Thursday, October 14, 2010

How to choose state of incorporation for start-ups: a comparative study of Delaware, Nevada and Wyoming legislation. Part II

In this part I am discussing the ability of Delaware, Nevada and Wyoming courts to handle corporate law cases.

State Court System

Delaware has been praised for its court system.12  Delaware has a separate Court of Chancery, dating back to 1792, which is a business law court where judges are appointed on merit, not elected. This Court has no juries, and decisions are issued in a form of written opinions. Delaware business case law is abundant and there is much precedent for corporations to refer to when considering what actions they can and cannot take. Delaware business law (statutes and precedents) has come to be considered as the “national corporation law” since all lawyers are well familiar with it, having studied it in law school, and the most well-known business-related decisions have come out of Delaware courts.13

However, there is also some criticism about the effectiveness of the Delaware courts and unclear standards they set. It has been said that "the [Delaware] law governing the responsibilities of directors has become so muddled that, incredibly, one can't get a consistent answer to the most basic corporate law question of how many fiduciary duties directors have - if you ask Delaware lawyers, the answer can range anywhere from two to five!"14  Uncertainty about case law is exacerbated by the high reversal rate for decisions from the Court of Chancery of approximately 25%.15  Also, the length of litigation of cases has been extensive: for example, certain cases involving “fairness” considerations took an average of 8.7 years to resolve.16  Frequency of litigation is also alarming: in 1999 and 2000, there were 1,280 complaints filed, of which 78% were related to breaches of the fiduciary duties.17

Nevada created a business court system in 2006 based on the Delaware, Maryland, Pennsylvania and North Carolina models. The business court system was created specifically for the purpose of attracting new businesses by minimizing the time, cost and risks of commercial litigation.18  It exists within the district courts of Washoe and Clark counties, where several judges are selected to primarily handle business cases, even though they also handle criminal and civil cases. Judges are selected based on their experience in business litigation. As per Nevada Secretary of State’s website, the court system offers “early, comprehensive case management, active judicial participation in settlement, priority for hearing settings to avoid business disruption, and predictability of legal decisions in commercial matters.”19  However, no written precedent exists as the court rules do not allow the publishing of opinions. A creation of a separate chancery court like the one in Delaware would require a constitutional amendment. 20

Wyoming does not appear to have a court or judges exclusively dedicated to business litigation, although it is probable that Wyoming has sufficient precedent relating to LLCs, given that Wyoming was the first state to adopt an LLC statute in 1977. Therefore, given the criticisms of the Delaware courts, lack of published written opinions in Nevada business court system and the fact that Wyoming does not appear to have a court specifically dedicated to business-related matters, it remains uncertain which of the three states should be preferred in terms of litigating business disputes.
12  See Lewis S. Black, Jr., Why Corporations Choose Delaware, (2007), available at (last visited Mar. 25, 2010).
13  See id.

14  William J. Carney and George B. Shepherd, The Mystery of the Success of Delaware Law: the Mystery of Delaware Law's Continuing Success, 2009 U. Ill. L. Rev. 1 (2009) (quoting Paul T. Schnell, From the Editor - M&A at Year-End, M&A Law, Glasser LegalWorks, N.Y., Jan. 2005, at 3-4).

15  See id. (referring to Norman Veasey et al., The Role of Corporate Litigation in the Twenty-First Century, 25 Del. J. Corp.L. 131, 135 (2000)).

16  See id. (referring to Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110 (Del. 1994) (nine years); Rabkin v. Philip A. Hunt Chem. Corp., 498 A.2d 1099 (Del. 1985) (6.5 years); Rosenblatt v. Getty Oil Co., 493 A.2d 929 (Del. 1985) (8.3 years); Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983) (eleven years)).

17  See id. (quoting Robert Thompson & Randall Thomas, The Public and Private Faces of Derivative Lawsuits, 57 Vand. L. Rev. 1747, 1761 (2004)).

18  Nevada Secretary of State, Why Incorporate in Nevada, available at (last visited Mar. 25, 2010).

19  Id.

20  See Arnold M. Knightly, New Business Court Called Unnecessary, (Jan. 30, 2009), available at

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