC Income as Share of Delaware’s Entity Revenue

Table 6B

Delaware Revenue from CFT and LLC/LPs, 2000–2021

Delaware’s budget numbers reveal that Delaware’s percentage of state revenue attributable to business entities is even larger than the numbers derived by looking only at franchise/tax revenue. Over the past decade, another approximately 10 percent of the state’s revenues came from “Abandoned Property,” which includes property in the custody of corporations or other entities organized in the state. Following the 1993 U.S. Supreme Court decision in Delaware v New York, all unclaimed intangible personal property for which the holder does not have an address on record escheats, after a period of time, to the state of incorporation. Delaware thus has been able to claim abandoned “accounts payable, accounts receivable credits, unredeemed gift cards or gift certificates, uncashed dividend checks, unclaimed merger consideration, dormant equities, and unclaimed royalty payments” in the custody of business entities organized in the state. Properly measured, then, close to 40 percent of Delaware’s budget can be traced to incorporations and entity organizations.

B. The Traditional Story of Competition in Corporate Law as Illustrated by Delaware Law for Publicly Held Corporations

Our study of Chancery Court cases in 2018 showed the surprising predominance of closely held firms, both closely held corporations and LLCs. When we looked to data about business organizations overall, we found a similar development, with the data revealing the numerical predominance of LLCs over corporations in Delaware and, with LLCs’ growing contribution to Delaware’s fisc, indicating that Delaware now has good reason to compete for LLC organizations. All this raises two further questions: Is Delaware now competing for LLC organizations? And, separate from that question: Are Delaware’s courts competing for LLC litigation?

As a prelude, we recognize that, to some extent, the two competitions are inextricably linked. The “package” that attracts companies to organize in Delaware often also makes it attractive to litigate in Delaware’s courts. Given this overlap, a common approach has been to collapse the two questions as integral parts of a unified topic that goes something like this: Delaware’s attractiveness as a place of entity organization reflects an integrated package that includes:

• An up-to-date corporate statute enabling business participants to take advantage of the value of separation and specialization in business entities in which directors have broad authority to make most corporate decisions and the courts’ initial response to challenges to director power is to defer to director decision-making;
• A thoroughly developed body of case law with common law precedent across a broad range of legal issues (particularly important given that so much of corporate law disputes are resolved under the common law of fiduciary duty) that is more likely to give participants in Delaware-organized firms clear answers for corporate governance questions than case law in other states where corporate cases are few and far between; and
• An efficient judicial system with experienced, sophisticated jurists who often come to the bench with a background in corporate transactions, who see corporate law issues every day, who decide cases without juries, and who understand nuances of corporate law better than judges in other states for whom a corporate law question will be a once-in-a-blue-moon kind of event. These expert judges provide timely responses, and appeals of their decisions go straight to the Delaware Supreme Court, a bench of five jurists more well-versed in corporate law than would be found in the highest court of any other American jurisdiction.

What does Delaware get in exchange for developing and maintaining this system? This state that is 49th in size and 45th in population among the 50 states has long attracted the majority of incorporations of America’s public corporations and that in turn has produced very tangible advantages:

• Money; as shown above, the franchise fees for entity organization brings in a substantial part of the state’s income, long above 20 percent and recently moving toward 30 percent, and the escheat of abandoned personal property bumps this income to around 40 percent of the state’s budget;
• The Wilmington bar has a book of business more sophisticated and larger than lawyers in a city of 70,000 might expect; lawyers across the country search out their expertise in mergers and other corporate transactions, including sophisticated litigation;
• The prominence of Delaware judges, as measured, for example, by attention that Delaware opinions receive nationally, and the deference and invitations that these judges receive to participate in policy and academic discussions dwarf the position of judges or justices in other states; and
• Delaware has attracted corporate service companies that provide another economic boost to the state’s economy from being the preeminent jurisdiction for publicly held companies.

C. Competition for LLCs: A Somewhat Weaker Delaware Package but Still Attractive to LLCs (and Increasingly Lucrative for Delaware)

Why are LLCs now disproportionately organizing in Delaware when, thirty years ago, closely held corporations did not do so? (We discuss LPs here as well, but focus on LLCs because there are far more of them than LPs.) Delaware was not attractive to closely held corporations in large part because, as explained above, some features of its corporation law desirable for publicly held corporations (e.g., refusal to provide default special protection to minority shareholders) was undesirable to smaller, closely held corporations. Delaware’s LLC law also does not provide default protection in the form, for instance, of an oppression remedy, so one would think there remain disincentives to organizing in Delaware. This is counterbalanced and perhaps outweighed by the law’s emphasis on maximum contractual freedom for LLC participants, which allows LLC members to draft provisions to protect their interests, if so desired. So, it could be that more closely held firms have organized in Delaware because, unlike with closely held corporations, Delaware’s LLC law does not actively discourage them from doing so.

It is also possible that Delaware has begun actively competing for LLCs in the same way it competes for public corporations, by providing features such as favorable LLC laws and a skilled judiciary. Certainly, the state’s growing income from LLCs and LPs gives it an incentive to compete, and aspects of its law, notably the ability of participants in alternative business entities to modify or waive fiduciary duties, may attract firm organizers. But if this is the case, it is competing for LLCs in a different way than it is competing for corporations. As Mohsen Manesh has observed, drawing on work by Ehud Kamar and Marcel Kahan, whatever legal-institutional “package” Delaware is offering LLCs appears far less attractive than the package it offers public corporations. Kamar and Kahan pointed out that Delaware charges large corporations significantly higher fees and taxes for incorporating there than do other states, successfully engaging in discriminatory pricing. Delaware can only do this, however, if it is offering these corporations a desirable product that other states, for whatever reason, cannot match. In contrast, Manesh points out, Delaware does not engage in discriminatory pricing with LLCs and LPs. These entities pay a flat $300 franchise fee for organizing in Delaware regardless of size.

Thus, while Delaware is obviously offering a desirable legal–institutional regime to LLCs and LPs, as demonstrated by the fact many are willing to incur some mild inconvenience to organize there, the state does not appear to be offering something so distinct that it can charge a great deal more than competitors. Even the elements of Delaware LLC and partnership law most often seen as distinct and likely to appeal to business organizers—contractual freedom and the ability to completely eliminate fiduciary duties—are not unique to Delaware. From this, some scholars have concluded that it is not Delaware’s LLC and partnership law that specifically draws entities to the state, but rather the background institutional features it already offers all businesses. As Jonathan Rohr concluded, “Delaware’s primary competitive advantages seem to be other, Delaware-specific benefits (such as its generally superior legal infrastructure) rather than ways in which the content of its law differs from that of other states.” In other words, Delaware may be competing for LLC and LP organizations, but, if so, the statutory product it is offering those entities is not that much better than offered by other states, and its main competitive advantage probably lies in the legal–infrastructure package it offers all business entities, including corporations.

D. Competing for LLC Litigation

A second possibility exists, which focuses on a different player in Delaware. Regardless of whether the state is competing for LLC (and LP) organizations, Delaware’s courts may be engaged in competition for LLC (and LP) litigation. The availability of the Chancery Court is certainly part of the “package” that Delaware offers all business entities, but we ask whether the court has its own incentives and opportunities to seek out new business in the form of lawsuits. Certainly, the court’s changing caseload over the last twenty years could be described as a decline in a mature market (fiduciary duty litigation) offset by expansion into emerging ones (contract governance and commercial litigation). Developments over the past twenty years also show that Delaware’s courts will move vigorously to maintain their position as a preeminent forum for business adjudication. A few examples suffice: When, in the early 2000s, Maryland created a new forum for technology cases that threatened to draw out-of-state cases, Delaware “altered its rules to allow the Court of Chancery to adjudicate technology disputes.” In 2003, Delaware instituted a voluntary mediation program for significant business cases in Chancery Court. In 2009, the state began allowing Chancery Court judges to hear arbitration matters (a program struck down by the federal courts). In 2010, the Delaware Superior Court formed the CCLD at the instigation of the Delaware bar, making no secret of the fact that the new division, much like the other developments, would “help maintain Delaware’s status as a top venue for business litigation.” And when cases involving Delaware corporations began being filed in other state courts, its courts blessed forum selection bylaws that would direct those cases back to Delaware’s courts.

Yet there are reasons to doubt that the Chancery Court is single mindedly trying to attract LLC and LP cases or having much impact, if it is. To be sure, the court and Delaware’s bar have strong incentives to maintain those features that attract business litigants in general—e.g., knowledgeable judges, up-to-date statutes, speed, and lack of jury trials. But targeting LLC and LP litigation faces obstacles. For one—and we draw again on observations by Mohsen Manesh—the specific nature of the contracts entered into by LLC and LP participants makes it harder to develop a body of legal precedent that will draw litigants or organizations. One reason corporate litigants are attracted to Delaware is the ramifying bodies of case law regarding business entities that its courts have developed over the last century and that will, presumably, continue to grow.

LLC and LP litigation may not, however, result in robust network effects because of the customized nature of LLC and LP agreements. According to Strine and Laster, “[j]udicial decisions on alternative entity agreements . . . tend to be ad hoc interpretations of specific provisions that do little to advance the development of common understandings among market participants. Because they turn on contractual clauses that frequently differ from case to case, the decisions produce few general principles that could lead to predictable and reliable practices.” Professor Michael Klausner, who has explored network effects, including in litigation, expected contract litigation, including litigation over terms of the corporate contract, to produce greater certainty: “When the use of a contract term becomes widespread, its value may rise . . . . More judicial precedents can be expected, on average, to enhance the clarity of the term. Common business practices implementing the term may become established, further reducing uncertainty. Legal advice, opinion letters and related documentation will be more readily available, more timely, less costly, and more certain.” But with LLCs and LPs just the opposite may happen, as judicial decisions produce changes in contract language. According to Strine and Laster: “Even when language appears familiar, it often departs subtly from the precise terms interpreted in earlier judicial opinions—and intentionally so. Alternative entity drafters . . . respond quickly to judicial constructions by tweaking or rewriting their provisions.” Paradoxically, then, while litigation over LLCs and LPs may be more drawn-out and intense than litigation over corporations, it may produce less useful precedents than does corporate litigation. A second point should also be made, though it is more speculative. It may be that the Chancery Court judges are less interested in attracting LLC and LP litigation than they are in attracting litigation over public corporations. Interpreting the long, convoluted governance agreements typical of large LLCs and LPs is not the most enjoyable work; Strine and Laster spoke of the “head-hurting” nature of the activity, and more recently Vice Chancellor Glasscock, in a case that required him to interpret an LLC agreement, expressed frustration at the task in a memorable passage: “This matter requires me to construe an LLC operating agreement. My father was an engineer. He frequently remarked that machinery would not be so poorly designed if the designer were condemned personally to keep it operating. I am a lawyer. I am struck that LLC agreements would be better drafted if the drafters were compelled to litigate over them, or worse, construe them as judges.” Furthermore, disputes over LLC or LP agreements rarely attract the media attention that is sometimes drawn by high-stakes litigation over public companies, nor does the one-off nature of such cases give judges the opportunity to shape national economic developments that was provided, for instance, by litigation over takeovers in the 1980s.

To sum up, while it appears a reasonable hypothesis that the increase in Delaware LLC litigation is traceable to the state competing for LLC organizations or to the Chancery Court competing for LLC litigation, or both, our study produced little evidence to support either of those claims. Delaware’s courts have not undertaken steps that would constitute competition for LLC and LP litigation in particular, nor has evidence appeared to support a claim that the state has specifically bent its efforts toward attracting those entities’ organizational business. The more likely conclusion is that LLC and LP business, both organizational and litigation, has risen in Delaware because the foundational qualities of Delaware’s legal infrastructure that have long attracted incorporations to the state are also attracting LLC organizations, and that it is the rising number of LLCs organized in Delaware that eventually produced more LLC cases for Delaware courts. That said, the growing importance of LLC and partnership fees to the state, and of LLC and LP cases to the Chancery Court, does create strong incentives for both to maintain their attractiveness to these business entities.

Conclusion

This article examined the shifting nature of litigation in the country’s most prominent business court, Delaware’s Court of Chancery, over the past twenty years. A comparison of the Chancery’s workload at the turn of the century to that in 2018 reveals deep changes in the work of the court and thus in the nature of litigation over governance of American companies. In 1999/2000, the court spent most of its time applying fiduciary duties to resolve disputes over acquisitions involving public corporations. Today, the sweep of its work is much broader. It still decides fiduciary duty cases, but those cases are a much smaller percentage of the court’s workload. The chancellors are now spending more of their time applying statutory provisions to resolve governance questions in corporations and other business entities, and, in a new development, they are increasingly called upon to resolve disputes in LLCs and other entities by interpreting the governance contracts—the LLC operating agreements and similar documents entered into by their participants. The docket is no longer dominated by public corporations; today, a majority of cases involve private entities, most often non-publicly held corporations but increasingly LLCs and LPs. And the court is being called upon to decide a significant amount of straightforward commercial litigation, disputes over contracts entered into between parties at arm’s length, most often involving post-acquisition disputes but also employment-related intellectual property disputes. While the chancellors used to spend most of their time doing one thing, applying fiduciary duties in acquisition cases, they now do many things, employing a range of legal tools and methodologies to resolve governance and other disputes in a diverse array of business enterprises. Having presented these empirical findings, this article concludes by drawing on that data to make forays into two related areas. First, it suggests that the changing nature of the court’s docket indicates that its judges are engaged in new forms of decision-making largely absent twenty years ago; and second, it documents that Delaware’s budget is increasingly reliant on LLC organizations, a finding with important implications for the perennial question of state competition for business entities.

Appendix

Table 2H.1
Monetary Relief in 2018 Class Actions Against Public Corporations

Table 2H.2
Nonmonetary Relief in 2018 Class Actions Against Public Companies

Table 2H.3
Monetary Relief in 2018 Class Actions Against Private Companies

Table 2I.1
Monetary Relief in 2018 Derivative Cases Against Public Corporations

Table 2I.2
Nonmonetary Relief in 2018 Derivative Cases Against Public Companies

Table 2J.1
Non-Monetary Relief in 2018 Derivative Cases Against Private Corporations

The authors would like to thank Steve Bigler, Sam Glasscock, David Hoffman, Ken Lagowski, Jonathan Lipson, Morgan Ricks, Neel Sukhatme, and Robert Guerrero, librarian at Richards, Layton & Finger, for comments and assistance; Vanderbilt law students and graduates Jing Xu, Yulin Wu, and Jie Shi, for excellent research assistance; and the editors of The Business Lawyer for excellent comments and edits.