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.