The Delaware Supreme Court held in Schnell v. Chris-Craft Industries, Inc., that “inequitable action does not become permissible simply because it is legally possible.” This means that even if a corporate action complies with the literal terms of a statute, Delaware courts can intervene if the action is deemed unfair or inequitable. Schnell thus demonstrates that Delaware courts will not allow statutory formalism to justify unfair corporate behavior. Equity acts as a safeguard against directors exploiting statutory provisions to the detriment of shareholders. The decision remains a cornerstone of Delaware’s approach to corporate governance, ensuring that statutory compliance is always subject to equitable scrutiny. It’s at least conceivable that an activist judge could invoke Schnell to impose liability in a particular case even though the technical requirements of SB 21 were satisfied.
But there's a sticking point. Note that SB 21 says that acts by directors, officers, and controlling shareholders may not, inter alia, "be the subject of equitable relief" if appropriate cleansing actions are taken. Does that foreclose the Schnell end-run? It depends on what you think "equitable relief" means. If you think it means that any relief granted pursuant to the court's exercise of its inherent equitable powers under Schnell is "equitable relief," then the end run likely won't work. But is there another reading?
