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Rod Dreher on Voting for Brian Carroll, the American Solidarity Candidate for President

As regular readers will recall, this year I switched my political party affiliation from the GOP to the American Solidarity Party. I recently cast my vote by mail for Brian Carroll, the ASP candidate for President. I'm a big fan of political commentator Rod Dreher, so I was interested in his essay explaining why he also voted for Carroll.

I haven’t voted in a presidential race since 2004, because I am so alienated from both parties. I am deeply on the right on social and cultural issues, but more to the left on economic policy, in the sense of wanting the government to do more for workers and ordinary people, and wishing that the GOP were not so much in thrall to its donor class. I’m a Tucker Carlson/J.D. Vance conservative. It’s easy for me to withhold my vote, living as I do in Louisiana, a red state that is going to go for Trump. But I am tired of not voting for president, and want to push myself to make a decision, and live with it.

Fortunately, when I looked recently at the Louisiana ballot, I discovered that the American Solidarity Party was on the presidential line—that is, its nominee Brian Carroll and his running mate Amar Patel. When I read the platform of the ASP, I found that I didn’t agree with everything, but the overwhelming majority of its pro-family, Christian Democratic (in the European sense) policies I could endorse. I realized that 2020 will be the first time in my life that I can cast a presidential vote for a candidate and his party, as opposed to against the greater of two Republicrat evils. So that’s what I plan to do, while voting Republican for Senator Bill Cassidy, and for U.S. Representative Garrett Graves.

Brian Carroll won’t win, but I cannot pass up the chance to show my support for a party that actually represents the full spectrum of my views as a conservative Christian. To be honest, if I were in a swing state, I don’t know that I would do this. I probably would, though, because it’s unusual to experience voting as an act of civic affirmation, instead of civic despair, and I would like to do that at least once in my life.

That's pretty much why I voted for Carroll.

A brief essay on Delaware Vice Chancellor Laster's Argument for Replacing Aronson with Rales

“Direct” shareholder suits arise out of causes of action belonging to the shareholders in their individual capacity. It is typically premised on an injury directly affecting the shareholders and must be brought by the shareholders in their own name. In contrast, a “derivative” suit is one brought by the shareholder on behalf of the corporation. The cause of action belongs to the corporation as an entity and arises out of an injury done to the corporation as an entity. The shareholder is merely acting as the firm’s representative.

Because the derivative suit is premised on a cause of action belonging to the corporation, one might assume that the corporation would simply bring the lawsuit itself. Derivative suits in fact are relatively rare; most suits in the corporation’s name are brought by the entity, rather than its shareholders. The derivative suit, of course, was devised so as to permit shareholders to seek relief on behalf of the firm in those cases where the corporation’s management for some reason elected not to pursue the claim. Logically, however, it would seem that the corporation should be given an opportunity to decide whether to bring suit before a shareholder is allowed to file a derivative suit.

Accordingly, Federal Rule 23.1 provides that shareholders may not bring suit unless they first make demand on the board of directors or demand is excused.[1] The requisite demand can take any form, although most jurisdictions require that it be in writing. The demand need not be in the form of a pleading nor a detailed as a complaint, but rather simply must request that the board bring suit on the alleged cause of action. To be sure, the demand must be sufficiently specific as to apprise the board of the nature of the alleged cause of action and to evaluate its merits. “At a minimum, a demand must identify the alleged wrongdoers, describe the factual basis of the wrongful acts and the harm caused to the corporation, and request remedial relief.”[2] The demand must be directed to the board of directors as a whole, and not merely to the chairman of the board, senior officers, or a majority shareholder.[3] Hence, for example, a fax sent to the office of the corporation’s chairman of the board did not satisfy the demand requirement.[4]

Although the demand requirement looks like a mere procedural formality, it has evolved into the central substantive rule of derivative litigation.[5] The foundational question in derivative litigation is the extent to which the corporation, acting through the board of directors or a committee thereof, is permitted to prevent or terminate a derivative action. Put another way, who gets to control the litigation—the shareholder or the corporation’s board of directors? Curiously, the answer to that question depends mainly on the procedural posture of the particular case with respect to the demand requirement.

Delaware requires demand in all cases except those in which it is excused on grounds of futility. In the seminal Aronson v. Lewis decision, the Delaware Supreme Court set forth the following test for demand futility:

[T]he Court of Chancery in the proper exercise of its discretion must decide whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.[6]

Several important questions immediately arise. First, did the court really mean to phrase the standard in the conjunctive? Must plaintiff create a reasonable doubt as to both prongs? In its subsequent Levine v. Smithopinion, the court made clear that the test is in the disjunctive, such that satisfying either prong suffices.[7]

Second, and more significant, how does “reasonable doubt” come into it? This odd phrasing has been sharply criticized:

The reference to “reasonable doubt” summons up the standard applied in criminal law. It is a demanding standard, meaning at least a 90% likelihood that the defendant is guilty. If “reasonable doubt” in the Aronson formula means the same thing as “reasonable doubt” in criminal law, then demand is excused whenever there is a 10% chance that the original transaction is not protected by the business judgment rule. Why should demand be excused on such a slight showing? Surely not because courts want shareholders to file suit whenever there is an 11% likelihood that the business judgment rule will not protect a transaction. Aronson did not say, and later cases have not supplied the deficit. If “reasonable doubt” in corporate law means something different from “reasonable doubt” in criminal law, however, what is the difference?, and why use the same term for two different things?[8]

In its leading defense of the reasonable doubt standard, the Delaware Supreme Court rather weakly countered that “the term is apt and achieves the proper balance.”[9] Somewhat more helpfully, the court rephrased the test by reversing it: “the concept of reasonable doubt is akin to the concept that the stockholder has a ‘reasonable belief’ that the board lacks independence or that the transaction was not protected by the business judgment rule.”

The Aronson standard proved awkward in some cases, such as when there had been a turnover in board composition, where the complaint alleged inaction rather than action, and so on. In Rales v. Blasband. Plaintiff brought a double derivative suit on behalf of a parent corporation with respect to the sale of subordinated debentures by its wholly owned subsidiary. Because the derivative suit did not challenge a decision by the parent corporation’s board, the court held that the Aronson standard did not apply:

Instead, it is appropriate in these situations to examine whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Thus, a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile.[10]

The court noted three scenarios in which this test is to be used in lieu of the Aronson standard: (1) where a majority of the board that made the challenged transaction has been replaced by disinterested and independent members; (2) where the litigation arises out of some transaction or event not involving a business decision by the board; and (3) where the challenged decision was made by the board of a different corporation.

In my Business Associations class, I have often argued that the Delaware Supreme Court should overrule Aronson and adopt Rales as the general standard. In a recent case involving Facebook, which Professor Ann Lipton noted on Twitter, Delaware Vice Chancellor Travis Laster advocated just such a move:

Both tests remain authoritative, but the Aronson test has proved to be comparatively narrow and inflexible in its application, and its formulation has not fared well in the face of subsequent judicial developments. The Rales test, by contrast, has proved to be broad and flexible, and it encompasses the Aronson test as a special case.[11]

VC Laster went on to explain that:

In using the standard of review for the challenged transaction as a proxy for the risk of director liability and hence the test for demand futility, Aronson was a creature of its time. Subsequent jurisprudential developments severed the linkage between these concepts. Under current law, the application of a standard of review that is more onerous than the business judgment rule does not render demand futile. Similarly, the availability of exculpation means that a standard of review that is more onerous than the business judgment rule may not result in a substantial likelihood of liability.[12]

Laster went on to review these changes in detail, explaining how they had called into question the continuing utility of Aronson.

In addition to its declining doctrinal relevance, the Aronson test has always been an awkward way of getting at the core problem in the derivative suit context. Recall that we are dealing here not with a lawsuit brought to redress an injury done to the shareholder but rather one done to the corporate entity. The board of directors is charged with running the corporation and therefore ought to control corporate litigation. On the other hand, when it is the directors or their associates who are on trial, we may not trust them to make unbiased decisions. Consequently, the law governing derivative litigation must balance the competing policies of deference to the board’s decision-making authority and the need to hold erring directors accountable.

The core question thus is: Do we trust the board of directors to make a good faith decision about the merits of the lawsuit in question. If so, the board should be allowed to control the case. If not, the shareholder should be allowed to go forward.

Aronson gets at that question only directly. In contrast, as Laster explained, Rales does so directly:

The significant advance made by Rales was to refocus the inquiry on the decision regarding the litigation demand, rather than the decision being challenged. . . . The Rales decision thus asked directly “whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations.”

Under Rales, a director is disqualified from exercising judgment regarding a litigation demand if the director was interested in the alleged wrongdoing, such as when the director received a personal benefit from the wrongdoing that was not equally shared from the stockholders. A director also is disqualified from exercising judgment regarding a litigation demand if another person was interested in the alleged wrongdoing, and the director lacks independence from that person. Id. Although these aspects of the Rales inquiry look to the relationship between the alleged wrongdoing and the directors considering the litigation demand, they do so for purposes of analyzing the directors’ ability to evaluate the litigation demand, not to determine the standard of review that would apply to the alleged wrongdoing.[13]

Ultimately, of course, the Delaware Supreme Court will have the final word. But the court will have a very hard time trying to justify preserving Aronson.

Material Adverse Change Clauses under UK Law

Interesting post from Narine Lalafaryan on the uncertain state of MAC clauses under UK law.

Delaware Chancery Court Provides Guidance on Breach of Efforts Covenants in M&A Agreements

The failed merger between Anthem and Cigna led to a ton of litigation in both federal and Delaware courts. As the saga winds towards its conclusion, there remained a suit in which both sides are suing the other for breaching covenants requiring each "to take all reasonable steps to consummate the Merger (the “Reasonable Best Efforts Covenant”) and to take “any and all actions” necessary to avoid impediments to the Merger from government entities (the “Regulatory Efforts Covenant”)."

The Delaware Business Litigation Report has a lengthy post on the case, describing the complex background and the issues involved. They key finding is that:

Cigna breached the Efforts Covenants, the Court held that the burden then shifted to Cigna to prove that, even if Cigna had met its obligations under the Efforts Covenants, a condition to closing – the No Injunction Condition—still would have failed. The Court ruled that Cigna had proved, in part based on the opinions of two of its experts, that the District Court would have concluded, and the Circuit Court would have affirmed, that the effect of the Merger on the market for the sale of commercial insurance to national accounts violated the anti-trust laws regardless of Cigna’s breaches and thus would have enjoined the Merger. The Court held, therefore, that Cigna had proved that it was more likely than not, that Cigna’s breaches of the Efforts Covenants would not have affected those courts acting to enjoin the Merger. For that reason, the Court held that, notwithstanding Anthem’s proof of Cigna’s violations of the Efforts Covenants, Anthem was entitled to no damages.

I plan to put this case aside for discussion in the next edition of my M&A casebook and treatise.

ISS Announces Social Justice and Litigation Changes in its Proxy Voting Policies

ISS has published its annual changes to its proxy voting policies:

Board Diversity, Race and Ethnicity (U.S.): Board diversity remains a critical issue for many investors, and concerns about racial inequality and injustice have put a spotlight on low levels of racial/ethnic diversity on boards and in C-Suites. For its U.S. Benchmark Policy, ISS proposes to adopt a new policy, to be effective from February 2022, at companies where the board has not identified any ethnically or racially diverse members. The proposed policy will be to generally recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis) where there are no identified ethnic or racially-diverse board members, beginning in 2022. Mitigating factors will be considered and the proposed coverage universe is all companies in the Russell 3000 and S&P 1500 indexes. ...

Mitigating factors include the presence of a racial and/or ethnic minority on the board at the preceding annual meeting and a firm commitment to appoint at least one racial and/or ethnic diverse member.

The ISS' existing policy has a similar rule with respect to gender diversity/

Director Accountability (All Global Policies): Under a proposed clarification related to the election of directors that will be made in the appropriate places in all ISS benchmark policies globally, we will explicitly note that significant risk oversight failures related to environmental and social concerns may, on a case-by-case basis, trigger vote recommendations against board members. ...

If a company is in a highly impactful sector and is not taking steps to reduce environmental and social risks that are likely to have a large negative impact on future company operations, ISS may recommend taking action against directors who fail to make their companies more resilient.

The proposed change makes it explicit that ISS has the flexibility to find that directors have failed in their risk oversight role if they have neglected to take meaningful steps to increase the resilience of companies to climate-related risks.

It's going to be interesting to see how ISS applies the new standard to firms in the energy sector, especially those in fossil fuels. I expect that this new policy will be seized upon by the fossil fuel divestment crowd as one more argument in their arsenal. I also expect we'll be seeing a lot of references to this new policy (and the preceding one) in ESG shareholder proposals next proxy season.

Shareholder Litigation Rights (U.S. and Canada): Litigation rights are in the news due to some recent court cases. ISS proposes modifications in the U.S. policy and addition of language codifying the Canadian policy regarding management proposals to establish exclusive forums. ...

When evaluating proposals to establish the state of incorporation as the exclusive forum for cases arising under state corporate law, shareholders must balance the advantages (potential cost savings from eliminating duplicative litigation in more than one forum; eliminating risks of unpredictable or incorrect outcomes from courts that are unfamiliar with the law of the state of incorporation, or even unfamiliar with corporate law generally) against the disadvantages (inconvenience to plaintiffs who must bring suit in another state and hire local counsel there). However, exclusive federal forum provisions seen to date generally require only that federal securities litigation be brought in the district courts of the United States, and generally do not specify a particular federal district. Plaintiffs are therefore free to file such suits in the district courts in their home states. Without the argument that an exclusive forum provision for federal law cases would seriously inconvenience plaintiffs, the benefits of eliminating duplicative litigation and ensuring that cases are heard by courts that are well-versed in the applicable law carry greater weight. However, it is acknowledged that separate exclusive forum provisions for state corporate law claims and federal securities law claims will likely prevent plaintiffs from bringing cases alleging both types of claims in the same court.

Because Delaware has a separate court system specializing in corporate law cases, with a large body of precedent stemming from Delaware's status as the most common state of incorporation in the US, the likelihood of a speedy and efficient resolution of Delaware corporate law cases, in particular, is considered to be greater if they are heard in Delaware courts. Therefore, in the absence of concerns about abuse of the provision or about poor governance more generally, ISS will generally recommend in favor of charter or bylaw provisions designating Delaware as the exclusive forum for state corporate law matters at companies incorporated in that state.

Charter and bylaw provisions designating US federal courts as the exclusive forum for cases arising under federal securities law (the Securities Act of 1933, as amended), which had previously been held to be impermissible by the Delaware Court of Chancery, were deemed to be facially valid under Delaware law in a March 2020 ruling by the Delaware Supreme Court. Some companies began incorporating such provisions into their governing documents almost immediately, either in the form of a bylaw amendment (which can be accomplished unilaterally by the board) or a charter amendment (which requires shareholder approval). This necessitates a new policy on these new voting items and provides an opportunity to re-examine the existing policy on exclusive forum provisions for state law matters and to reorganize the entire litigation rights section for clarity. The policy on fee-shifting remains unchanged.

Note that a board that unilaterally adopts an exclusive forum bylaw without shareholder approval will be marked down under ISS' policy against such changes.

In general, this is a positive change. It recognizes the excellence of Delaware courts and the need to control multiple fora litigation.

CooleyPubCo has posted a memorandum on the ISS changes that is quite helpful.

Banning short selling in response to COVID-19 proved harmful rather than beneficial

Very interesting post at Oxford Business Law Blog:

France’s financial market regulator, the Autorité des Marchés Financiers (‘AMF’), banned short selling in 92 specified equities for a one-day period, beginning on March 16, 2020 and ending on March 17, 2020. So did the Commissione Nazionale per le Società e la Borsa (‘CONSOB’), the governmental authority of the Italian stock market, by introducing a temporary ban on taking or increasing net short positions in respect of 85 companies’ shares admitted for trading on the Mercato Telematico Azionario (‘MTA’), the Italian regulated stock market. Similar actions were taken by the relevant authorities in Spain, Belgium, Greece, and Austria. In these countries, short-selling bans have been viewed as a possible tool to curb the adverse consequences on stock market liquidity and investors’ confidence. However, although subject to a similar economic scenario, other European countries, such as Germany and the United Kingdom, did not ban short-selling. All bans expired or were lifted on May 18, 2020. The purpose of our study is to examine whether the temporary short-selling bans in the EU during the COVID-19 crisis have achieved the market supervisors’ goals and, more generally, if similar bans are effective and desirable. Our conclusion is that they have are not.

Go read the whole thing, but the bottom line is that countries that banned short selling didn't do their economies or their investors much good.

Some more skeptical thoughts about the American Law Institute's planned Restatement of Corporate Law

A while back I noted that the American Law Institute is going to try writing a Restatement of the Law of Corporate Governance. I was skeptical.

Some thoughts: First, a restatement that applies to both closely held corporations and public corporations is unlikely to be successful. I refer you to my mentor Michael Dooley who argued that:

. . . the participants in a firm must have some governance structure to determine three basic questions. First, what are the general sorts of adaptive decisions that will need to be made over time? Second, what general normative principle guides decision making—that is, for whose benefit are decisions to be made? And, third, who, within the firm, shall make the adaptive decisions?

The answer to the second question is the same for all capitalist firms: decisions are to be made to benefit the interests of the residual claimants because maximizing their wealth necessarily maximizes the wealth of the coalition. The first and third questions are closely related, but their answers differ depending on salient characteristics of the type of firm in question.

In most general partnerships and closely held corporations, there is no functional distinction between management and residual claimants because the same persons perform both functions. Thus, all adaptive decisions, whether routine or extraordinary, are made by the residual claimants. In publicly held corporations, however, management and residual claimants have sharply differentiated functions. This distinction is codified in all corporations statutes by provisions similar to section 8.01(b) of the Revised Model Business Corporation Act: “All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation.”

The different decision-making structures prescribed for partnerships and closely held corporations, on the one hand, and publicly held corporations, on the other, result only partially from the number of putative decision makers involved in the respective types of firms. The characteristics that primarily dictate the choice of decision-making structure are the similarities in information and interests of the decision makers. Thus, if all partners actively participate in the management of the business, each partner should have (or, at least, be exposed to) the same facts necessary to make adaptive decisions. And since all partners are residual claimants, each has the same interest, namely, increasing the size of the residual interest. Under these conditions, an elaborate decision-making structure is unnecessary because the partners will tend to reach agreement informally and largely by consensus. Not only is this aspect of partnership governance the one that is most frequently observed,¹⁹ it is also the one predicted by Kenneth Arrow's theories of organizational decision making. According to Arrow, where an organization's decision makers have identical information and interests, decisions will be reached by “Consensus” because each participant, voting in his or her own self-interest, will naturally select the course of action preferred by the others.²¹

Where information and interests differ, however, it is obviously infeasible to involve all participants in the decision-making process. Given the normative goal of increasing the size of the residual interest, it makes sense to confer decisive authority on the residual claimants in a partnership, but only because the partners are also the active managers of the firm. Where the residual claimants are not expected to run the firm and especially when they are many in number (thus increasing disparities in information and interests), their function becomes specialized to risk-bearing, thereby creating both the opportunity and necessity for managerial specialists. Again as Arrow predicts, where information and interests differ, the residuals will no longer either be able or inclined to reach decisions that are in the best interests of their group. Instead, it will become “cheaper and more efficient to transmit all the pieces of information once to a central place” and to have the central place “make the collective decision and transmit it rather than retransmit all the information on which the decision is based.”

Arrow calls this latter decisional structure “Authority” . . ..

 ^{______________}

¹⁹ It is significant that the default governance rule for partnerships provides for equal participation in management by the partners. See Unif. Partnership Act § 18(e) (1914). Many state corporations statutes permit close corporation shareholders to adopt a partnership-like governance structure by dispensing with the board of directors and assuming direct shareholder control of the business. See, e.g., Del.Code Ann. tit. 8, § 351 (1991). The Revised Model Business Corporation Act has recently been amended to provide even greater flexibility by authorizing the use of unanimous shareholder agreements to tailor the corporation's governance structure to the shareholders' particular needs. See Rev. Model Business Corp. Act § 7.32. This procedure gives close corporation shareholders the same amount of self-determination regarding governance as is available under the Uniform Partnership Act. See generally Committee on Corporate Laws, Changes in the Revised Model Business Corporation Act—Amendments Pertaining to Closely Held Corporations, 46 Bus.Law. 297 (1990).

²¹ See generally Kenneth J. Arrow, The Limits of Organization (1974).

Michael P. Dooley, Two Models of Corporate Governance, 47 Bus. Law. 461, 466–67 (1992). A Restatement of Public Corporate Law must grapple with the value of authority. In turn, that means you have to grapple with the tradeoff between authority and accountability that drives my work on director primacy:

The director primacy account of corporate governance begins with the observation that the size and complexity of the public corporation ensures that stakeholders face significant collective action problems in making decisions, suffer from intractable information asymmetries, and have differing interests. Under such conditions, consensus-based decision-making structures are likely to fail. Instead, it is cheaper and more convenient to assign the decision-making function to a central decision maker wielding the power to rewrite intra-corporate contracts by fiat.

Stephen M. Bainbridge, Why the North Dakota Publicly Traded Corporations Act Will Fail, 84 N.D.L. Rev. 1043, 1046 (2008).

Second, if the Restatement does track Delaware law, there is a serious irony here. Dooley was active in leading the opposition to the first effort. Mike was the Reporter for the Model Business Corporation Act and helped lead  the ABA Business Law Section’s Ad Hoc Committee on the ALI Corporate Governance Project (known as “CORPRO”). One of CORPO’s main goals was to move the Project TOWARDS Delaware law. See, e.g., Michael P. Dooley & E. Norman Veasey, The Role of the Board in Derivative Litigation: Delaware Law and the Current Ali Proposals Compared, 44 Bus. Law. 503 (1989). For example, “the procedures governing derivative suits gradually moved toward the Delaware position, as did the substantive provisions governing interested-director transactions.” Stephen M. Bainbridge, Independent Directors and the Ali Corporate Governance Project, 61 Geo. Wash. L. Rev. 1034, 1043 (1993).

Third, one of the core problems with the first effort was that it did not restate Delaware law. If you’re going to restate public corporation law, you have to restate Delaware law. But the first effort was managed by Mel Eisenberg—one of the giants of the corporate law academy in the latter part of the 20^th Century, for whom I had great admiration—and who bought into the race to the bottom thesis that Delaware law is pure evil. As a result, “Unlike previous restatements prepared by the American Law Institute, the Corporate Governance Project undertook not only to restate the laws governing the internal affairs of corporation, but also to make recommendations on what corporate law should provide and what would be considered good corporate practice.” Elliott Goldstein, Future Articulation of Corporation Law, 39 Bus. Law. 1541 (1984). That approach drove much of the opposition which eventually led the reporters to admit that they were not restating the law, which resulted in the change of name from restatement to Principles. See Dooley, supra, at 493 (noting that the draft document “no longer purports to restate the law”). If you’re going to restate Delaware law, why bother? We have several very fine treatises on Delaware law. In addition, whose word are you going to take on the content of Delaware law: the members of the Delaware judiciary or a bunch of academics and lawyers?

Which brings me to my main concern about the current project. A number of the members of the committee are well known critics of Delaware law and, in some cases, known proponents of federalizing corporate law. Indeed, a number of folks on the committee are among the academics Leo Strine famously accused of pretending that they knew the law of Delaware (re corporate purpose) better than the Delaware judiciary. See Honorable Leo E. Strine, Jr., The Dangers of Denial: The Need for A Clear-Eyed Understanding of the Power and Accountability Structure Established by the Delaware General Corporation Law, 50 Wake Forest L. Rev. 761, 788 (2015) (“Rather than pretend that the law is already what they wish it to be, advocates of change should take on the harder work involved in real reform.”). All honorable folks, but not who I would want to undertake a restatement of Delaware law rather than a running critique thereof.

Guest Post: Does Van Gorkom's requirement of an informed decision survive Corwin?

My friend Robert T Miller of the University of Iowa law school sent along this email in response to my post Does Van Gorkom's requirement of an informed decision survive Corwin? I'm stumped:

I stand by my conclusion in the article on Van Gorkom. I get there primarily because I don’t read Stroud as expansively as you do. In addition, I’m not completely clear what meaning you’re attributing to Singh, but as I read it, there’s nothing in Singh that contradicts what I said in the article. And, to be clear, my article does not predate Singh. Singh was decided in 2016, and I wrote the Van Gorkom article in 2017. I cite Singh twice in the article, in nn. 631 and 676.

To start with Stroud, I read the case to mean that, in fulfilling its duty of candor, a board need not draw legal conclusions such, “We breached our duty of care.” Nevertheless, to fulfill its duty of candor, it must disclose all the material facts in its possession, including any facts that tend to show that it breached its duty of care. That is, the board does not need to say, “We were grossly negligent,” even if it actually believes that. But the board does need to say (provided this is true), “We met for one hour to discuss the merger, but we spent most of the time talking about baseball.” I believe the rule here is same as it is under the federal securities laws.

As to Singh, I read it as merely correcting VC Parson’s misunderstanding of Corwin in the opinion below, which is In re Zales Corp. Stockholders Litig., 2015 WL 6551418 (Del. Ch. 2015). That is, in Corwin, the Supreme Court talked about “the business judgment rule” applying after an uncoerced, fully-informed shareholder vote (compare how the court talked in Unocal).Such language, however, is ambiguous. On one reading, it means this: in a Revlon transaction, after an effective Corwin vote, the standard of review shifts from Revlon to the BJR, in the sense that the court will review the board’s actions from the beginning asking not whether the board took reasonable steps to get the best price reasonably available but whether the board breached its duty of loyalty or its Van Gorkom duty of care. On another reading, the language in Corwin means this: in a merger that would be reviewed under either Revlon or the BJR, after an effective Corwin vote, the standard of review shifts to the rational business purpose test, the standard of review that applies when the BJR is satisfied (i.e., there has been no breach of the board’s duties of loyalty or care). In the opinion below, the Court of Chancery had read Corwin the first way at the re-argument phrase. What Strine is saying in Singh is that this reading is a mistake. It is the second interpretation of Corwin that is correct: after an effective Corwin vote, the suit should be dismissed unless the merger lacks a rational business purpose (i.e., amounts to waste).

To turn to your problem, then, my answer is the following. The board’s duty of candor requires that it state all material facts in its possession in the proxy but not that it state legal conclusions such as, “We breached our duty of care.” If the board really was grossly negligent in approving the merger, then the board must state the material facts, which will support the conclusion that it breached its duty of care. If the board fulfills this duty and the shareholders vote to approve the merger anyway, then the vote will be effective under Corwin. Hence, the cause of action for breach of the duty of care will be extinguished, and the only possible claim is for waste. That claim will fail, and the suit will be dismissed.

If the board fails to state all the material facts about its process, however, then the Corwin vote will not be effective. As a result, the shareholders may sue for any breach the board committed, including a breach of the duty of care. Nevertheless, if the corporation has a 102(b)(7) charter provision, any claim sounding in the duty of care will be immediately dismissible under Malpiede v. Townsend. In the extremely unlikely event that the corporation does not have a 102(b)(7) provision, however, the shareholder’s suit will go forward, and the directors will be liable in damages for their breach of the duty of care. This is the same conclusion I reached in the Van Gorkom article.

We are disagreeing here, I think, primarily because of our disagreement about Stroud. If I follow you, you’re reading Stroud as meaning that a board’s duty of candor does not include stating material facts in its possession that tend to show it breached its fiduciary duties. If it were right, then a board could breach its duty of care, not disclose the material facts about the breach in the proxy, get an effective Corwin vote on the basis of that proxy, and then use that Corwin vote to extinguish the claim based on its duty of care. In my view, that would be an outrageous result, and, as I say, I don’t think that’s the law. I note too that your example concerns breaches of the duty of care related to the approval of the merger. Part of what I’m talking about in the passage you quote concerns breaches of the duty of candor—i.e., it goes to why the proxy omitted to state material facts. Such omissions can arise either from breaches of the duty of loyalty or from the duty of care. Those questions get more complicated, but, as I saw, I understand your example as applying to the simpler issue of a breach of the duty of care in the approval process of the merger.

That was very helpful.

If Company A owns Company B, which acts badly, can Company A shareholders bring an oversight claim against Company A for failing to monitor Company B?

A buddy sent along this email: "Company A owns Company B, which acts badly. Can Company A shareholders bring an oversight claim against Company A for failing to monitor Company B?"

To which I responded:

Yes.  Caremark itself involved misconduct by a subsidiary. Caremark’s agreement with the government “required a Caremark subsidiary to enter a guilty plea to two counts of mail fraud.” In re Caremark Intern. Inc. Derivative Litig., 698 A.2d 959, 965 n.10 (Del. Ch. 1996). In In re Yahoo! Inc. Shareholder Derivative Litig., 153 F. Supp. 3d 1107, 1121 (N.D. Cal. 2015), the court found that plaintiffs had failed to state a Caremark claim with respect to Yahoo’s board’s failure to monitor a subsidiary, but the court gave no reason to think that such a claim was bad law. See also Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, Civil Action No. 12151-VCG, 2017 WL 6452240, at *18 (Del. Ch. Dec. 18, 2017) (rejecting Caremark claim based on alleged oversight failures of defendants in connection with subsidiary's decision to engage in business venture with third party that resulted in large losses due to third party's fraud); Martin Petrin, Assessing Delaware's Oversight Jurisprudence: A Policy and Theory Perspective, 5 Va. L. & Bus. Rev. 433, 480 (2011) (explaining that “it appears that Caremark claims may be used to hold directors of a parent company liable for failing to oversee conduct that occurred in a subsidiary-a prospect that seems particularly unsettling for directors of large corporate conglomerates”).

Religiosity Enhances the Quality of Management Earnings Forecasts

There's a new paper linked on SSRN: Chourou, Lamia and Luo, He-san and Zhong, Ligang, Does Religiosity Enhance the Quality of Management Earnings Forecasts? (July-August 2020). Journal of Business Finance & Accounting, Vol. 47, Issue 7-8, pp. 910-948, 2020, Available at SSRN: https://ssrn.com/abstract=3700039 or http://dx.doi.org/10.1111/jbfa.12446

Abstract: This study investigates whether firms located in areas with higher levels of religiosity disclose higher‐quality management earnings forecasts than do other firms. Using a US sample of 4,655 firm‐year observations over the period 2001 to 2014, we find that firms headquartered in counties with higher proportions of religious adherents issue earnings forecasts that are less optimistically biased and that the effect of religiosity is concentrated in firms with weak monitoring mechanisms. We also find that religiosity mitigates pessimistic bias in management earnings forecasts, but only for those issued by firms operating in low litigation industries. This result suggests that when the litigation risk is high, both ethicality and risk aversion are at work and their competing effects likely offset each other. Additionally, we document that forecasts issued by firms in more religious areas trigger stronger stock price reactions than those issued by other firms and that the effect is limited to forecasts containing optimistic bias. Overall, our results show that religiosity enhances the quality of management earnings forecasts, but the effect varies based on different conditions.

Unfortunately, they're charging $42 to download it, so I'm just taking the abstract's word for it.

Does Van Gorkom's requirement of an informed decision survive Corwin? I'm stumped.

Assume the following:

1. The board of directors is approached by a private equity fund-backed management buyout group.
2. The board approves the transaction but, in doing so, was grossly negligent in failing to inform themselves of all information reasonably available to them.
3. The board then puts the proposal to a vote of the shareholders. The shareholder vote is uncoerced. The proposal is approved by a substantial majority of the disinterested shareholders.
   1. But the proxy statement did not disclose that the directors had been grossly negligent in failing to inform themselves of all information reasonably available to them.
4. Has the shareholder vote satisfied Corwin?
   1. See Stroud v. Grace, 606 A.2d 75, 84 n.1 (Del. 1992) ("We recognize the long-standing principle that to comport with its fiduciary duty to disclose all relevant material facts, a board is not required to engage in “self-flagellation” and draw legal conclusions implicating itself in a breach of fiduciary duty from surrounding facts and circumstances prior to a formal adjudication of the matter. Nonetheless, when a board allegedly breaches its fiduciary duties, we will not uphold shareholder ratification unless the board discloses all material facts relevant to the issue at hand.").

Assuming Corwin applies, is there any room left for rebutting the business judgment rule by showing that the directors failed to satisfy the informed decision requirement laid out by Van Gorkom? Or is that requirement a dead letter?

On the basis of Leo Strine's decision in Singh v. Attenborough, 137 A.3d 151 (Del. 2016), I think the answer to the former is no:

We affirm the judgment of the Court of Chancery solely on the basis of its decision on reargument of October 29, 2015, finding that a fully informed, uncoerced vote of the disinterested stockholders invoked the business judgment rule standard of review. But, we note that the reargument opinion's decision to consider post-closing whether the plaintiffs stated a claim for the breach of the duty of care after invoking the business judgment rule was erroneous. Absent a stockholder vote and absent an exculpatory charter provision, the damages liability standard for an independent director or other disinterested fiduciary for breach of the duty of care is gross negligence, even if the transaction was a change-of-control transaction.Therefore, employing this same standard after an informed, uncoerced vote of the disinterested stockholders would give no standard-of-review-shifting effect to the vote. When the business judgment rule standard of review is invoked because of a vote, dismissal is typically the result. That is because the vestigial waste exception has long had little real-world relevance, because it has been understood that stockholders would be unlikely to approve a transaction that is wasteful.

On the other hand, I take it that Robert Miller disagrees:

Even after Corwin, in the absence of a Section 102(b)(7) provision in the corporate charter, a plaintiff-stockholder may argue post-closing that the stockholder vote was not fully informed, and if the plaintiff succeeds on this score, the directors would be liable in monetary damages for any breaches of their duty of care, including under Revlon. In the presence of a Section 102(b)(7) provision, the plaintiff-stockholder has to argue that any material misstatement or omission in the disclosure resulted from a breach of the board's duty of loyalty--a claim that, in a third-party transaction in which the directors were not otherwise interested--is very unlikely to succeed. See Larkin v. Shah, C.A. No. 10918-VCS, 2016 WL 4485447, at *20 (Del. Ch. Aug. 25, 2016). The upshot is that, even after Corwin, Section 102(b)(7) remains very important in insulating directors from post-closing actions for damages in merger cases.

Robert T. Miller, Smith v. Van Gorkom and the Kobayashi Maru: The Place of the Trans Union Case in the Development of Delaware Corporate Law, 9 Wm. & Mary Bus. L. Rev. 65, 219 n.676 (2017). But note that his article pre-dated Singh.

I welcome comments, but prefer not to get speculation. Cites preferred.

Update: We got a great response from Robert Miller. Here.

I'm proposing to make remote teaching a permanent option for my law school

I just sent the powers that be at my law school the following message:

I’m finding that I really enjoy teaching remotely. Let me explain why:

1. As you know, many of my classes—especially Business Associations—have to be taught in our largest classrooms, where I have to boom to be heard in the back and where my eyesight—even with glasses—prevents me from seeing the back few rows as more than blurs.
1. Remotely, I can speak normally and can see student faces more easily.
2. Because I use a Mac at home and the office, switching to the classroom Windows machines has always been a headache.
1. Using a Mac to teach from has made my life much easier.
2. Using a Mac at home has also allowed me to be much more spontaneous. I routinely pause the lecture to pull things off the internet or open files from DropBox. My greatly diminished Windows skills make that much harder on the classroom screens.
3. I find I am more experimental. I am using PollEverywhere, with I think success. But I’m also incorporating more videos and so on to see what works.
4. I’m more available to students. I send out Doddle polls to find out when they want me to hold office hours in a week. I meet with them individually via Zoom even in the evening.
5. I have the flexibility of recording a class for asynchronous viewing in even of a crisis.
6. My attendance has been very good. 20-22 out of 24.
1. I credit that in part to the greater intimacy that online learning seems to promote.
7. I get a TON of student questions via chat. Students are much more willing to ask a question via private chat than to raise their hand in a classroom, especially because I have a policy of not naming the student who sent the question.
8. I’m even attending more faculty meetings since they went to remote.
9. My carbon footprint is lower. I’ve only driven my car 4 times since March.

What I propose is that the administration give serious thought to giving faculty an option to teach remotely on a permanent basis. In my case, for example, Helen and I are about 90% sure that we will not retire in California. Currently, my plan is to retire mid-2025, when I am Social Security eligible. But remote teaching would make it possible for Helen and I to move now and for me to continue teaching well past 2025. Plus, as you know, I am not a morning person and constantly request afternoon classes. But if I were on the East Coast, I could get up late, teach a class at 1 PM and it would still be 10 am in Los Angeles.