When corporate relationships break down, they can usually only be resolved through litigation. If your company is incorporated in Delaware, this usually means you will be headed to the specialized Delaware Court of Chancery. As a result, your company and your investments will be governed by some of the most detailed and technically nuanced statutes and case law in the nation. This often leaves investors, business leadership, directors, and stakeholders wondering how Delaware law works and why Delaware matters so much for corporate law.
At Shlansky Law Group, our team helps clients and Delaware businesses every day. Throughout our many years of experience, we have represented managers seeking to protect their companies and minority investors fighting for their right to have a say. When it comes to Delaware business disputes, knowing the rules and procedures is half the battle. Call us today at 347.378.6990 for a confidential consultation.
Frequently Asked Questions About Delaware Business Law
Why is my business governed by Delaware law if it isn’t located there?
This is one of the most counterintuitive rules of corporate law. When a company headquartered in New York City has its operations center in Philadelphia, and is then involved in an internal dispute, it initially seems that either New York or Pennsylvania would be the most relevant state.
However, businesses can generally be incorporated in any state, regardless of whether they operate there or have a physical presence. Delaware is an attractive choice for registering a company because it has detailed statutes and specialized courts focused on corporate law.
Once a company is incorporated in a state, its internal mechanics are generally governed by the “internal affairs doctrine.” This doctrine states that disputes about a corporation’s internal affairs ought to be resolved using the laws of the state of incorporation. Delaware courts strongly enforce this doctrine. This means your business may be governed by Delaware law, even if your business is based in and operates entirely on the West Coast.
What is the Court of Chancery, and why does it matter?
In most states, trial courts have “general jurisdiction” and “powers of law and equity.” They may also be required to have factual determinations made by juries that have no formal knowledge of the law and no interest in it. The Delaware Court of Chancery is the exact opposite.
General jurisdiction means that the court can hear a wide variety of cases. For example, a trial judge in Indiana might preside over a felony jury trial one day and then try a medical malpractice lawsuit from the bench the next. Most states expect their judges to be a “jack of all trades,” which often prevents them from being specialized experts in any one particular area of the law.
“Powers of law and equity” means that the court can order both legal and equitable remedies and occasionally combine them. Legal remedies are usually money damages, while equitable remedies are much more flexible and typically order a party to take (or refrain from taking) a certain action. This creates situations where a court’s decision is like a box of chocolates; you never know what you’re going to get.
Unlike other states’ courts, the Court of Chancery has specialized jurisdiction. The judges focus almost entirely on corporate litigation when an equitable remedy is desired. This means they are experts in business litigation, and there is little guesswork about what a judge might do if he sides with either party. This specialization means that you cannot pull wool over his eyes or make emotional arguments that might sway a jury. It also means that if a Delaware business is involved in a legal dispute, the Court of Chancery is likely to preside over it.
What kinds of corporate litigation cases does your firm typically handle?
SLG handles fights for control and accountability. When the people running a company disagree with the people who own it, things get ugly.
Our bread and butter is breach-of-fiduciary-duty litigation. We defend officers and directors when angry stockholders accuse them of mismanaging the company or engaging in self-dealing. On the flip side, we represent minority stockholders and institutional investors who have been shut out by management and need to force transparency.
Additionally, we handle lawsuits related to mergers and acquisitions. When a company gets sold, stockholders almost always sue, claiming the board left money on the table. We work with financial economists to tear apart valuation models and prove whether the deal price was fair. If your legal problem involves who controls the company or how the profits are distributed, that is where we step in.
How fast does business litigation move in Delaware?
If you are used to the sluggish pace of regular state courts, Delaware will shock you. The Court of Chancery moves incredibly fast.
In a typical court, you might go through a year or two of continuances and delays before you even come close to trial. In large part, this is because most courts have to hear both criminal and civil trials. Criminal defendants have a constitutional right to a speedy trial, while civil defendants do not.
In the Chancery Court, if your case involves an urgent issue like a frozen bank account, a stolen trade secret, or a disputed board election, the court can put you on an expedited track.
Even non-expedited cases usually move at a brisk pace. The judges actively manage their dockets. They do not tolerate lawyers who use discovery delays as a stalling tactic. If you bring a lawsuit in Delaware, you need a legal team prepared to move aggressively from day one.
I already have a lead attorney in my home state. Why do I need a Delaware attorney?
People often have a great relationship with a litigator in their home state. It makes sense to want him to run the case. That is fine, but he cannot do it alone.
Your local attorney does not know the Delaware judges and chancellors. He does not read the daily slip opinions coming out of the Chancery Court. And most importantly, the court actually requires you to have Delaware counsel “on the ground” to file appearances and handle the local procedural rules.
Delaware courts have specific, rigid procedural rules. A brilliant trial lawyer from California might know everything about the California Corporations Code, but if he tries to file a brief in the Court of Chancery using arguments that are tailored to a California judge, the Delaware judges will typically not be moved whatsoever.
SLG regularly handles disputes involving Delaware business entities in Delaware courts. We make sure your primary lawyer does not make a fatal procedural mistake that costs you the case. You can continue working with the attorney you trust, and we will ensure the case survives in Delaware’s strict, formal legal environment.
What is the difference between direct and derivative stockholder lawsuits?
In a direct lawsuit, a stockholder is arguing that they suffered harm separate from the company as a whole. For example, if you are a minority stockholder and business management refuses to allow you to vote, you suffer a direct harm. Since you suffered the harm, you can file a direct suit.
A derivative lawsuit is a bit different and a little counterintuitive. In these suits, a stockholder steps into the corporation’s shoes to sue its leadership. Examples include directors embezzling company funds or wasting the company’s resources. In this instance, the stockholder did not suffer direct harm; the corporation did.
Derivative lawsuits create a strange dynamic where the company is going after its own leadership. Most of the time, the company leadership is who makes decisions for the company. As a result, derivative lawsuits face massive procedural hurdles that require a dedicated Delaware litigation attorney to overcome.
Are directors personally liable if a business strategy loses money?
Usually not. After all, if directors were personally responsible every time a product flopped or a marketing campaign failed, nobody would ever serve on a board. Businesses would never take risks.
Delaware protects directors through the business judgment rule. This rule presumes that when directors decide on an issue, they are making an informed, good-faith decision for the company’s best interest. This means stockholders cannot sue just because a decision lost money or looks bad in hindsight.
To overcome the business judgment rule, stockholders need to show that the decision was not informed, was not made in good faith, or was not made for the company’s best interest. Showing that the decision ultimately proved to be a bad one is not sufficient. Instead, they will have to show that the directors engaged in gross negligence or self-dealing that harmed the company. This is a significant uphill battle that few lawsuits ever successfully overcome.
What happens if there is a deadlock on the board of directors?
Deadlocks destroy companies. It often happens when founders split a business down the middle and suddenly disagree on fundamental issues like hiring, funding, or selling the company. The board cannot pass resolutions. The company becomes paralyzed. In the dog-eat-dog world of business, a paralyzed business will not survive.
When this happens in a Delaware corporation, you cannot just force the other side to sell you their shares. If the bylaws do not have a specific tie-breaking mechanism, the dispute inevitably goes to the Chancery Court.
The court has a few nuclear options to fix a true deadlock. The most drastic is appointing a custodian. The judge appoints an independent third party to run the company, break the tie, and sometimes even liquidate the business entirely.
Nobody wants a court-appointed custodian running his life’s work. It is expensive, unpredictable, and usually results in everyone losing some level of control. However, the threat of a custodian is usually enough to force the warring factions to the negotiating table.
Do I need to travel to Delaware for hearings and depositions?
You probably expect to spend weeks in a hotel room in Wilmington. The reality is much more manageable.
For the vast majority of the litigation process, you do not need to set foot in a Delaware courtroom. SLG handles the filings, the negotiations, and the day-to-day procedural fights. When it comes time for depositions, lawyers usually travel to the witness. If your company is headquartered in Texas, the attorneys typically fly to Texas to depose your executives in a local conference room.
Since the COVID-19 pandemic, the Court of Chancery has also become incredibly comfortable with remote technology. Many routine hearings, status conferences, and even oral arguments are conducted over video. The judges care about efficiency above almost everything else.
However, if your case goes all the way to a full trial on the merits, you will absolutely need to travel. Trials are almost always held in person, and the judge will want to assess witness credibility face-to-face. But trials are rare. Most corporate disputes are resolved through intense motion practice and settlement negotiations long before anyone has to book a flight.
Can a company pay for my legal defense if I am sued as a director?
Corporate litigation is ruinously expensive. If stockholders sue you personally for decisions you made on the board, the attorney fees alone can bankrupt you before the case even gets to trial.
Fortunately, Delaware law allows corporations to protect their leadership through indemnification and advancement. Indemnification means the company ultimately pays for your legal damages and expenses if you are found to have acted in good faith.
But indemnification only happens at the end of the lawsuit. Advancement is what actually saves you in the short term. If your company’s bylaws include an advancement provision, the corporation must pay your legal bills as they come in during the lawsuit. You just have to promise to repay the money if a judge later determines you actually committed a crime or engaged in intentional fraud.
Companies often try to cut off advancement when someone in upper management gets mad at a former executive. He may manufacture reasons to refuse to pay the legal fees to starve the executive out. We litigate these disputes constantly. If the bylaws guarantee advancement, the Court of Chancery will aggressively force the company to write the checks, ensuring you have the resources to actually defend yourself.
SLG Helps You in Delaware Corporate Disputes
Whether you need to defend your board’s strategic decisions or hold a corrupt management team accountable, the legal strategy you choose in the first few weeks will define the entire outcome. You need an attorney who knows the law and is not afraid to push back hard against aggressive tactics.
At SLG, we have built our practice by helping investors and companies successfully resolve corporate governance crises. If you are dealing with a Delaware business dispute, call the SLG team today at 347.378.6990 to schedule a consultation.
