My dear friend Charles Elson has a great op-ed in the Financial Times on SB 313. Sadly. it's behind a paywall. But here's the money quote (which I think is fair use):
The bill passed by Delaware’s general assembly jettisons the state’s traditional approach of protecting investors. Now sent to Delaware Governor John Carney for approval, it would allow the management of companies to strike secret side deals with big shareholders, bypassing the board on governance questions previously reserved for directors. For example, the bill would allow agreements giving a single shareholder veto power over the hiring or firing of a chief executive.
I don't object to boards making precommitments (see my article Dead Hand and No Hand Pills: Precommitment Strategies in Corporate Law). Instead, I agree with the points made by the Delaware Supreme Court inn Grimes v. Donald, 673 A.2d 1207 (1996), in connection with a CEO compensation package that allegedly would cause the corporation to commit financial suicide if it terminated the CEO:
... business decisions are not an abdication of directorial authority merely because they limit a board's freedom of future action. A board which has decided to manufacture bricks has less freedom to decide to make bottles. In a world of scarcity, a decision to do one thing will commit a board to a certain course of action and make it costly and difficult (indeed, sometimes impossible) to change course and do another. This is an inevitable fact of life and is not an abdication of directorial duty.
If the market for senior management, in the business judgment of a board, demands significant severance packages, boards will inevitably limit their future range of action by entering into employment agreements. Large severance payments will deter boards, to some extent, from dismissing senior officers. If an independent and informed board, acting in good faith, determines that the services of a particular individual warrant large amounts of money, whether in the form of current salary or severance provisions, the board has made a business judgment. That judgment normally will receive the protection of the business judgment rule unless the facts show that such amounts, compared with the services to be received in exchange, constitute waste or could not otherwise be the product of a valid exercise of business judgment.
Having said that, however, I completely agree with Charles that such arrangements must be fully and fairly disclosed. I also agree that management should not be able to make such deals. Such deals should be the board's sole prerogative. Finally, I agree that the board must comply with its fiduciary duties of care and loyalty at the time it enters into the contract. I emphasize the timing because we're talking about precommitments. There's no point in making porecommitments if you can weasel out of them by claiming your fiduciary duty precludes you from performing when the time comes. Hence, I criticized delaware cases finding that the board has a continuing duty to constantly reassess the merits of such a contract.
