August 31, 2012
Delaware's Arbitration: Encroachment or Substitution?
Posted by Usha Rodrigues

The world of corporate law was abuzz yesterday with the story that a U.S. District Court struck down the Delaware Chancery Court's recent foray into arbitration as unconstitutional.  DealProf Steven Davidoff provides a typically incisive summary and analysis.  I'm not sure quite where I come down on the question, but to me it boils down to would Chancery Court's proposed arbitration mechanism merely substitute the sophisticated vice chancellors and chancellor for other arbitrators?  In which case, we shouldn't care so much. Or might it encroach on areas that are the typical subject of civil litigation? In which case there's real harm to the public from a loss of transparency. 

Davidoff says much the same:

In some ways the arbitration provisions may be a victim of Delaware’s success. The court’s five Chancery Court judges are really the best in the country at adjudicating corporate law disputes involving shareholders. The reason is not only their competence but their experience in deciding these matters.

So, it is no surprise that to the extent companies want to extend arbitration to previously public domains, these provisions would come into play. The likely reasons they have not been used more often are the pending litigation and the fear that companies have of their validity. But had the provisions really been confined to purely private disputes without affecting shareholders, they might have been more defensible in the federal court

Davidoff points to two events, the Skyworks Solutions/Advanced Analogic Technologies arbitration and the Carlyle's attempt to go public but require shareholder fiduciary duty and securities law claims to be arbitrated in Delaware, as reasons for unease with Chancery Court arbitration. In each case, shareholders lost out on valuable information that traditionally would have been theirs.

It's hard to say from this vantage point how much of the Chancery Court's arbitration procedure would merely substitute for private arbitration, and how much would displace civil litigation--only 6 proceedings have occurred so far.  I'm torn because I'm sympathetic both to Delaware's desire to capitalize on the value of the Chancery Court's expertise, and to the idea that the Court's opinions are a rich, fundamentally public resource.  I'm no arbitration expert, but perhaps there is a way for Delaware to tie its own hands, limiting its arbitration proceedings to disputes in which the public has traditionally not been afforded access?  Might that pass constitutional muster?

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