The Court of Chancery: Overview and Insights
Since 1792, when the Constitution of the Delaware state was adopted, Delaware’s Court of Chancery has been the sole forum for resolving corporate governance issues. Unlike other state courts in which corporate litigation is considered a mere sideshow, the Court of Chancery is believed to be "the preeminent forum for the resolution of disputes concerning the internal affairs of Delaware corporations." See In re Trados Inc. Shareholder Litigation, 2009 WL 2225958, at *5 (Del. Ch. July 27, 2009). Over the past century, litigants have increasingly chosen Delaware courts as the preferred forum for resolving corporate governance matters. Today, about 50 percent of Fortune 500 companies are incorporated in Delaware and over 90 percent of initial public offerings are listed on the NYSE or NASDAQ, both of which require Delaware incorporation.
Delaware’s Chancery Court was essentially the first administrative tribunal in the United States to adopt and apply the principles of Anglo-American equity law. The most important of these principles is that the Court of Chancery provides equitable relief to protect the interests of innocent defendants. See Allen, 872 A.2d at 36. Unlike the more adversarial and formalistic approach of common law courts, the Chancery Court is designed to provide equitable and flexible remedies. See Stephen H. Grant, The Delaware Court of Chancery, 172 F.R.D. 601, 604 (1997). Its unique jurisdiction over matters relating to equity and trust law is evidenced by several historical cases. For example, in 1852, the Court of Chancery declared in Coleman v. Miller, 10 Del. Ch. 38 (Del. Ch. 1852) , that shareholders of Delaware corporations were entitled to inspect their corporations’ books and records. Coleman’s grant of the right to inspection by shareholders of fractional ownership of the company’s stock has evolved into the broadly accepted Delaware law requiring a corporation to turn over books and records for inspection when those stockholders plead and prove a particularized purpose for the inspection. See 8 Del. C. § 220.
The Delaware Court of Chancery’s historic role as "guardian of corporate democracy" can be traced back to the Chancery’s English roots. See Allen, 872 A.2d at 49. Prior to 1600, there was no court that specialized in administering the law of trusts. Instead, the Chancery handled all civil law. See Adam J. Levet, Incidental Expenses, Not Directors’ Fees, Are Chargeable Against Corporate Surplus — The Important Case of Sutherland v. Sutherland, 32 Del. J. Corp. L. 225, 226 (2008). In 1603, a separate jurisdiction for equity matters was created due to the growing complexity of law and the inadequacy of common law courts to handle equitable issues. See id..
Modern corporate law jurisprudence is based on the doctrine of separate persons and limited liability, which are embodied in the common law, as well as the statutory law of the General Corporation Law of the State of Delaware, 8 Del. C. Chapters 1- 18. The Delaware General Corporation Law has evolved over time both in legislative chambers and in the Court of Chancery and the Delaware Supreme Court, chiefly with the aim of aiding the State of Delaware in its effort to attract and retain corporations. In doing so, the General Assembly and the judiciary were mindful of the desires of corporations to avoid the overly technical and formal requirements of the common law that often may interfere with the due process of law. See Allen, 872 A.2d at 49.
Key Features and Takeaways of Chancery Guidelines
The Court of Chancery in Delaware is known for having developed and continually improved its "Guidelines for Practitioners" over the years. These guidelines are the product of ongoing collaborative efforts between the Delaware Bench and Bar. This includes updates to the original guidelines drafted by then Chief Justice Norman Veasey in 1993, see 618 A.2d 1 (Comm. Exch. 1992), and the "Bench Bar Guidelines" adopted in 2000 by former Chief Chancery Vice Chancellor William Chandler, 748 A.2d 978 (Del. Ch. 2000), as well as the eventual adoption of "Supplementary Guidelines" in 2010, 2010 Del. Ch. Lexis 79 (Del. Ch. April 12, 2010) (Morris, C.); and most recently, the "2019 Revised Guidelines," e.g., In re Appraisal of Donahue Acquisitions LLC, 2019 WL 688056 (Del. Ch. Feb. 19, 2019).
The conscientious practitioner will be familiar with these guidelines and treat them with the respect they deserve as a standard for best practices in the Court of Chancery. In short, there are many important guidelines that apply to filings and judicial proceedings in the Court of Chancery. The guidelines not only cover matters such as the form of briefs, but also cover issues such as the availability of a transcript, or the necessity and appropriate grounds for making a motion to re-argue an adverse decision. Indeed, although the guidelines have evolved over time, they appear to be designed not only to require strict adherence, but also to avoid unnecessary complications for the Court of Chancery, the parties, and their counsel.
For example, the Supplementary Guidelines provide for expedited relief in the event of a discovery dispute, including a prompt scheduling of a hearing to address the issue, a requirement that all participants "be prepared to discuss the resolution of the dispute," and a prohibition on the taking of "document depositions pending the resolution of the dispute." Notably, the Supplementary Guidelines provide that "[t]he parties are expected to honor agreements entered into or orders agreed upon either orally or through memorialization by e-mail or letter following the Court’s approval." Also, "an attorney shall not object to a request for discovery on the basis of best evidence or the hearsay rule." 2010 Del. Ch. Lexis 79 at *4-*6.
In addition, the expanded scope of these guidelines (to now include not only the guidelines for briefs and materials filed with the Court, but also amendments that affect the legal rulings made by the Court in prior decisions), suggests an effort to avoid unnecessary and time-consuming "reargument" motions based on new facts that do not affect the legal conclusions of the prior decision, or attempts at injecting new legal theories in cases that have moved past the submission of briefs on the applicable law. It is also noteworthy that although the 2010 Supplemental Guidelines provide that "any member of the Bar may suggest amendments to the Guidelines," changes to the Guidelines will usually be done on a periodic basis, perhaps every five years, "to all for consideration by future practitioners." Id. at *12. Thus, the commonly known "2019 Revised Guidelines," will probably not be revised and updated until 2024, or later.
Since many, if not most, of the litigants in the Court of Chancery are either represented by Delaware counsel, or are corporations that frequently engage Delaware counsel, adherence to the guidelines is essential.
Court of Chancery Procedural Rules
Each court has its own set of procedural rules for the filing of cases and how proceedings are carried out. This section will provide a brief summary of those rules in the Court of Chancery. The Court of Chancery hears many types of cases, although gentlemanly conduct is required from attorneys practicing in the Court. Some examples of the rules include deadlines for filing briefs, types of pleadings that are permitted, requirements for filing exhibits to briefs, and requirements for citations in briefs. These rules are set out in the Delaware Court of Chancery Rules. The Court of Chancery Rules list out in detail all types of motions that can be filed with the court, how to file them, and when a response is due from the adverse party. The Rules also set out the process for oral argument before the Court.
Key Judicial Decisions and Opinions
The Court of Chancery’s Opinions have shaped corporate governance and securities law for years. In 2015, Vice Chancellor Laster expanded the application of the "Clearinghouse" exception which shields claimants from having to bring claims in any forum but in Delaware when particularized disclosures are the basis of a M&A challenge in the case of In re Riverbed Technology, Inc. Shareholder Litigation (Del. Ch. Apr. 17, 2015). The "Clearinghouse" exception is named for the 2010 case of Teachers’ Retirement Systems of Louisiana v. Aidinoff (Del. Ch. No. 3943). Vice Chancellor Laster held that shareholders were not required to bring their disclosure claims elsewhere before they proceeded to trial in Delaware. He found that shareholders would be severely disadvantaged without immediate access to a Delaware forum for the expeditious resolution of disclosure claims. The ability of directors to consider only protected disclosures in support a motion to dismiss claims was further established in In re Plains Exploration & Production Company Stockholder Litigation (Del. Ch. May 12, 2014). In this case, Vice Chancellor Laster justified his denial of a motion to dismiss based on a limited review of the challenged disclosures, finding that a disclosure was protective because the disclosure may only be material as a result of confidential information. Also, for the first time since interpreting Section 220 of the Delaware General Corporate Law in the context of disgorgement claims, the Court of Chancery in Calma v. Templeton (Del. Ch. Aug. 26, 2015) found that a corporation must disclose communications with its financial advisor where the communications did not concern decision-making but were sought to effectuate legally important transactions.
Chancery Practitioners Guidelines
The Court of Chancery has a number of guidelines that may be useful to practicing in the Court. For example, all motions, memoranda, briefs, stipulations, proposed orders, motions in limine, notice of deposition, notice to produce, notice to admit and proposed stipulations must be filed electronically through the Court’s electronic filing system (except for original signature documents under rule 5(d)). Practitioners should also file a copy on the Courtofs Chancery Rules page of LexisNexis. Local counsel may be needed to assist out-of-State lawyers, and they are urged to contact the pro bono committee of the Court for information on such assistance . Practitioners should consult the Handbook for Counsel regarding the rules on practice and procedures in the Court. The Court has an internal office with volunteer law clerks which "will assist the Court and Court staff in using the Internet to market the Court’s jurisprudence and opinions." Law clerks are also available "to work on selected projects for judges, including the solicitation of scholarly articles or law reviews." The Court is on the delaware Judiciary Intranet, which is limited to use by Delaware judges and their staff members. Practitioners "should [be] familiar and skilled in the use of computer research aids," including Westlaw, LexisNexis, and the like.
Differences Between Chancery Court And Civil Court
The most common distinction between the Court of Chancery and a traditional civil court is their jurisdiction. Pursuant to 10 Del. C. § 341, the Court of Chancery has jurisdiction over "all actions that the writs or forms of action of the common law may be used, except in certain cases in this chapter other courts have jurisdiction." Other special statutes, such as 18 Del. C. §§ 1001-1022, confer Delaware Chancery jurisdiction over certain specific types of disputes and causes of action, such as insurance company demutualizations and dissolutions. Although an action may fall under the jurisdiction of the Court of Chancery, that does not mean that the action can only be filed in the Court of Chancery. For example, a legal malpractice claim can be filed in either the Court of Chancery or the Delaware Superior Court. The key is whether the cause of action "arises out of" a fiduciary relationship or not. If a cause of action is within the court of equity jurisdiction of the Court of Chancery, a legal malpractice claim should be filed in the Court of Chancery; however, if a cause of action is not within the equity jurisdiction, a legal malpractice claim should be filed in the Delaware Superior Court.
Future Developments In Chancery Guidelines
As courts and litigants become more familiar with new technologies and the realities of business demands, the Court of Chancery Guidelines will continue to evolve. With the rise of digital discovery and the added complexity of data management, self-collection obligations will only become more prevalent. Efforts to limit the time frame for document searches helped simplify this burden somewhat, and a best practice should be to take advantage of these limits where they exist. Spoliation and data self-collection are likely to continue to have outsized importance given the relevance to duty of care claims, at the board level, in particular, and will require parties to grapple with the fact that the breadth of issues implicated by such standards of care requires significant efforts in discovery.
The continued availability and use of innovative processes and technology in the Court of Chancery will also become more pronounced. For example, computerized review software (often referred to as predictive coding) is increasingly used in other jurisdictions. The court-approved use of such tools and methodologies offers the promise of significant cost savings as both sides in an action become more adept at using the available tools. The extent to which the Supreme Court of Delaware permits the use of all of these tools and methodologies will set the course for how the court addresses the issues of self-collection and predictive coding .
The rise of social media requires parties to understand and quickly execute on collection plans that account for this ever-changing world. Messaging platforms, microblogging, and other electronic communications of a personal nature must be weighed in assessing their discoverability.
With the rise of initial coin offerings and blockchain distributed ledgers, in addition to the litigation and regulatory issues these new technologies bring, issues of corporate governance and oversight will require some thought as related to blockchain distributed ledgers. Virtual currencies may become another area in which the evolving technology will require management of risk to a new level, and therefore will require employees in the organization to have an understanding of the implications of their use.
As in-house counsel develops capabilities in these areas, and as small and mid-size firms seek to partner with larger firms with respect to the application of these and related processes and technologies to the legal issues presented in a corporate governance context, the trend toward increased reliance on technology will only increase.
For parties involved in the litigation process, and for courts, the challenge will be identifying the proper balance between efficiency and the application of principles of fairness, without subordinating one to the other in inappropriate ways. This balancing act will require the continuous effort of all parties involved in the litigation process.