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Chernynkaya On April - 3 - 2010

I just read this, and can’t believe I’ve never heard of it. Has anyone else? I am posting the article in its entirety. Am I missing something here, or is this as bad as the Citizen’s United SCOTUS decision? I need talking down.


April 2, 2010

By Aaron Lake Smith

Corporate Court Acting in Secret, Citizens Locked Out

Delaware has a special court for corporations. And it’s about to start hearing cases that the public can’t hear about.

Last week, the state of Delaware radically altered the playing field between corporations and consumers by offering to hear lawsuits against Fortune 500 companies under conditions of secrecy, for a fee. Instead of receiving an open hearing before the general public, the Delaware News Journal reports that the Delaware Chancery Court’s new “fast-track” system will allows disputes involving the state’s tremendous cache of corporations to be considered in a private backroom meeting, not with a jury, but with a special jurist known as a chancellor.

In this new form of arbitration, the chancellor will act as a hired consultant, listening to both sides of an argument and dispatching a private ruling within 90 days. Although this new judicial innovation in the state that houses 60 percent of the nation’s publicly traded companies has not raised the same uproar as the U.S. Supreme Court’s infamous Citizens United decision, the new law has equally ominous implications for the future of American democracy.

Most ordinary citizens have never even heard of the Court of Chancery, but among America’s executive class, the Chancery has long been a prized legal venue thanks to its pro-business, pro-management rulings. The Delaware Chancery Court has been consistently rated the #1 court in the country by corporate lawyers and the U.S. Chamber of Commerce (PDF). Combined with the state’s lax corporate governance regulations, the Chancery is one of the prime reasons so many companies chose to incorporate in Delaware. When boards and CEOs are threatened with shareholder lawsuits and hostile mergers, they’re competing with a home-court advantage in the pro-business Chancery. The Chancery is also notoriously hostile to federal agencies of every stripe that might penalize the state’s corporate class—intemperate even to CEO-friendly agencies like the Securities and Exchange Commission.

The 200-year-old and entirely juryless Chancery is one of the most powerful judicial bodies in the country, a holdover from the British Empire that most other states had abandoned by the 18th century. Instead of judges or juries, the Chancery is chaired by a set of chancellors and vice-chancellors, each appointed by the Delaware governor to serve out a 12-year term making what equates to the national policy toward big business. William T. Quillen, former Delaware chancellor, attributes Delaware’s throwback judicial system to the state’s “basic conservatism.

The court’s homogeneity is astounding—all the chancellors come from corporate law backgrounds, mainly from the firms of Morris, Nichols and Skadden Arps, and there has never been a chancellor of color.

The Delaware chancellors have consistently played the legal rear-guard in the executive compensation debate. Since most companies are incorporated in Delaware, just about every dispute over CEO pay ends up playing out in the Chancery. In a landmark 1996 decision, the Chancery rejected a Disney shareholder lawsuit and allowed a former president Michael Ovitz to walk away with $140 million in severance. Since then, the Chancery has continued to shield the corporate management that provide their court with its raison d’être, and have swatted away lawsuit after lawsuit from citizens and “activist shareholders”—those with the audacity to demand that companies they own act in their own interests.

In 2009, the Chancery had its chance to weigh in on the financial crisis when Citigroup faced down a major shareholder lawsuit. Shareholders alleged the board of the company had shunted its responsibility to investors, failing to recognize and manage risky subprime investments. Citigroup, of course, was so poorly managed that the company needed to beg for $45 billion in direct bailouts under the Troubled Asset Relief Program, and received hundreds of billions more in indirect government guarantees. But instead of acknowledging any wrongdoing by a team of executives that had turned their company into a ward of the state, the Chancery sided with management, issuing a dismissive shoulder-shrug of a ruling.

Chancellor Chandler wrote of the shareholder lawsuit, “When one looks past the lofty allegations of duties of oversight and red flags used to dress up these claims, what is left appears to be plaintiff shareholders attempting to hold director defendants personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company.”

Tiny, Napoleonic Delaware has never had much in the way of natural endowments, but the state’s cutthroat cleverness has allowed it to flourish at the expense of its neighbors. Delaware has a long history of treating government as a business and undercutting the competition—other U.S. states.


Written by Chernynkaya

I am an artist and have lived in Los Angeles all of my life, except for a brief hippie period when I lived in SF. I am currently (semi-unwillingly) retired, but have had several careers.

22 Responses so far.

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  1. Chernynkaya says:

    Hey, thanks to you all for talking me down! I knew I could count on you guys--I feel much better. 🙂

  2. kesmarn says:

    Cher, this certainly doesn’t sound like a good thing… But, like you, I know so little about the court system in Delaware that it’s hard to get a fix on how threatening the whole situation is.

    For instance, does it help to calm our concerns if we know that, apparently the Delaware Supreme Court can reverse Chancery decisions? This appears to be the case. (“On Wednesday, March 25, 2009, the Delaware Supreme Court issued an opinion reversing the Chancery Court’s decision in Ryan v. Lyondell Chemical Co., 2008 WL 2923427 (Del. Ch. July 29, 2008).”, this from the Court Securities Law Blog.)

    Still, the secrecy of the Chancery in a state that is corporation-friendly, to say the least, is worrisome. I’m concerned, too, about the number of corporations that are going private.

    In our area there was a corporate headquarters for a huge chain of nursing homes in the U.S. When it was publicly traded, the CEO’s annual compensation and other important facts about the business were made public. But about three years ago, the company went private and the lights went out. Just last week our local paper uncovered the fact that the CEO of this company (same guy who ran it when it was public) has stock options that are worth $186,000,000. That is OUR money! Those nursing homes run on Medicare and Medicaid dollars. They run on poor quality meals for the residents and under-paid nursing assistants who are responsible for getting 24 people ready for bed every night. Yet the machinations of how these corporations are run are all kept in the dark.

    A lot more sunshine is needed everywhere.

  3. SueInCa says:

    This sounds mostly like internal/ownership/stockholder issues. The thing about corporations is no one person is really responsible for the company. That is why people incorporate, because when things go wrong, their personal fortunes are safe. As far as I am aware if an individual sues a corp(except shareholder/ownership) issues the trial takes place in the jurisdiction where the incident ocurred.

  4. SanityNow says:

    Hi Cher,
    This looks like a fancy name for arbitration. I’d be curious how they decided to call it a Chancery Court. Seems that if they really wanted to run under a radar, they’d just call it, well…Arbitration Court. It would instantly lull the pedestrian observer to sleep. But Chancery sounds so…royal. In fact, I would bet good money (again, if I had any good money…) that this is an archaic term that has made it to today. It is not a court of law but a court of equity. If you filed bankruptcy, your case would be handled by a court of equity.

    As to fair and open process, it actually is still fair and open but its only open to those involved in the suit. Presumably, the share holders would be represented by a board who would then secure legal representation. So as long as shareholders are paying attention to the degree that they want to, it is a transparent process.

    I tend to agree with KQ below, this looks like an author who is very understandably getting riled up about something that sounds awful but has been going on for literally 400 years.

    Great story though. Almost got me riled up.

  5. KQ says:

    Unless they make this mandatory not much has changed. But right now arbitration is an option in many business disputes. Mostly because both sides don’t want to face open court. Unless this is something new this is not the little guy against big corporations. It’s rich people versus big corporations who are trying to save money on court costs because arbitration is much cheaper for both parties to adjudicate.

    Lately I’ve been taking Alternet with a grain of salt as well. I would check other sources to verify anything they print these days.

    • Khirad says:

      I put Alternet in with Counterpunch, as well. They get a little out there for me.

    • Chernynkaya says:

      Ok, thanks KQ

      • KQ says:

        From what I can see the court has existed for a long time. The “fast track” process sounds new but the article really does not talk about it much. Instead they go through a diatribe about past court actions and history.

        Here’s the original story.


        On the surface to me it seems Alternet may be raising more outrage for a pretty common practice and 90% of what the court does is B to B stuff anyway. In fact the “fast track” is optional. It handles mostly cases like patent disputes, ownership disputes and competency law. I mean the new arbitration services they will provide are not even legally binding.

        To say it has equal imposition on democracy the SCOTUS decision was sounds like pure hyperbole. How could something optional and not legally binding be nearly as bad as unlimited legal corporate funding of campaigns?

        Like I it’s good to find out for yourself. I admit I’m jaded by the constant red flaq alerts by some in the progressive opinion media.

      • KQ says:

        I’m not saying the Chancery does not exist but I am also pretty sure people have a right to bring civil cases to public courts. I’ve been involved in arbitration when companies I worked with defended patents.

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