ProfessorBainbridge.com

A New Start

I'm relaunching ProfessorBainbridge.com at Substack. The focus will continue to be corporate law and governance. I hope you'll join me. I will leave this site up as an archive for at least a while.

On not signing most open group letters by my fellow legal academics

Last week, I signed an open letter to the Delaware legislature by a group of corporate law academics addressing aspects of Delaware SB 21, which was then pending before the Delaware House.

This week, as you may have seen, 80 out of the ~120 Harvard law school faculty signed a group letter protesting certain Trump administration actions--especially those targeting law firms--as being detrimental to the rule of law. 

Predictably, where Harvard leads, the rest of legal education follows. I hear rumors of similar letters in the works at some law schools or among faculty at multiple law schools.

I have been asked to sign some. But I'm not going to do so.

First, however, let me emphasize that I share the signer's concerns about the way the Trump administration is punishing law firms of which the administration disapproves. The use of unilateral executive action is inconsistent with the rule of law. This is true even though I think some of what some of the law firms did to incur Trump's wrath was seriously problematic. In particular, Perkins Coie played a major role in commissioning and disseminating the Steele dossier, which has been widely and effectively discredited. In effect, they committed election fraud. Having said that, I believe Trump should have had the Justice Department investigate to determine if laws were broken rather than unilaterally imposing punishment by executive decree. If the Justice Department concluded laws were broken by the firm, then prosecute the firm. That is how the system is supposed to work. That is how the rule of law is supposed to work.

But I have three reasons for not signing a version of the Harvard letter. First, I share many of the concerns that Harvard law professor Adrian Vermeule identified in an open letter to his students explaining why he didn't sign the Harvard letter:

1. "In virtue of its joint signature list, its collective voice, and its claim to portray itself as a consensus statement of those who otherwise disagree, the letter hovers ambiguously between a statement of the faculty as such and a mere aggregation of “individual” views."
2. "It speaks only to the “fears” of some, not all, of our students, and threatens to inflame the fears of other students."
3. What signal does it send to students "who support the current President and the legal policies of his administration. What exactly are [they] supposed to think when an overwhelming supermajority of the faculty, although purporting to speak “in their individual capacities,” jointly condemn those policies? [They] might be forgiven for wondering if [they] will get a fair shake during [their] time at the law school.

Second, we have just come through a year of massive campus unrest. In response to which, many universities recommitted themselves to the principles announced in the Kalven Report:

The instrument of dissent and criticism is the individual faculty member or the individual student. The university is the home and sponsor of critics; it is not itself the critic. It is, to go back once again to the classic phrase, a community of scholars. To perform its mission in the society, a university must sustain an extraordinary environment of freedom of inquiry and maintain an independence from political fashions, passions, and pressures. A university, if it is to be true to its faith in intellectual inquiry, must embrace, be hospitable to, and encourage the widest diversity of views within its own community. It is a community but only for the limited, albeit great, purposes of teaching and research. It is not a club, it is not a trade association, it is not a lobby.

Since the university is a community only for these limited and distinctive purposes, it is a community which cannot take collective action on the issues of the day without endangering the conditions for its existence and effectiveness. There is no mechanism by which it can reach a collective position without inhibiting that full freedom of dissent on which it thrives. It cannot insist that all of its members favor a given view of social policy; if it takes collective action, therefore, it does so at the price of censuring any minority who do not agree with the view adopted. In brief, it is a community which cannot resort to majority vote to reach positions on public issues.

The Report thus advocated that, in most cases, there should be "a heavy presumption against the university taking collective action or expressing opinions on the political and social issues of the day, or modifying its corporate activities to foster social or political values, however compelling and appealing they may be." In other words, a norm of institutional neutrality. 

Granted, neither the Harvard letter nor the others reportedly circulating purport to speak for the university. Technically, there is no violation of the letter of the principle of institutional neutrality. But surely there is at least a seeming inconsistency between these letters and the spirit of institutional neutrality. As Professor Vemuele observes of the Harvard letter:

In virtue of its joint signature list, its collective voice, and its claim to portray itself as a consensus statement of those who otherwise disagree, the letter hovers ambiguously between a statement of the faculty as such and a mere aggregation of “individual” views.

Finally, and most importantly, as academics, we cultivate specialized knowledge that gives our opinions particular weight within our domains of expertise. When we sign open letters on matters beyond these domains, we risk lending our professional credibility to positions where we lack specialized insight. This practice may inadvertently dilute the value of academic expertise broadly.

Our professional standing results from years of focused study and contribution in specific fields. When we leverage this standing on issues where we possess only general knowledge, we potentially mislead the public about the depth of expert consensus. This creates an ethical tension: should we use the authority granted to us for one purpose to influence discourse in unrelated areas?

This position doesn't require political silence—we remain free to participate as private citizens. Rather, it suggests that our public use of professional credentials should align with the areas where we possess genuine expertise. This approach upholds both intellectual honesty and the distinctive value of academic contribution to public discourse.

So, when it comes to group letters I am going to continue my longstanding policy of sticking to my lane: federal securities and Delaware corporate law.

Moving the Blog Poll

I'm thinking about moving my blog https://t.co/DQw5w4N9iJ to Substack with an exclusive focus on corporate law and governance. No politics, wine,recipes, or other folderol. I'd start off at $ 5/month and commit to doing at least 2 substantive posts a week, more likely 3. Would…

— Steve Bainbridge (@PrawfBainbridge) March 30, 2025

Trump's assault on the legal profession

This is going to be an unpopular comment with a lot of my lawyer friends, but here goes: I do not defend what Trump is doing to law firms. At the same time, however, I don't see BigLaw as a bunch of innocent victims. I dug out Austin Sarat's book about cause lawyering, because he deals with the resistance conservative and libertarian lawyers faced from their law firms when they wanted to represent causes they believed in. He describes an incident in which a law firm forced a lawyer out because his partners disapproved of the pro bono work he did for pro-life groups. And that was not the only incident of the type. When I was in practice, there were other similar incidents and I was told my firm would never approve pro bono representation of such groups. So, I'd be more sympathetic to BigLaw's complaints about being punished for representing clients if they were a little less selective about the kinds of clients they were willing to represent.

And while we're on the topic, let's ask ourselves whether the norms of our profession ought to excuse us not only from legal responsibility for our clients but also for moral responsibility. There's a tone in some of the BigLaw defenders that suggests lawyers are just hired guns who cannot be held accountable for what their clients do. And I agree that lawyers should not be legally punished for representing particular clients. But surely they should not be exempt from criticism when they represent evil clients.

Optionality is optimal: Talley, Gordon, Bainbridge et al Law Professor Letter to the Delaware Legislature Urging SB 21 be Made Optional

Eric Talley, Jeff Gordon, and I have each posted proposals that Delaware SB 21 be amended to make it optional. Over the weekend we worked up a letter to the Delaware legislature advancing just such a proposal (Eric deserves full credit for pulling the laboring oar). (Download Talley, Gordon, Bainbridge, et al SB21 Letter here.) We ended up with 25 corporate law professors cosigning the letter.

The letter argues that an opt-in approach offers several advantages:

1. Preserving Flexibility and Market Choice – Delaware’s competitive strength lies in its ability to accommodate a range of governance preferences. That strength is part of what attracts highly heterogeneous companies to incorporate in the state. Granting corporations the ability to opt into the provisions of SB21—rather than imposing them immutably and mandatorily—ensures that each company can make an informed decision about its governance structure while preserving Delaware’s reputation as the jurisdiction of choice for corporate flexibility.
2. Mitigating the Risk of Reincorporation – Providing corporations with an option to adopt SB21’s provisions circumvents the concerns over mass reincorporation out of Delaware, so-called “DExit.” Companies objecting to the common law regime will now have a ready alternative that obviates the need to explore alternatives in other states.  Moreover, corporations that opt in would still benefit from the familiar substantive law of Delaware as to other corporate attributes—one superintended by an expert and nimble court applying a rich body of precedents.  A corporation contemplating leaving Delaware could now get the model it wants without having to reincorporate.  And, providing this flexibility alleviates critics’ concerns that a rigid statutory mandate will accelerate rather than dampen an incorporation exodus. Put simply, an opt-in model would demonstrate that Delaware remains responsive to corporate needs without forcing a one-size-fits-all approach on everyone.
3. Avoiding Constitutional and Legal Challenges – A voluntary opt-in framework would also be more robust to constitutional challenges than a broad, mandatory limitation on the Chancery Court’s vested equitable powers under Delaware’s constitution. Allowing opt-in would invite Delaware corporations (and not the General Assembly) to experiment with their governance structures, obviating thorny questions about separation of powers and legal validity that are commonplace with abrupt and mandatory statutory shifts such as the one SB21 proposes.
4. Leveraging Market Forces to Settle the Debate – The competing claims about SB21’s long-term impact—whether it strengthens or weakens Delaware’s franchise—could be field tested empirically by allowing corporations to choose for themselves. Those who find the new provisions attractive can adopt them, while those who prefer the status quo can maintain their current governance structures. Over time, Delaware’s corporate governance framework will evolve based on demonstrated market preferences rather than armchair speculation.

The letter also argues that the proposal could be adopted with just a few minor tweaks to the current bill:

To take just one example, a one-sentence addition to Section 102(b) of the DGCL could provide that Delaware corporations may, through an express charter provision, opt into the new rules on conflicted transactions and inspection rights contained in SB21. Under this approach, the current versions of Sections 144 and 220 would remain intact, and SB21’s key provisions would be codified into new DGCL Sections 144A and 220A that are turnkey ready for companies to embrace through charter provisions as they see fit. This minor textual revision involves minimal legislative alteration while upholding the core strengths of Delaware’s corporate law tradition.

My coauthors and I are not unanimous in our view of SB 21. Some of us (including yours truly) think that if the legislature is unwilling to make SB 21 optional, the legislature should go ahead and pass the bill as is. Others think that unless the bill is made optional, the bill should not be passed. But all of us agree that optionalty is the optimal solution. 

Update: Ann Lipton reports that "a Delaware rep introduced a proposed amendment to SB 21 that would adopt Eric Talley's opt-in proposal (also endorsed by Jeffrey Gordon and Stephen Bainbridge)."

Lauren Pringle reports:

It got more than traction! It got pre-filed as House Amendment 1 to Senate Substitute 1 for Senate Bill 21!

You can download the proposed bill here.

Delaware Senate Bill 21: A Comprehensive Analysis and Proposals for Improvements

As regular readers know, I have been posting a lot about pending Delaware Senate Bill 21. Using Claude, I pulled all of those posts into a single document--Delaware Senate Bill 21: A Comprehensive Analysis and Proposals for Improvements--that you can download from that link.

It offers an overview of SB21. It confirms my endorsement of the bill's general framework, but proposes 9 tweaks that I believe would significantly improve the bill.

As for using AI, I think Clause did a pretty good job of boiling 12 blog posts down into a single document. 

 

Talley and Gordon on contractarian solutions to the conflicted controller debate surrounding Delaware SB 21, which I endorse

I am what is known in corporate law jurisprudence circles as a contractarian. As I explain in my essay, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, “contractarians” model the firm not as an entity, but as an aggregate of various inputs acting together to produce goods or services. Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management monitors the performance of employees and coordinates the activities of all the firm’s inputs. The firm is simply a legal fiction representing the complex set of contractual relationships between these inputs. In other words, the firm is not a thing, but rather a nexus or web of explicit and implicit contracts establishing rights and obligations among the various inputs making up the firm.

The nexus of contracts model has important implications for a range of corporate law topics, the most obvious of which is the debate over the proper role of mandatory legal rules. As a positive matter, contractarians contend that corporate law in fact is generally comprised of default rules, from which shareholders are free to depart, rather than mandatory rules. As a normative matter, contractarians argue that this is just as it should be.

As a contractarian, I was very interested by a proposal in the CLS Blue Sky Blog from Professor Eric Talley that adopts a contractarian approach to the issues currently roiling Delaware corporate law. For the benefit of those who are coming in late, Delaware's proposed Senate Bill 21 (SB21) aims to restructure fiduciary duty analysis for controlling stockholders, officers, and directors in Delaware corporations. Proponents argue SB21 is necessary to prevent corporations from leaving Delaware for states like Nevada or Texas—a phenomenon dubbed "DExit." Critics counter that the bill would undermine Delaware's competitive advantage of predictable case law interpreted by skilled judges.

Professor Eric Talley identifies a crucial oversight in the debate: Delaware's historical strength lies not only in its judiciary but also in its flexible, contractarian approach to corporate law. Talley proposes a modest alteration to SB21—adding an "opt-in" feature—that would preserve Delaware's contractarian principles while addressing concerns from both sides.

This solution would create a new section (144A) offering relaxed safe harbor for transactions involving interested parties, but only for corporations whose charters expressly adopt it. A complementary provision, Section 102(b)(8), would authorize corporations to adopt this safe harbor through charter amendments. This approach draws inspiration from Delaware's successful Section 102(b)(7), which allows corporations to waive monetary liability for breaches of duty of care.

Talley argues this contractarian solution would preserve Delaware's flexibility while addressing concerns from both perspectives. Companies could choose their preferred governance framework rather than being subjected to a universal rule. This approach would also remedy SB21's most significant drawback—its mandatory nature—by making the proposed safe harbor optional, thus reaffirming Delaware's commitment to the flexible, enabling approach that has kept it at the forefront of corporate law.

In a forthcoming post at the CLS Blue Sky Blog, Professor Jeffrey Gordon offers what he calls "an additional framing and a minor modification to Talley’s proposal, a friendly amendment." Gordon's argument begins with the dual nature of controlling shareholders in corporate governance. While controllers help solve managerial agency costs through close monitoring, they also present their own agency costs through potential extraction of "private benefits of control" via diversionary transactions.

Gordon explains that the difference between U.S. law (which allows controllers to retain control premiums) and other jurisdictions (which require premium sharing through "mandatory bid" rules) stems from trust in Delaware courts to maintain effective fiduciary litigation that prevents excessive private benefit extraction by new controllers.

This judicial control is particularly crucial for dual-class stock structures, where the wedge between cash flow rights and control rights creates ongoing temptation for controllers to divert resources. Gordon provides examples showing how controllers with decreasing cash flow rights have increasing incentives to divert corporate resources.

Gordon articulates a key insight: incorporating in Delaware represents a commitment strategy by controllers to assure investors they won't extract improper private benefits. This commitment subjects controllers to Delaware's rigorous fiduciary duty regime.

Building on Professor Eric Talley's opt-in proposal, Gordon supports preserving a demanding fiduciary duty regime while allowing some controllers to opt out, with pricing consequences in capital markets. Gordon adds refinements for approval processes: for dual-class companies, requiring majority approval from each class; for single-class companies, requiring majority approval from disinterested shareholders. Without these approvals, opt-outs would be evaluated under the TripAdvisor standard.

Finally, Gordon suggests controllers should be able to lower the threshold for "facts and circumstances" control determination (e.g., from 33% to 20%) when opting into the new regime, and he proposes specific language for a new Section 102(b)(8) to implement these recommendations.

I find their general approach attractive, even if I might quibble with a few details. Delaware corporate law is generally enabling, meaning it provides corporations with broad flexibility to structure their governance and operations as they see fit, rather than imposing rigid mandatory rules. This approach allows companies to tailor their bylaws, board structures, and fiduciary obligations within the framework of statutory and common law principles. As a contractarian, I think that is as it should be.

Both Talley and Gordon propose an"opt-in" approach under which companies would have to choose to switch from current law into their proposed safe harbor, with voting structures that are designed to protect minority shareholders. I concur that an "opt-in" approach is superior here to an "opt-out approach."

First, an opt-in approach preserves Delaware's current fiduciary duty regime as the default, maintaining the predictability and established precedent that many corporations value. This avoids disrupting the existing legal framework that has been developed through decades of case law and judicial expertise.

Second, an opt-in model aligns with Delaware's contractarian tradition by allowing corporations to affirmatively choose the governance structure that best suits their needs, rather than forcing all corporations to take action to maintain the status quo. This respects corporate autonomy and the ability of firms to make deliberate governance choices.

Third, an opt-in approach better protects minority shareholders by requiring explicit action (and in Gordon's refinement, specific approval processes) to adopt the more relaxed fiduciary standards. This ensures greater transparency about the change and provides clearer notice to investors.

Finally, an opt-in structure serves as a market test for the new fiduciary regime. If the new safe harbor truly adds value and reduces unnecessary litigation without harming minority shareholders, corporations will voluntarily adopt it. If it doesn't, the market will signal this through limited adoption.

Note that neither Talley nor Gordon address the provisions of SB21 amending the shareholder inspection rights under DGCL section 220. The logic of allowing companies to opt-into those provisions seems equally compelling.

The Badly Drafted Books and Records Provisions of Delaware SB 21: What Documents Can Shareholders Inspect?

As regular readers know, I have been blogging regularly about the SB 21 bill currently pending before the Delaware legislature. I've focused solely on the provisions amending DGCL section 144 as it relates to conflicted interest transactions by directors, officers, and controlling shareholders. In this post, I turn to the provisions of SB 21 governing inspections of books and records.

I should make clear here that the version of SB 21 I am working with here is the one from the DSBA Corporation Law Council not the original text. 

As I explain in my book, Corporate Law (Concepts and Insights):

DGCL § 220 provides that shareholders have the right to inspect a corporation’s books and records, subject to a variety of limitations:

(b) Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from:

(1) The corporation's stock ledger, a list of its stockholders, and its other books and records; ....

A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. ...

As the Delaware Supreme Court has explained, for example, inspection rights can be very useful in a variety of contexts:

Section 220 provides stockholders of Delaware corporations with a “powerful right.” By properly asserting that right under section 220, stockholders are able to obtain information that can be used in a variety of contexts. Stockholders may use information about corporate mismanagement, waste or wrongdoing in several ways. For example, they may: institute derivative litigation; “seek an audience with the board [of directors] to discuss proposed reform or, failing in that, they may prepare a stockholder resolution for the next annual meeting, or mount a proxy fight to elect new directors.”

More than a decade ago, we noted that “[s]urprisingly, little use has been made of section 220 as an information-gathering tool in the derivative [suit] context.” Today, however, stockholders who have concerns about corporate governance are increasingly making a broad array of section 220 demands. The rise in books and records litigation is directly attributable to this Court’s encouragement of stockholders, who can show a proper purpose, to use the “tools at hand” to obtain the necessary information before filing a derivative action. Section 220 is now recognized as “an important part of the corporate governance landscape.”

SB 21 makes a number of significant changes to Section 220 that will substantially limit or even eliminate its utility for such purposes.

Perhaps most importantly, SB 21 adopts a much narrower definition of the books and records that are subject to inspection. Under current law, where a shareholder seeks to prove director or officer mismanagement in connection with a particular transaction or event, the shareholder is entitled to inspect relevant contracts, correspondence, and the like. See, e.g., Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 791 (Del. Ch. 2016) ("This court has the power to order production of documents prepared by officers and employees as part of a Section 220 inspection."); see also KT4 Partners LLC v. Palantir Techs. Inc., 203 A.3d 738, 752–53 (Del. 2019) (holding “that the Court of Chancery should not order emails to be produced when other materials (e.g., traditional board-level materials, such as minutes) would accomplish the petitioner’s proper purpose, but if non-email books and records are insufficient, then the court should order emails to be produced”).

In contrast, SB 21 creates a new statutory definition of books and records that largely limits the materials a shareholder may inspect to board-level materials. Emails and other correspondence between managers, contracts, and similar materials seemingly are not subject to inspection under the new provisions.

But then we come to new section 220(b)(4), which provides that "This section does not affect: ... b. The power of a court, independently of this chapter, to compel the production of corporate records for inspection and to impose reasonable restrictions as provided in paragraph (b)(3) of this section, provided that, in the case of production of books and records described in paragraph (a)(1) of this section at the request of a stockholder, the stockholder has met the requirements of this subsection." The bill's synopsis cryptically explains that "preserves whatever independent rights of inspection exist under the referenced sources and does not create any rights, either expressly or by implication." It's unclear what the "referenced sources are," but under existing law a shareholder may have inspection rights granted by the corporation’s certificate of incorporation, its bylaws, or a shareholder agreement. In addition, under pre-DGCL Delaware law, shareholders had a common law right to inspect books and records. Shareholders have sometimes argued that those common law rights continue to exist independently of section 220. But the law here is not clear. See, e.g., King v. DAG SPE Managing Member, Inc., No. CIV.A. 7770-VCP, 2013 WL 6870348, at *7 (Del. Ch. Dec. 23, 2013) ("Section 220(d) at least arguably preempts a director's common law right to inspect corporate books and records. As the relevant authorities demonstrate, Delaware courts enforced this right at common law only until 1981, when the General Assembly enacted 8 Del. C. § 220(d).").

In sum, it is unclear what work new Section 220(b)(4) is intended to do.

But now we come to new section 220(g). (Note that the original version of SB 21 lacked this provision, which would leave access to below board level documents to the tender mercies of (b)(4).) It provides that:

(g) In any proceeding brought by a stockholder under subsection (c) of this section to compel the inspection of book and records, the Court of Chancery may order the corporation to produce, in addition to any books and records or other records ordered to be produced pursuant to subsection (e) of this section, other specific records of the corporation only if and to the extent: (1) such stockholder has met the requirements of subsection (b) of this section; (2) such stockholder has made a showing of a compelling need for an inspection of such records to further the stockholder’s proper purpose; and (3) such stockholder has demonstrated by clear and convincing evidence that such specific records are necessary and essential to further such purpose.

Subsection (e) provides in pertinent part that "the Court of Chancery may not order the corporation to produce any records of the corporation other than the books and records set forth in paragraph (a)(1) of this section." It's not clear why subsection (g) doesn't simply jump straight to (a)(1), but let's pass over that issue.

Although subsection (g) preserves a limited right to access materials like emails, contracts, and other below board level documents, it imposes quite high burdens on the shareholder to get access to such documents. The shareholder must identify specific documents.

Consider, for example, the documents at issue in Yahoo Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 791 (Del. Ch. 2016), where the stockholder was using a Section 220 inspection to gather the information necessary to bring a derivative suit challenging the hiring and compensation of Yahoo's COO. Those documents included "emails to and from the directors from management or the compensation consultant, emails among the directors themselves, and documents and communications prepared by Yahoo officers and employees about the Board's deliberations." Id. The court limited the documents subject to inspection to documents possessed by the members of the Compensation Committee "including their email communications."

Will it be enough under subsection (g) for the stockholder to say "I want all emails related to the hiring of the COO"? Or would the stockholder have to specify "the email from CEO Jane Smith" to Compensation Committee Chair Helen Doe on February 28, 2025"? Or something in between?

Once the stockholder achieves the required--albeit uncertain--level of specificity, the stockholder must prove that it has a "compelling need" for the documents. How does the stockholder do that?

Last, the stockholder must demonstrate "by clear and convincing evidence that such specific records are necessary and essential to further such purpose." "Clear and convincing evidence is evidence that produces an abiding conviction that the truth of the contention is 'highly probable.'” Matter of Koyste, 111 A.3d 581, 588 (Del. 2015). This "is a much more difficult standard of proof than the ordinary preponderance of the evidence standard applied in most civil contexts." Miranda v. Delaware State Lottery Commn., No. CIV.A. K10A10008 WLW, 2011 WL 3329282, at *2 n.8 (Del. Super. Aug. 1, 2011).

In addition, one wonders whether a plaintiff who shows a "compelling need" for purposes of (g)(2) has shown that such records "are necessary and essential to further such purpose"?

To sum up, the amendments to Section 220 substantially undermine the Delaware Supreme Court's repeated insistence that shareholder books and records inspections be used routinely as a way of satisfying the requirement that derivative suits be plead with particularity. Worse yet, the new provisions contain multiple ambiguities that are going to require much litigation to resolve.

Andrew Verstein's new article "The Corporate Census" gets a nice shout out from corporate governance guru Evan Epstein

I am a huge fan of Evan Epstein's newsletter. In the latest post, he offers up a good summary of the state of play in Delaware's current corporate law debate about the fiduciary duties of controlling shareholders. https://lnkd.in/ghgDW-WE
In the post, Evan gives a nice shout out to my friend and colleague Andrew Verstein's new article, which Evan (correctly IMHO) praises for its "remarkable findings." I concur. It's an important article. https://lnkd.in/gxM4ZpR4

Courts are not omniscient and/or sacrosanct. Not even Delaware courts. The law governing conflicted controller transactions needs a legislative fix.

Lucian Bebchuk has posted a critique of Delaware SB 21, which raises several objections to the bill. As a supporter of the bill, I disagree with much of it. But I want to speak here to an aspect that I have seen among a lot of SB 21's opponents, which is a sort of patrician view that courts should not be subject to legislative correction:

Delaware officials have long taken pride in the role played by these courts and have put forward the caselaw developed by these courts as a major asset that favors Delaware incorporation. ...

By contrast, passing the legislation would communicate a judgment by the Delaware legislature that (a) the Delaware courts have gotten their work wrong and developed inferior doctrines with respect to important subjects, and (b) the courts nonetheless applied these doctrines for a substantial period of time. Furthermore, enacting the proposal would also communicate the legislature’s judgment that corporate planners would be better off without the guidance and predictability provided by the body of caselaw developed on these important subjects.

Problem 1: As Justice Sotomayor has acknowledged, "All judges make mistakes. (Even us.) See Brown v. Allen, 344 U.S. 443, 540, 73 S.Ct. 397, 97 L.Ed. 469 (1953) (Jackson, J., concurring in judgment) ('We are not final because we are infallible, but we are infallible only because we are final')." Dietz v. Bouldin., 579 U.S. 40, 53 (2016). 

Delaware courts have gotten the law of conflicted controller transactions wrong. Egregiously so. I refer you to my article, A Course Correction for Controlling Shareholder Transactions, in which I identify three problems with the caselaw in this area:

    A.    Overly Broad Definition of "Controller"

1. 1. Delaware courts have significantly expanded who qualifies as a "controlling shareholder" beyond those with majority voting power
   2. Courts increasingly find control in shareholders with significantly less than 50% ownership
   3. The "superstar CEO" doctrine from Tornetta v. Musk allows finding control based on managerial rather than voting power
   4. Courts now emphasize "soft control" through contractual rights, commercial relationships, and other non-voting mechanisms
   5. The expanded definition creates uncertainty and may eventually lead to finding someone a controller even without stock ownership

    B.    Problems with the Standard for Reviewing Conflicted Transactions

1. Delaware courts have departed from the *Sinclair Oil* threshold test, which required showing that a controller received a benefit at both the expense of and to the exclusion of minority shareholders
2. Courts now apply the exacting "entire fairness" standard whenever a controller: Stands on both sides of a transaction or Receives a unique or non-ratable benefit, even without harm to minority shareholders
3. This expansion has led to treating many ordinary commercial transactions between controllers and controlled entities as inherently suspect

    C.    Excessive Scrutiny of Director Independence

1. Courts have made cleansing conflicted transactions increasingly difficult through heightened scrutiny of director independence
2. The definition of independence has expanded to emphasize personal relationships that might influence objectivity
3. The inquiry has become highly subjective, contextual, and fact-specific, creating uncertainty
4. Courts have shown growing skepticism of independent directors in controlled companies
5. The indeterminate standard allows judges to find bias in an increasing variety of relationships

These trends have led to significant consequences, including increased litigation, uncertainty in transaction planning, deterrence of potentially beneficial transactions, and controllers threatening to reincorporate outside Delaware (as with Elon Musk and Tesla). A course correction is needed to restore balance between preventing abusive controller conduct and allowing legitimate transactions with proper safeguards. There being no signs that the Delaware courts would do the job, it was necessary for the legislature to step in.

Problem 2: Lucian worries that "corporate planners" will lack "the guidance and predictability provided by the body of caselaw" governing conflicted controller transactions. But therein lies the problem. It is not just that the recent Delaware judicial decisions in this area have made serious doctrinal errors, it is not just that those decisions are premised on unsound public policy norms, but it is precisely that those decisions have resulted in a lack of guidance and predictability. My article notes Chancellor McCormick's acknowledgment that it's now "impossible to identify or foresee all of the possible sources of influence that could contribute to a finding of actual control." This creates significant uncertainty for legal advisors and transaction planners. My article describes uncertainty about whether Delaware courts apply different standards for determining controller status at different procedural stages (motion to dismiss versus trial), which increases litigation costs. My article notes that various Delaware jurists split 4-2 on a director independence question in Sandys v. Pincus, demonstrating that "Delaware decisions regarding independence are characterized by a lack of consistency."

Problem 3: Now we come to my most fundamental disagreement with what I take to be the import of Lucian's argument. If I am reading him correctly, Lucian seems to suggest that there is something wrong with a legislature passing a bill that some might see as calling out the courts for having made bad law. But what would Lucian have the legislature do when courts make bad law? To the contrary, in this era of common lawmaking in statutory contexts, it is precisely the province of the legislature to correct judicial errors. It is also perfectly legitimate for the legislature to send the courts signals when the courts overstep their bounds. We are not talking about constitutional rights here, which the courts must defend against legislative intrusion, after all, but ordinary laws that rest on a statutory foundation. 

DExit is a trickle not a flood and is unlikely to become a cascade

A cascade effect (a.k.a. domino effect or snowball effect) occurs when a change triggers a chain of events in which one state of the world rapidly transforms into a new state. 

Many commentators on the DExit phenomenon appear to assume that we are on the verge of a cascade event in which huge numbers of Delaware corporations decide to change their state of incorporation to some other state.

As I explain in my article, DExit Drivers: Is Delaware's Dominance Threatened?, the number of firms that have moved from Delaware is tiny. It barely amounts to a trickle. As I also explain therein, for most firms, Delaware remains the preferred choice. The only plausible exception is the small number of publicly traded firms having a controlling shareholder, who have faced a greater risk of liability as a result of recent Delware court decisions (discussed in my A Course Correction for Controlling Shareholder Transactions). Assuming SB 21 passes the Delaware legislature, those decisions will be overturned and the incentive driving DExit will be significantly reduced.

But let's assume I'm wrong. Would DExit become a cascade?

This brings us to my friend and UCLAW colleague Andrew Verstein's new article, The Corporate Census. This is a really important new article in which Andrew presents:

... the first database of all entity formations in the United States, going back to the founding. All previous studies were based on tiny subsets of corporations, such as only large public corporations. Looking at the broader sample destabilizes core empirical assumptions in the field. For example, while Delaware is commonly thought to be the leader for incorporations, its law is not even in the top five.

Of particular import for present purposes is Andrew's finding that, although "Delaware is thought to have taken New Jersey's leading role in the early 20th century, New Jersey actually continues to beat Delaware until the late 1980s." Contrary to conventional wisdom there was no cascade in which massive numbers of corporations decamped from New Jersey to Delaware. 

To my mind, Andrew's findings suggest that there will not be a domino effect. If DExit becomes a real phenomenon rather than clickbait, it will still take decades for Delaware to be overtaken. 

This doesn't mean SB 21 is unnecessary. To the contrary, as I discuss in Course Correction, Delaware common law has gone seriously awry in this area. Both as a matter of doctrinal consistency and sound policy, the law needed to be changed. It does, however, suggest that Delaware can take its time and do it right. 

In any case, go read Andrew's article. 

A Bibliography of my Delaware SB 21 Posts

• A Comment on Larry Cunningham's Weinberg Center Program on SB 21: Would Tornetta Come Out the Same Way?

• A Question About Delaware SB 21 and Fairness

• Another Delaware SB 21 drafting problem

• Could the Chancery Court End-Run SB 21?

• Is Delaware SB 21 the Start of a Race to the Bottom?

• Delaware SB 21 and Director and Officer Conflict of Interest Transactions: The Good, the Bad, and the Missed Opportunities

• Preliminary Reaction to Delaware SB 21 and Comparison to the Proposals I Made in A Course Correction for Conflicted Controller Transactions

• Professor Talley Poses a SB 21 Question: I resort to AI