Corporate Court Acting in Secret, Citizens Locked Out

Photo by bloomsberries, Flickr Creative Commons

Photo Credit: Flickr Creative Commons

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.