Delaware's Vantagepoint: The Empire Strikes Back in the Post-Post-Enron Era

Abstract

The Delaware Supreme Court shifted its corporate-law jurisprudence in the post-Enron period, replacing its historic deference to corporate management with uncharacteristic scrutiny. Commentators claim that this shift was a result of the looming federal threat to Delaware's primacy. Not surprisingly, perhaps, with the federal threat abating, Delaware's strategy has changed. In this article, I explore the court's state of mind in the post-post-Enron era through the lens of a particular case, VantagePoint Venture Partners 1996 v. Examen, Inc. In VantagePoint, the court declared that the internal affairs doctrine (providing that the law of the state of incorporation governs disputes among directors, officers, and shareholders) is a constitutional mandate, and hence, that other states are barred from regulating the internal affairs of Delaware firms. This decision not only removes any doubt that the Delaware Supreme Court acts to further Delaware's chartering market interests, but also exposes Delaware's new fears and ambitions. And I contend it was designed to do no less than chart the future course of American business entity law. The Empire has, indeed, struck back. VantagePoint highlights often overlooked aspects of the current structure of entity law. Despite its dominance and advantages in attracting entity charters, Delaware remains vulnerable to other states' choosing not to adhere to the internal affairs doctrine. This threat is made more acute by changes in the chartering markets. Unlike most states, Delaware relies heavily upon revenues from incorporations. In recent years, Delaware's domination in the market for publicly traded firms has been failing to produce the benefits it once did. However, Delaware is now filling the gap through the dramatic growth in revenues from chartering of closely held firms (most notably LLCs). In light of its reliance upon these revenues, Delaware has incentives to expand greatly its chartering business in the closely held context, particularly since any federal preemption of state corporate law is likely to be limited to publicly traded firms. The VantagePoint decision - which addresses a California statute purporting to apply domestic law to a shareholder dispute within a closely held Delaware corporation - suggests that the Delaware Supreme Court is very much aware of these conditions and of this burgeoning market's particular vulnerability to outside regulation. The Delaware Supreme Court designed VantagePoint to further these interests in an unconventional way. Doctrinally dubious, the decision is not likely to persuade other jurisdictions through the unforced force of reason. Rather, it is intended to deter other states from regulating the affairs of Delaware entities and to create the very conditions - the appearance of ongoing interstate conflict - that might convince federal actors to prevent other states from doing so. The deployment of VantagePoint by Delaware's natural allies in corporate choice-of-law litigation elsewhere suggests that this campaign against internal affairs regulation by other states has already begun. VantagePoint marks the beginning of Delaware's post-post-Enron efforts to entrench whatever internal affairs law it creates, not just for Delaware, but also for the United States. Ironically, this strategy reflects a new reality for Delaware contrary to the one that guided its behavior immediately after Enron: rather than constituting the greatest threat to Delaware's primacy, federal actors may be the only ones who can save it.