In Praise of Open Courts in Delaware

Agenda-Setting Financial Insight.
Sept. 4 2012 6:30 PM

In Praise of Open Courts in Delaware

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Courts that are open to the public are healthy for Delaware and dealmakers.

Photo by Win McNamee/Getty Images

Courts that are open to the public are healthy for Delaware and dealmakers. A U.S. district judge ruled that the state’s jurists can’t arbitrate disputes behind closed doors. That may disappoint shy companies, but it ensures that the Fortune 500’s preferred legal forum remains accountable. The mergers world can also depend on continued access to helpful -and sometimes witty - decisions. 

The popularity of private arbitration has soared among the corporate set, with a big boost from the U.S. Supreme Court. The confidential process typically entails fewer rules, tighter deadlines and lower costs than litigation. And in several recent decisions, the highest U.S. court has upheld controversial arbitration agreements, stressing their value in diverting lawsuits from overloaded courts.

Afraid of losing cases to private arbitrators, Delaware in 2009 permitted companies to resolve their disputes in secret before the state’s own judges. Litigants would fatten government coffers with a $12,000 filing fee and a $6,000 daily payment, the reasoning went, and the Delaware bench would maintain its pre-eminence as arbiter of corporate altercations.

But last week, a federal judge shot down the scheme. She ruled that the public had a constitutional right to see what taxpayer-funded jurists are up to. And from a policy perspective, open hearings and published opinions tend to keep judges, lawyers and witnesses honest. 

They also serve an essential business purpose. Dealmakers need to know if a proposed transaction will pass legal muster, and investors deserve prompt notice when a company breaks the rules. Court precedents help clarify matters in both instances. Allowing litigants, in effect, to keep conflict resolutions off the record creates potentially dangerous gaps in the law. 

Executives who want to resolve their disputes confidentially can still hire private arbitrators. There’s also little risk that Delaware will lose its reputation as corporate America’s home court. 

What’s more, the bons mots of judges like Leo Strine won’t be muffled. In a recent opinion blocking Martin Marietta’s hostile bid for rival Vulcan, the Delaware chancellor wrote that “the road to true love seldom runs smooth, even for companies that make paving materials.” Keeping lines like that under wraps seems almost criminal.

Read more at Reuters Breakingviews

Reynolds Holding is a Breakingviews columnist who writes from New York about the law in conjunction with Reuters Legal. Before joining Breakingviews, he was a national editorial producer for the Law & Justice Unit at ABC News, a senior writer for Time magazine and the executive editor of Legal Affairs, the first general interest magazine about the law.