South Dakota Beats Delaware as Best Legal Climate for Businesses

September 12, 2017

For the first time in 15 years Delaware’s court system has lost the top spot in a key business survey, ceding its place to South Dakota, according to a Monday poll conducted by an arm of the U.S. Chamber of Commerce.

Delaware has held the number one spot since 2002, when the U.S. Chamber of Commerce’s Institute for Legal Reform (ILR) began polling lawyers and executives about the “lawsuit climate” in U.S. states.

Delaware fell to 11th in this year’s survey.

The rankings are based on questions about impartiality and competence of judges, quality of appellate review and treatment of class action lawsuits, among other things.

Law is big business in tiny Delaware. A majority of Fortune 500 companies incorporate in the state, providing more than 20 percent of its general budget revenue, in part because its courts set a high bar for shareholders to sue corporate boards.

Lisa Rickard, the president of the ILR, said in an interview that Delaware had been resting on its reputation while other states adopted changes and passed it by.

Some like South Dakota have tried to make it easier to register a business, while others such as North Carolina have formed business courts to mimic Delaware’s Court of Chancery.

Jeff Bullock, Delaware’s secretary of state, said its leading position makes Delaware a target for criticism, and noted that lawmakers annually updated the state’s business laws in response.

South Dakota’s governor’s office did not respond to a request for comment.

Since the last survey in 2015, Delaware barred companies that incorporate in the state from forcing “loser pays” rules on shareholders who sue.

“That was heard by a lot of board rooms and a lot of general counsel,” said Rickard.

She did compliment Delaware’s judges for a string of recent rulings that have severely curtailed investor class actions challenging merger deals.

Those class actions in Delaware over the last five years peaked at 486 in 2015 before tumbling to 206 last year, according to the Court of Chancery. Only 68 were filed through the end of August this year.

“The idea that anyone could objectively believe that Delaware has become less business friendly is absurd,” said Stuart Grant of Grant & Eisenhofer, the state’s most prominent law firm representing shareholders.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Noeleen Walder and Andrew Hay)

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