OPINION
Dear Friends,
Folks, even the Wall Street Journal is on top of the devastation that is going on in Delaware.
Delaware trying hard to drive away corporations is what the headline says. That sums up exactly, word-for-word, what I’ve been saying for years, folks.
It’s extremely exasperating that America’s First State is deeply full of and run by corruption, in my opinion, from the top down that this is happening. No one in leadership, from the Governor John Carney, on down, is doing anything to stop this devastation.
You may have heard of this ESG thing, which leftist Leo Strine is pushing. Sounds like a good thing, right? Corporations should have to worry about the environment and charities—and not just shareholder value. Don’t kid yourself, folks, this latte liberal wants to line his own pockets with endless litigation for Chancery, in my view. The problem is, we’re all onto what I see as the Chancery’s corruption, relationship-based verdicts that keep the law so nebulous, the only way to get an answer is to come back to court. And as the Wall Street Journal says: Delaware will drive away corporations.
Please send your feedback on this. It is always welcome and appreciated.
Respectfully Yours,JUDSON Bennett–Coastal Network
Delaware Is Trying Hard to Drive Away Corporations
A flirtation with ESG is jeopardizing its status as a preferred destination for corporate headquarters.
By William P. Barr and Jonathan Berry
Nov. 24, 2023 3:12 pm ET
Delaware wasn’t always the go-to state for corporate law. And if it escalates its flirtation with environmental, social and governance investment principles, the First State might end up losing its privileged status, just like its neighbor once did.
New Jersey became “the mother of trusts” in the late 19th century by pioneering incorporation laws that gave companies unprecedented freedom. But the Garden State lost that title in 1913 when Gov. Woodrow Wilson set out to correct perceived abuses by making executives liable for corporate “irresponsibility.” Companies responded by fleeing the state.
Wilson’s successor repealed his changes, but the damage was done. As Ralph Nader and co-authors later put it: “Any state that could elect Woodrow Wilson as Governor could never be fully trusted by big business again.”
History stands to repeat itself in Delaware. New Jersey fell prey to Wilson’s trust-busting progressivism. Today, Delaware is falling in line with other blue states in embracing ESG, which rejects shareholder value as corporate law’s lodestar. Meanwhile, red states are developing potentially attractive alternatives.
The federal government and many blue states are using ESG to inject the progressive political agenda on climate, race, and other issues into corporate governance. Joe Biden’s native Delaware, where state government is controlled by Democrats, isn’t immune to this trend. Indeed, the outsize importance of Delaware’s corporate law makes it a valuable asset for enterprising officeholders. Look no further than the example of former Delaware Supreme Court Justice Tamika Montgomery-Reeves, who in 2021 declared that state law allows directors “to consider interests of broader constituents,” such as “stakeholders other than stockholders.” President Biden named her to the federal appellate bench in 2022.
Newly assertive progressive politics threatens to upset the time-honored legal formula that helped Delaware maintain its corporate-law monopoly for a generation. Delaware earned its reputation by scrupulously deferring to companies’ good-faith pursuit of shareholder value, freeing up executives to focus on business.
That era may soon be over. Not only Delaware’s politicians, but even its corporate-law elder statesmen today advocate that the state should adopt a more assertive and explicitly pro-ESG corporate law.
The watchword is Delaware’s Caremark doctrine, which makes executives liable for failures in risk management. Once reserved for outright corporate crime, this notable exception to Delaware’s signature deference to executives has demonstrated expansive potential. Two former Delaware Supreme Court justices have stated that, under the doctrine, ESG issues should become more than optional social-responsibility topics. They should be “risks” that boards are required to oversee. The influential former Delaware Supreme Court Chief Justice Leo Strine has coauthored several papers—including one titled “Caremark and ESG: Perfect Together”—addressing how the doctrine invites companies to undertake ESG initiatives.
Recent trends at Delaware’s highly specialized business court, the Court of Chancery, follow this change in the political wind. Claims under Caremark—which a leading chancellor once called “the most difficult theory in corporation law” for plaintiffs to win on—are increasingly succeeding, and thus have proliferated on the court’s docket.
Companies have noted the shift’s legal import, but less so its political implications. It is no coincidence that the board-level Caremark “risks” that both the plaintiffs’ bar and companies’ legal advisers stress correspond to du jour ESG issues like climate change, DEI, and #MeToo—or even the 2020 presidential election.
Activists wield Caremark to pressure companies on ESG initiatives. But it won’t stop there. As the logic of ESG-inspired “risk management” takes hold, expect Delaware law to elevate issue activism steadily over old-fashioned shareholder value throughout corporate law.
Witness the recent case rejecting a Disney shareholder’s request for corporate records after the company’s stock plummeted following its opposition to Florida’s Parental Rights in Education Act. The Court of Chancery held that the shareholder’s motivation was improperly “political,” but Disney management’s campaign to improve its image with progressives at the expense of alienating its customers was “an ordinary business decision.”
While batting away a shareholder lawsuit might score temporary points with executives, wise leaders will look closer. The Disney case is significant because it foreshadows the completed evolution of Delaware corporate law. Companies not in step with ESG will have litigation risk under Caremark; companies that go overboard will be free from accountability. Politicizing corporate law will be far more costly in the end.
The clear signal is that Delaware’s commitments to both board-level deference and shareholder value will bend to accommodate ESG. That is bad news for management and shareholders alike.
Delaware’s weakness presents an opportunity for red states that oppose ESG. This year Texas elected to set up its own designated business court. Georgia, Utah and Wyoming recently did the same. Ambitious legislators and attorneys in these states and others can capitalize by developing an efficient alternative that upholds shareholder value.
Like corporations, corporate law itself competes in a market. Some companies have learned the hard way that embracing ESG can boost their competitors. Delaware may soon learn that lesson too.
Mr. Barr served as the U.S. attorney general, 1991-93 and 2019-20, and is managing partner of Torridon Law PLLC. Mr. Berry served as head of policy at the U.S. Department of Labor, 2018-20, and is managing partner of the law firm Boyden Gray PLLC.