Incorporate in Delaware: Benefit From America's Best Legal Environment

Tuesday, May 1, 2007 - 01:00

Editor: Please tell us about your background and the nature of your practice.

McNally: I was born and raised in Delaware. I graduated from Columbia Law School in 1972 and I have been practicing in Delaware for the last 35 years. My practice is concentrated on representing parties in the Court of Chancery, the state Superior Court and the Federal District Court in Delaware, mostly on corporate issues and commercial disputes between companies. I do some corporate counseling as well where I advise people about Delaware law and the duties of directors under Delaware law. Finally, I was the principal drafter of the Delaware Voluntary Mediation Act, and I have participated in numerous mediations, arbitrations and other forms of alternative dispute resolution.

Editor: What benefits would a company coming to the U.S. have if it reincorporates as a Delaware corporation?

McNally: There are three primary advantages. The first is that Delaware has a very well developed corporate law and a well developed law for other business entities like statutory trusts and limited partnerships and limited liability companies. This provides people with guidelines that will provide greater certainty about how they can structure a transaction or create an entity that will pass legal muster.

The second advantage is that Delaware law tends to be an enabling law. It gives people who wish to structure a transaction or create an entity a wide range of choice to establish the governing principles in their contracts or in the documents governing the entity, subject of course to strict fiduciary duty standards that apply in some transactions involving self-dealing.

The third reason is that we have a well developed court system that resolves business disputes very expeditiously, and for the most part there is a sense among litigants that they receive fair treatment and get a fair result. The key in Delaware is that you can get a complicated case through the court system fairly quickly and not get bogged down for years like you would in other jurisdictions.

Editor: How important is the commitment of Delaware courts to support of the business judgment rule?

McNally: The business judgment rule allows directors to take appropriate risks to develop the business of their corporations. It is used appropriately in Delaware to avoid second guessing made after the fact about decisions people made in good faith and without self-dealing. Our free enterprise system will not continue to thrive if directors are afraid to innovate because they stand in mortal fear of personal liability. The good news is that notwithstanding the fear factor generated by decisions in other states and by ill-considered actions by prosecutors and regulators, the business judgment rule is alive and well in Delaware. The Disney case is a good example of that where, notwithstanding the fact that the amount of compensation paid to a departing executive was thought to be very high, the Delaware courts found that the board's action in approving it was protected by the business judgment rule. Because the Disney board made a business judgment without the taint of self-dealing, the courts were required to respect that decision and not hold the directors personally liable.

Editor: What safeguards exist in Delaware to prevent excessive jury verdicts?

McNally: In Delaware, we do not permit punitive damage awards in the Chancery Court. We do not generally allow punitive damages in purely commercial disputes between businesses in Superior Court. We do not have juries in the Court of Chancery so corporate disputes are decided by a well-trained and highly competent judge who will not be misled by emotional arguments. Delaware by law permits stockholders to agree that their board of directors will not be sued for negligence as a result of a business judgment that does not involve self-dealing. Finally, in Delaware the reality is that the business judgment rule protects directors against liability for their decisions that were made in what they believed was in the best interest of the company.

Editor: If a Delaware corporation is sued in an out-of-state court in a case dealing with the rights and responsibilities of directors, is Delaware law applicable in such situations?

McNally: It is applicable with respect to the duties of the directors to the company or the duties of the directors to the shareholders. Under the internal affairs doctrine enunciated by the U.S. Supreme Court, the law of the state of incorporation is the law that controls the duties of directors to the company and its shareholders. Otherwise, you would have 50 different laws applying to a national corporation depending on where suit was filed.

If a legal proceeding takes place out of state involving an issue of Delaware law, we are often called upon by non-Delaware lawyers (who are usually acting as the primary counsel for their clients with respect to Delaware law) to assist them in interpreting Delaware law, including helping them draft briefs dealing with questions of Delaware law.

Delaware lawyers or ex-judges are sometimes called upon to serve as expert witnesses on Delaware law before foreign courts. For example, I have been an expert witness on Delaware law in several cases.

Please email the interviewee at emcnally@morrisjames.com with questions about this interview.