ProfessorBainbridge.com

Delaware's Latest Guidance on Material Adverse Change Clauses

From Fried Frank:

Channel Medsystems, Inc. v. Boston Scientific Corporation (Dec. 18, 2019) is the Delaware Court of Chancery’s first decision issued since the Delaware Supreme Court’s 2018 Akorn decision to evaluate whether an acquiror had a right, under a merger agreement, to terminate a pending acquisition on the grounds that there was a “Material Adverse Effect” or “Material Adverse Change” in the target company. (We use “MAE” and “MAC” interchangeably in this memorandum.) Akorn was the first case in which the Court of Chancery, post-trial, found the existence of an MAE and the first post-trial Delaware decision to find that an acquiror had the right to terminate a merger agreement based on an MAE. In Channel, by contrast, Chancellor Bouchard ruled, after trial, that there was not an MAE and that the acquiror was required to close the merger.

Both Akorn and Channel involved the discovery, between signing and closing of a merger agreement, that a target company executive, without knowledge of the target, had submitted fraudulent reports to the Food and Drug Administration relating to the company’s products (in Akorn, the target’s key products, and in Channel, the target’s sole product). In Akorn, there was a dramatic decline in the target company’s financial performance and a severe and “durationally significant” loss of its potential future earnings due to the regulatory noncompliance. In Channel, however, before the acquiror sought to terminate the transaction, the FDA had accepted the target’s remediation plan (which indicated that FDA approval of the target’s product was likely); the remediation plan did not appear to involve significant ongoing costs or other effects on the target; and, prior to trial, the FDA approved the product. The Chancellor held that the acquiror had failed to prove, on a quantitative or qualitative basis, that an MAE would be reasonably expected to occur, and thus it did not have a right to terminate the agreement.

Lots more very helpful analysis follows.

The odd underrepresentation of corporate law academics on corporate boards

Larry Cunningham has an interesting (at least for corporate law academics) new article on corporate law professors on corporate boards of directors (or, more precisely, the lack of the same):

... there are no more corporate law professors on public company boards today than in the 1990s. A comparison of directories of corporate law professors with public company board slates shows that at most 20 of today’s roughly 1,000 law professors are on public company boards, about the same as before SOX.

Larry then recounts evidence suggesting that firms would benefit from having corporate law academics on their boards.

From the the cryptozoological wing of the corporate law zoo

Famed Delaware Chancellor William Allen once compared the corporate law doctrine of waste to one of the most famous cryptids:

Absent an allegation of fraud or conflict of interest courts will not review the substance of corporate contracts; the waste theory represents a theoretical exception to the statement very rarely encountered in the world of real transactions. There surely are cases of fraud; of unfair self-dealing and, much more rarely negligence. But rarest of all-and indeed, like Nessie, possibly non-existent-would be the case of disinterested business people making non-fraudulent deals (non-negligently) that meet the legal standard of waste!

Steiner v. Meyerson, CIV. A. 13139, 1995 WL 441999, at *5 (Del. Ch. July 19, 1995)

Vice Chancellor Glasscock has gone him one better:

In the cryptozoological division of equity's menagerie are a number of rarae aves and chimeras—some, perhaps, not so chimerical as once thought. One unusual denizen is on display here. A stockholder brought a purported derivative action, alleging that insiders had structured an acquisition unfair to the corporation. The action withstood a motion to dismiss, and the corporation formed a special litigation committee of the board to evaluate the claim. I then stayed the matter for several months, to allow the special litigation committee, assisted by its own counsel, to consider the cause of action. Ultimately, the special litigation committee found that it was in the corporate interest that the cause of action be pursued, and determined that that asset would best be monetized on behalf of the corporation by allowing the original plaintiff to proceed, derivatively.

In re Oracle Corp. Derivative Litig., CV 2017-0337-SG, 2019 WL 6522297, at *1 (Del. Ch. Dec. 4, 2019)

I've been at the corporate law gig for 36 years as student, practitioner, author, and professor and in all that time I have never encountered a case in which the SLC not only though the suit should go forward but also that it should go forward under plaintiff's control. 

 

Frankly, I would be less surprised to find myself sharing a cab with Bigfoot.

Stakeholder Capitalism

Interesting. Provocative. Worth reading. https://t.co/0c1zU7G5qm

— Professor Bainbridge (@ProfBainbridge) February 13, 2020

Dear Bishop McElroy: Stop misleading your flock. Abortion is different when it comes to making political choices.

Bishop Robert McElroy of San Diego gave a speech entitled “Conscience, Candidates and Discipleship in Voting” in which he posited that:

Frequently in discussions of the application of Catholic social teaching to voting, the question is raised whether one issue has a unique priority among all of the other issues in its claim upon believers in the current election cycle. Some have categorized abortion in that way. Others, climate change. This question deserves deeper scrutiny. ...

Four points should be considered.

1. 1. There is no mandate in universal Catholic social teaching that gives a categorical priority to either of these issues as uniquely determinative of the common good.
   2. The death toll from abortion is more immediate, but the long-term death toll from unchecked climate change is larger and threatens the very future of humanity.
   3. Both abortion and the environment are core life issues in Catholic teaching.
   4. The designation of either of these issues as the preeminent question in Catholic social teaching at this time in the United States will inevitably be hijacked by partisan forces to propose that Catholics have an overriding duty to vote for candidates that espouse that position. Recent electoral history shows this to be a certainty.

Contrary to Bishop McElroy, I believe abortion is of preeminent importance. I draw here on St. John Paul II's encyclical Evangelim Vitae, in which he wrote that:

Among all the crimes which can be committed against life, procured abortion has characteristics making it particularly serious and deplorable. The Second Vatican Council defines abortion, together with infanticide, as an "unspeakable crime". ...

Christian Tradition-as the Declaration issued by the Congregation for the Doctrine of the Faith points out so well-is clear and unanimous, from the beginning up to our own day, in describing abortion as a particularly grave moral disorder.

Consider also John Paul II's apostolic exhortation Christifideles Laici:

The common outcry, which is justly made on behalf of human rights—for example, the right to health, to home, to work, to family, to culture—is false and illusory if the right to life, the most basic and fundamental right and the condition for all other personal rights, is not defended with maximum determination.

In the United States, the USCCB's Forming Consciences for Faithful Citizenship: A Call to Political Responsibility states:

The threat of abortion remains our preeminent priority because it directly attacks life itself, because it takes place within the sanctuary of the family, and because of the number of lives destroyed.

To be sure they go on to counsel that one "cannot dismiss or ignore other serious threats to human life and dignity such as racism, the environmental crisis, poverty and the death penalty," but that doesn't mean that any of them have displaced abortion as the Church's preeminent priority.

Given that clear teaching, I do not understand how Bishop McElroy in good conscience can claim to the contrary. 

Let's give proxy advisory reforms a sunset provision

I concur with Professors Yoon-Ho Alex Lee, Matthew Spitzer and Eric Talley who endorse the SEC's proposed regulation of proxy advisory services with an important caveat:

In our own scholarship, we have advanced the analytic argument that these difficulties need not place a prohibitive roadblock in the way of new financial regulations. To the contrary, they often represent an opportunity for regulatory experimentation—i.e., the embrace of new regimes on a provisional basis, and the concomitant value of information and learning that comes from such experimentation. Moreover, we are of the view that the added wisdom that comes through regulatory learning—along with the value of the “real option” to decide whether to retain the provisional rules—constitute unappreciated benefits in the calculus of cost-benefit analysis (“CBA”). ...

... if the proposed rule were characterized as provisional (and subject to an express sunset provision), the Commission would benefit in three concrete ways:

• First, including a sunset will allow the Commission to tally as an additional benefit the “option value” associated with a provisional rule. In other words, given the high degree of uncertainty concerning the effects of the proposed rule, the Commission can legitimately recognize expected benefits of information generated from the provisional rule change simply by including a sunset provision.[7]
• Second, the provisional period will allow the Commission to gather data from the industry so that, upon sunset, the Commission will be much better equipped to move forward with a more permanent version (and possibly a better version) of its rule with reliable empirical data.
• Finally, in the case that the rule’s critics prove correct in their fears about the rule’s prohibitive costs, the sunset provision would allow the Commission a more seamless path to repealing the rule.

On the basis of the foregoing analysis, we are of the opinion that the Commission’s proposal is a promising one as measured through a regulatory experimentation lens.

Yours truly cited by Delaware Chancery Court in the Panera Bread Company Appraisal case

From Vice Chancellor Zurn's opinion:

The board of directors “has the sole power to negotiate the terms on which the merger will take place and to arrive at a definitive merger agreement embodying its decisions as to those matters.”⁴³⁴

⁴³⁴ Stephen M. Bainbridge, Mergers and Acquisitions 56 (2d ed. 2009) (citing 8 Del. C. § 251(b)); accord 8 Del. C. § 141 (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors ....”).

IN RE APPRAISAL OF PANERA BREAD COMPANY, CV 2017-0593-MTZ, 2020 WL 506684, at *25 (Del. Ch. Jan. 31, 2020).

The preponderance of the evidence shows that the board directed Shaich’s negotiations and “arrive[d] at a definitive merger agreement embodying its decisions as to th[ose] matters.”⁴⁶³

⁴⁶³ Bainbridge, supra note 434, at 56.

Id. at *26.

 

I've got a question about how California AB-5 (the gig economy bill) interacts, if at all, with NYSE director independence listing standards

In my forthcoming Advanced Corporate Law casebook, I offer the following problem:

Wolfgang is a world famous chef

Wolfgang is a member of the board of directors of DAA, a publicly traded Hollywood talent agency

He is paid $200,000/year in directors fees

Also receives $50,000 for each board and committee meeting he attends

Company annually contributes $100,000 to a retirement fund for Wolfgang

Wolfgang’s domestic partner John is an independent contractor who is paid $125,000 plus expenses by DAA to develop menus for the company’s in-house cafeteria.

Relevant NYSE provision?

Is the relevant section § 303A.02(b)(ii)?

The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).

Commentary: Compensation received by a director for former service as an interim Chairman or CEO or other executive officer need not be considered in determining independence under this test. Compensation received by an immediate family member for service as an employee of the listed company (other than an executive officer) need not be considered in determining independence under this test.

Presumably not, since John is not an employee. Instead, I would argue that the pertinent provision is § 303A.02(b)(v): 

The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues.

And, of course, let us not forget § 303A.02(a)'s requirement that the board consider all material relationships, including those not listed in subsection (b).

But what about AB 5, which provides that:

(a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(B) The person performs work that is outside the usual course of the hiring entity’s business.

(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Does that affect John's status?

"Religious Sincerity in Corporations"

Ben Edwards:

California Western's Catherine Hardee, recently posted her paper Schrodinger's Corporation: The Paradox of Religious Sincerity in Heterogeneous Corporations to SSRN.  It's a fascinating piece and has already been featured on Ipse Dixit if you're curious about a podcast version.

Her abstract sets the key problem out well:

Consider a corporation where one group of shareholders holds sincere religious beliefs and another group of shareholders does not share those beliefs but, for a price, will allow the religious shareholders to request a religious exemption to a neutrally applicable law on behalf of the corporation.  The corporation is potentially both religiously sincere and insincere at the same time. A claim by the corporation for a religious accommodation requires the court to solve the paradox created by this duality and declare the corporation, as a whole, either sincere or insincere in its beliefs. While the Supreme Court and scholars have noted some of the particular issues raised when determining the religious sincerity of shareholders’ claims, to date no one has engaged systematically with the question of whose religious sincerity should be attributed to the corporation when shareholders hold heterogeneous, or diverse, religious beliefs.

One possible solution to the problem might be to allow ordinary private ordering to address the issue.  The board could designate one share class with the right to control the corporation's religious beliefs about birth control.  So long as the holder of those shares sincerely held the belief, it could settle the question of what religious view to attribute to the corporation.

Hardee takes a hard look at this commodification of religious sincerity and explores how it could harm religious freedom generally.  She creates a framework for considering how to resolve these questions and cautions against using contracts to barter for religious exemptions.

I agree that it's an interesting article, well worth a read. Personally, however, I stand by what I wrote in my articles Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers and A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood. Courts should ask whether the corporation's shareholders would be entitled to reverse pierce their corporation's veil. If so, the court should allow the corporate entity to vindicate the shareholder's religious beliefs. If not, then the shareholders' religious beliefs should not be ascribed to the corporation.

Lyman Johnson on Delaware Corporate Fiduciary Duty Law and A Partial Objection

Lyman Johnson has a short but very useful essay on fiduciary duties under Delaware corporate law. His main point follows:

Three distinct actors owe fiduciary duties – executive officers, directors, and controlling shareholders – and numerous aspects of their duties greatly differ.  But Delaware corporate law is not unique in the way many believe.  Conventional wisdom holds that, uniquely, corporate law’s standards of conduct (fiduciary duties) diverge from judicial standards of review, the latter being more deferential.  Yet, the two sets of standards often converge and are identical.  The supposed distinction is not uniformly accurate, and unenforceable standards of conduct may not be “law” at all where standards do diverge.

I concur and urge you to go read the whole thing. But I have to respectfully dissent from the following:

... if a director complies with the duty of care, the business judgment rule standard of review obtains.  If a director breaches her duty of care, the business judgment rule standard does not apply.  The standard of review for the duty of care thus requires that the standard of conduct be fulfilled.  The former is not more forgiving, it is equivalent in its demands, again pointing toward convergence, not divergence.

To be sure, Lyman could point to Justice Horsey's Technicolor decision as support for his interpretation:

To rebut the rule, a shareholder plaintiff assumes the burden of providing evidence that directors, in reaching their challenged decision, breached any one of the triads of their fiduciary duty—good faith, loyalty or due care. If a shareholder plaintiff fails to meet this evidentiary burden, the business judgment rule attaches to protect corporate officers and directors and the decisions they make, and our courts will not second-guess these business judgments. If the rule is rebutted, the burden shifts to the defendant directors, the proponents of the challenged transaction, to prove to the trier of fact the “entire fairness” of the transaction to the shareholder plaintiff. [Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del.1993).]

As I explain in my book Corporate Law:

Notice how the justice puts the cart before the horse. Directors who violate their duty of care do not get the protections of the business judgment rule; indeed, the rule is rebutted by a showing that the directors violated their fiduciary duty of “due care.” But this is exactly backwards. Under the abstention theory of the business judgment rule, the rule’s core purpose is to prevent precisely what Technicolor requires. Recall that the rule prevented Shlensky from even getting up to bat with his care claims. The business judgment rule thus precludes courts from asking the question of—let alone deciding—whether the directors violated their duty of care. In contrast, under Technicolor the business judgment rule’s primary function is the procedural task of assigning burdens of proof. In that limited guise, moreover, the rule merely assigns to plaintiff the burden of establishing a prima facie case—the same burden plaintiff bears in all civil litigation. If plaintiff fails to carry that burden, the business judgment rule requires the court to dismiss the lawsuit without inquiry into the merits of the decision. But so what? Under this conception, the business judgment rule is nothing more than a restatement of the basic principle that the defendant is entitled to summary judgment whenever plaintiff fails to state a prima facie case. At best, Technicolor thus trivializes the rule.

By opening the courthouse door to care questions at the outset of the litigation, however, Technicolor went beyond merely trivializing the rule to gutting it. Arguably, Technicolor broadened the scope of judicial review of board decisionmaking to reach not just the process by which the decision was made but also the substance of the directors’ decision. Significant consequences follow from this distortion of the business judgment rule. It is commonly held, for example, that mere allegations of director impropriety do not entitle plaintiff to discovery.[1] Yet, one can plausibly read Technicolor as authorizing precisely the sort of fishing expeditions the business judgment rule was intended to prevent.

Technicolor can be reconciled with the mainstream of business judgment rule analysis only by interpreting the duty of “due care” as being limited to the adequacy of the decision-making process. At several points in the opinion, Justice Horsey in fact so characterized that duty.[2] In addition, numerous Delaware precedents interpret the requirement of due care as being limited to questions of process.[3] Yet, nothing in Technicolor explicitly limits its references to the duty of care to the decision-making process. Arguably, the cart remains before the horse.

Should we care that law professors are less religious than the general population?

Paul Caron reports on research from Jim Lindgren finding that law professors are considerably less religious than the public at large, which hardly seems surprising:

Michael Simkovic thinks we shouldn't care:

In my view, these comparison groups are uninformative and inappropriate for some of the uses to which they have been put.  For example, some argue for hiring preferences for faculty members with certain supposedly under-represented ideological views. 

Law professors should not be judged by their ideological beliefs, but by their academic rigor. Law professors should not be compared to the general U.S. population or members of congress, but rather to scientists. Like scientists, law professors are much more highly educated than the general population, have higher incomes, and have opted into a career where they are expected to advance knowledge, often by relying on data collection and analysis based on scientific principles of causal inference. 

Personally, I do find it troubling from a social perspective. lawyers are key members of what Christopher Lasch called The New Elite and Joel Kotkin calls The Clerisy. Kotkin writes of them that:

The increasingly “woke” values of the educated upper classes reflect, as Alvin Toffler predicted almost half a century ago, the inevitable consequence of mass affluence, corporate concentration, and the shift to a service economy. The new elite, Toffler foresaw, would abandon traditional bourgeois values of hard work and family for “more aesthetic goals, self-fulfillment as well as unbridled hedonism.” Affluence, he observed, “serves as a base from which men begin to strive for post economic goals.”

The driving force for these changes has been the ascendant clerisy, which, reprising the role that the Church played in medieval times, sees itself as anointed to direct human society, a modern version of the “oligarchy of priests and monks whose task it was to propitiate heaven,” in the words of the great French historian of the Middle Ages, Marc Bloch. ...

The educated, affluent class detests President Trump, whom many in the Third Estate support, and has rallied to its preferred candidate, Elizabeth Warren, who emerges from the legal and university communities and voices the progressive rhetoric common to this class. (Warren’s less brainy left-wing rival, Bernie Sanders, fares better among struggling, often younger workers.) Warren’s clerisy supporters represent what French Marxist author Christophe Guilluy calls the “privileged stratum,” which operates from an assumption of moral superiority that justifies its right to rule. They are the apotheosis of H. G. Wells’s notion of an “emergent class of capable men” that could “take upon itself the task of “controlling and restricting . . . the non-functional masses.” This new elite, Wells predicted, would replace democracy with a “higher organism” of what he called “the New Republic.” ...

The clerisy is working to undermine basic liberal democracy.

The irreligiosity of law professors is just one indicator of this larger trend, of course, but each indicator is troubling.

Pro bono legal representation may be available to University of California job candidates who were rejected because their diversity, equity, and inclusion statements scored too low

Brian Leiter has the story:

Pro bono legal representation may be available--read on.

As we've noted on several occasions, schools in the UC System have begun requiring applicants for faculty positions to submit a diversity statement. In most searches, these statements have been evaluated holistically as part of an overall application. However, several UC schools have participated in Advancing Faculty Diversity Pilot Programs where contribution to diversity statements have been evaluated as a threshold requirement. In other words, for these searches, if you didn’t get a passing score on your diversity statement, you were not considered further.

This methodology has had an enormous impact. As we discussed last month, for a 2018-2019 search in the Life Sciences, UC Berkeley rejected 76% of the applicants without even considering their research, teaching skills, or academic merits (out of 893 qualified applicants, 679 were eliminated solely because their diversity statements were deemed inadequate). ...

If you applied to and were rejected to one of these searches, or are planning to apply to one of the upcoming searches, you can help to challenge UC’s unlawful policies. Daniel Ortner from the Pacific Legal Foundation is looking for individuals who were impacted by these searches to potentially offer free pro bono representation. You can reach him at dortner@pacificlegal.org.

No word yet on whether I'll need him. In any case, maybe this is what the UC Regents are discussing in their closed door meeting today.