A few days ago, I posted VC Laster's Dell Decision Gives a Very Director Primacy Spin on MFW, in which I argued that:
In his recent opinion in In re Dell Techs. Inc. Class V Stockholders Litig., 2020 WL 3096748 (Del. Ch. June 11, 2020), Vice Chancellor Laster gave a very board-centric spin on the MFW rule. Tyler O'Connell's Morris James blog post explains:
The Delaware Supreme Court’s MFW decision provides a safe harbor for controlling stockholder buyouts that are conditioned upon approval of a special committee of independent directors and a majority-of-the-minority vote, provided, inter alia, “there is no coercion of the minority.” Kahn v. M & F Worldwide Corp. (MFW), 88 A.3d 635, 645 (Del. 2014). The Court of Chancery’s recent decision in In re Dell Tech. Inc. Class V. S’holders Litig., 2020 WL 3096748 (Del. Ch. Jun. 11, 2020), held that a redemption of minority stockholders’ shares failed to satisfy MFW due to the company’s decisions to give the special committee an impermissibly narrow mandate and then bypass it to negotiate directly with minority stockholders.
The Vice Chancellor didn't cite my work on director primacy, but the opinion is very much in the spirit of director primacy ....
I go on to explain. Ann Lipton, however, thinks I'm wrong. Instead, she thinks the decision is about judicial supremacy:
The part that I’m interested in, however, is Laster’s attention to the varying incentives of even the “disinterested” stockholders. That’s what I was discussing in Shareholder Divorce Court, namely, how large institutional shareholders are likely to have cross-holdings that affect their preferences, and lead them to favor nonwealth maximizing actions at a particular company if they benefit the rest of the portfolio (after the article was published, I posted about additional empirical work in this area here). Laster has historically been especially sensitive to these kinds of conflicts. ...
The problem, though – as I discuss in Shareholder Divorce Court and What We Talk About When We Talk About Shareholder Primacy– is that if you’re going to recognize the heterogeneity of shareholder interest due to these different types of portfolio-wide investments, it’s unclear why a majority vote should be permitted to drag along the minority in a particular deal. Which conflicts will we recognize as generating bias, and which will we ignore? That’s the problem that cases like Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) and MFW are forcing Delaware to confront. Laster’s far more willing to engage here; so far, other judges have, umm, avoided the issue. ...
In practical effect, it seems, Laster is less about director primacy than judicial primacy, in a way that often puts him at odds with other members of the Delaware judiciary. (See, e.g., my discussion of Salzberg v. Sciabacucchi, and the differing views of the nature of the corporation expressed by Laster and the Delaware Supreme Court). Because once you hold that shareholders are too biased to make decisions, that doesn’t necessarily lead to director primacy; instead, it creates more space for the judiciary to step in to protect the interests of the abstract notion of shareholder, distinct from the ones who actually cast ballots.
It's an interesting spin. Professor Lipton is an exceptionally accomplished student of Delaware law, especially in the M&A context. Which worries me.
If she's right, and Laster is really pushing a view that when "shareholders are too biased to make decisions" the judiciary ought to step in, that's a serious break from how I understand Delaware law both descriptively and normatively.
Justice Jackson famously observed of the Supreme Court: “We are not final because we are infallible, but we are infallible only because we are final.”[1] Neither courts nor boards are infallible, but someone must be final. Otherwise we end up with a never-ending process of appellate review. The question then is simply who is better suited to be vested with the mantle of infallibility that comes by virtue of being final—directors or judges?
Corporate directors operate within a pervasive web of accountability mechanisms. A very important set of constraints are provided by a competition in a number of markets. The capital and product markets, the internal and external employment markets, and the market for corporate control all constrain shirking by directors and managers.[2] Granted, only the most naïve would assume that these markets perfectly constrain director decision making.[3] It would be equally naïve, however, to ignore the lack of comparable market constraints on judicial decision making. Market forces work an imperfect Darwinian selection on corporate decisionmakers, but no such forces constrain erring judges.[4] As such, rational shareholders will prefer the risk of director error to that of judicial error. Hence, shareholders will want judges to abstain from reviewing board decisions.
The shareholders’ preference for abstention, however, extends only to board decisions motivated by a desire to maximize shareholder wealth. Where the directors’ decision was motivated by considerations other than shareholder wealth, as where the directors engaged in self-dealing or sought to defraud the shareholders, however, the question is no longer one of honest error but of intentional misconduct. Despite the limitations of judicial review, rational shareholders would prefer judicial intervention with respect to board decisions so tainted.[5] The affirmative case for disregarding honest errors simply does not apply to intentional misconduct.
The mere fact that shareholders are heterogenous, however, does not mean that directors are conflicted. Absent evidence that the directors themselves are conflicted or beholden to someone who is, courts should not second-guess board decisions. Other Delaware jurists have consistently recognized this proposition:
Even in the takeover context, where Delaware courts have long acknowledged the potential for directors to be conflicted, Chancellor William Allen warned that Delaware courts need to employ “the Unocal precedent cautiously. . . . The danger that it poses is, of course, that courts—in exercising some element of substantive judgment—will too readily seek to assert the primacy of their own view on a question upon which reasonable, completely disinterested minds might differ.” City Capital Assocs. Ltd. P’ship v. Interco, Inc., 551 A.2d 787, 796 (Del. Ch. 1988).
In the same heightened scrutiny context, then VC and later Justice Jack Jacobs likewise observed that: “[a]lthough ‘enhanced scrutiny’ must be satisfied before business judgment rule presumptions will apply, that does not displace the use of business judgment in the board room.” QVC Network, Inc. v. Paramount Commc’ns, Inc., 635 A.2d 1245, 1268 (Del. Ch. 1993), aff’d, 637 A.2d 34 (Del. 1994).
In the past, VC Laster has recognized that Delaware law is director-centric. not judge-centric. See Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder Directors, 70 BUS. LAW. 33, 35 (2015) (“Delaware corporate law embraces a ‘board-centric’ model of governance."); In re CNX Gas Corp. Shareholders Litig., 2010 WL 2705147, at *10 (Del. Ch. July 5, 2010) ("Delaware law would seem to call for a consistently board-centric approach.").
One assumes he also recognizes that the logic of director primacy is one of judicial deference to the board's authority absent a conflict of interest or other evidence that the need for accountability justifies intervention.
[1] Brown v. Allen, 344 U.S. 443, 540 (1953) (Jackson, J., concurring).
[2] See Mark J. Roe, German Codetermination and German Securities Markets, 1998 Colum. Bus. L. Rev. 167, 181 (identifying the “principal monitoring mechanisms” as “market competition (in capital and product markets), takeovers, a good board of directors, and a concentrated shareholder”); Jonathan R. Macey, Private Trusts for the Provision of Private Goods, 37 Emory L.J. 295, 303-06 (1988) (arguing that: “Competition in capital markets, product markets, and the market for corporate control all induce managers and directors of public corporations to act in ways consonant with shareholder welfare.”).
[3] A. Mechele Dickerson, A Behavioral Approach to Analyzing Corporate Failures, 38 Wake Forest L. Rev. 1, 21 (2003) (opining that although “market restraints” should “induce directors to make decisions ... that are in the best interests of the business,” markets “generally will not curb directorial misconduct—especially when firms face financial crises”).
[4] Another way of looking at the problem invokes the principle of subsidiarity, which posits the social primacy of the smallest units in society. In turn, subsidiarity provides both moral and instrumental justification for the business judgment rule:
[Subsidiarity] suggests that people closest to the problem at hand are the ones with the strongest moral claim to finding a solution. To empower higher authorities as anything but second-best solutions or even last resorts endangers the rights and liberties of those who are most affected. The subsidiarity principle also embodies the practical point that those closest to the problem have the strongest interest in seeing that the problem is solved most competently.
Robert A. Sirico, Subsidiarity, Society, and Entitlements: Understanding and Application, 11 Notre Dame J. L. Ethics & Pub Pol’y 549, 552 (1997). Because boards are closer to the problem than courts, subsidiarity posits that they should have decision-making primacy.
[5] As former Delaware Chief Justice Veasey observes, “investors do not want self-dealing directors or those bent on entrenchment in office. . . . Trust of directors is the key because of the self-governing nature of corporate law. Yet the law is strong enough to rein in directors who flirt with abuse of that trust.” E. Norman Veasey, An Economic Rationale for Judicial Decisionmaking in Corporate Law, 53 Bus. Law. 681, 694 (1998).
