Explaining Delaware’s Blunder

Delaware’s judiciary is widely regarded as the most sophisticated corporate law judiciary in the United States. Its judges are not only experts in corporate law, but also keenly aware of the political forces that shape Delaware’s position as the jurisdiction of choice for publicly traded corporations. That institutional sophistication has historically allowed Delaware’s courts to navigate threats to the state’s corporate law franchise without inviting unnecessary confrontation. How, then, did Delaware’s judiciary provoke a political backlash that culminated in the hurried enactment of the 2025 amendments to Delaware’s corporate code, which displaced decades of judge made fiduciary duty doctrine and curtailed shareholder inspection rights?

To appreciate the puzzle, consider the judiciary’s handling of the litigation surrounding the federal government’s rescue of Bear Stearns during the 2008 financial crisis. The Federal Reserve orchestrated a merger between Bear Stearns and JP Morgan to prevent the investment bank’s collapse. The transaction involved aggressive deal protections designed to ensure shareholder approval, raising serious questions under Delaware corporate law. Yet when shareholders challenged the transaction, the Delaware Court of Chancery stayed the proceedings in favor of a parallel litigation in New York. Rather than strictly apply Delaware precedent and potentially thwart federal efforts to rescue Bear Stearns, the court effectively stepped aside.

The decision was unusual for a judiciary that ordinarily insists on adjudicating disputes involving Delaware corporations. But it was consistent with Delaware’s longstanding sensitivity to threats to its corporate law franchise. At the time, federal intervention was widely understood as a principal threat to Delaware’s dominance. Adherence to established Delaware precedent risked provoking a confrontation with federal authorities. Deferring the litigation to another jurisdiction illustrates how Delaware’s judiciary can exercise institutional judgment when it recognizes the political stakes.

My forthcoming article, The Controlling Shareholder Amendments Reconsidered, offers an explanation for why that institutional sophistication failed to prevent the controlling shareholder backlash. The central argument is that Delaware’s judiciary did not recognize controlling shareholders as a politically powerful constituency capable of threatening the state’s corporate law franchise. Delaware judges are adept at identifying and managing political threats, but they cannot respond to a threat they have not recognized.

Traditional accounts of American corporate governance have emphasized dispersed ownership, managerial agency costs, and board centered accountability, treating controlled corporations as exceptions to the dominant model. Dominant political economy accounts consequently recognized shareholders as a political constituency, but largely framed their interests in opposition to those of managers, without adequately distinguishing between classes of shareholders. This framing shaped scholarly assumptions and judicial instincts alike, obscuring the political power that controlling shareholders could mobilize when provoked.

The marginalization of controlling shareholders within the dominant narrative of American corporate governance helps explain the courts’ continued expansion of doctrines that both eroded the private benefits of control and exposed conduct that controllers would have preferred to keep hidden. First, Delaware courts broadened the definitions of control and self dealing, subjecting a wider range of transactions to heightened judicial scrutiny. Second, increasingly expansive books and records jurisprudence subjected controllers to what the Article calls “sunlight overload,” allowing shareholders to uncover potential conduct that might otherwise have remained private. Delaware’s reliance on reputational sanctions, including scathing opinions and pointed judicial rebukes, further amplified the consequences of that exposure.

But Delaware stepped on the wrong toes. A series of high profile decisions embarrassed some of the most influential figures in American business, transforming doctrinal pressure into political mobilization. Controlling shareholders demonstrated that they were not merely subjects of corporate regulation, but a constituency capable of reshaping the rules themselves. Their efforts culminated in the Controlling Shareholder Amendments, which substantially altered the legal framework that Delaware’s judiciary had developed.

Delaware’s experience thus illustrates a fundamental limitation of institutional sophistication. Even a judiciary exceptionally skilled at managing political threats cannot defuse a threat it fails to recognize. Understanding the evolution of corporate law requires attention not only to judicial doctrine and familiar sources of political pressure, but also to the power of constituencies that conventional accounts of corporate governance have overlooked.

The Article is available for download here.

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