ProfessorBainbridge.com

How does Delaware decide cases so quickly?

Matt's theory is that " It is the expertise within Chancery’s broader ecosystem – both bench and bar – that fuels the court’s performance." Makes sense to me.

— Steve Bainbridge (@PrawfBainbridge) August 14, 2022

David Skeel on The Corporation as Trinity

I am reminded of a line of dialogue from the musical 1776. After Richard Henry Lee returns from Virginia with the proposal for independence, Edward Rutledge states:

"Mr. President, although we of South Carolina have never seriously considered the question of independence, when a gentleman proposes it, attention must be paid."

This came to mind as I read my friend David Skeel's CLS Blue Sky Blog post, The Corporation as Trinity. I have considered the question of corporate personhood but never taken it very seriously. It is a doctrine for which I have very little patience. But when a scholar such as Skeel proposes it, attention must be paid.

Christian theology, as brilliantly explicated in [St. Augustine's] The Trinity, states that God consists of three different persons – the Father, the Son, and the Holy Spirit – but is a single divine being. Drawing on recent work by the theologian Curtis Chang, I argue that corporate personhood has similar qualities and that the analogy is not accidental. According to Christian scripture, the universe is a reflection of God. If this is true, the echoes – in particular, echoes of the Trinity – extend even to human institutions such as corporations. Much as theologically orthodox Christians understand God to be both one and three, I argue that corporations are best seen as having a corporate identity distinct from their managers, shareholders, and other constituents and reflecting the qualities of these constituents. ...

The Trinitarian perspective combines attributes of both the aggregate and the real entity theories of the corporation. The distinction is that the Trinitarian perspective insists that both theories are needed, rather than one or the other.

He elaborates on the argument in a paper posted to SSRN.

I mused on the nature of corporate personhood in my post The corporation is not a real entity and to argue to the contrary is "transcendental nonsense." In it, I confessed that:

I have a very practical mind. Most abstract reasoning strikes me as metaphysical mumbo jumbo. ... Put simply, I just can't wrap my head around the metaphysical abstractions required to think of the corporation as an entity--real or otherwise--rather than as an aggregate. Being unable to perform the mental gymnastics necessary to "thingify" the corporation, I am happy to find such a distinguished precedent for dismissing the effort so blithely. 

The precedent to which I referred to was Felix S. Cohen's wonderful article, Transcendental Nonsense and the Functional Approach, 35 Colum. L. Rev. 809 (1935). In it, he referred to the question of where a corporation is located as "a question identical in metaphysical status with the question which scholastic theologians are supposed to have argued at great length, 'How many angels can stand on the point of a needle?'”

To that confession I must now add that, for me, analogizing the corporation to the Trinity doesn't help much. For while it is the case that I believe in the Trinity (I give it what we Catholics call religious assent), I don't claim to understand it. I take comfort in C.S. Lewis' point that while the Trinity is something that is ultimately beyond our intellectual understanding, we can experience it. Or, as Lewis explained, “We cannot compete, in simplicity, with people who are inventing religions. How could we? We are dealing with Fact. Of course anyone can be simple if he has not facts to bother about.”

If you're more comfortable with metaphysics and philosophy that I am, however, you likely will find Skeel's analysis helpful. Conversely, if you're not, you would still benefit from reading Skeel's article. After all, I'm still trying to understand the Trinity.

In sum, attention must be paid to Skeel's article because it's a wonderful example of intellectual arbitrage. Few other scholars would be so smart, adventurous, and widely read to pull off such a feat.

The Business Lawyer's Symposium "The ESG Movement: Law, Economics and Values,” includes my paper "Don’t Compound the Caremark Mistake by Extending It to ESG Oversight"

Symposium behind a paywall.

My article behind a paywall.

Calculating Damages Where the Breach of Fiduciary Duty Involves a Flawed Process: What Happens if There is Unfair Dealing but the Price is Fair

Where the entire fairness standard is applicable to a corporate law dispute, there are two aspects to the inquiry: 

... fair dealing and fair price. The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock.... However, the test for fairness is not a bifurcated one as between fair dealing and price. All aspects of the issue must be examined as a whole since the question is one of entire fairness.

Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1162–63 (Del. 1995).

I have frequently therefore pondered the question of what happens if there the court concludes that the defendants acted unfairly but that they nevertheless (perhaps by accident or sheer stupidity) ended up paying a fair price. Because this is not a bifurcated test, it seems like could there be damages for the unfair dealing, but if they paid a fair price how would you calculate those damages? The answer is complicated by the court's holding in Cinerama that "the measure of damages for any breach of fiduciary duty, under an entire fairness standard of review, is not necessarily limited to the difference between the price offered and the true value as determined under the appraisal proceedings. Under Weinberger, the [Court of Chancery] may fashion any form of equitable and monetary relief as may be appropriate, including rescissory damages." Id. at 1166 (internal quotation marks removed).

It seems a friend and fellow corporate law professor has been pondering the same sort of questions, as she sent along the following question via email:

Have you thought about how damages are computed where what's violated is a process? The only case I have found on the point is one where the court says "entire fairness applied, there was fair price but not fair dealing, we'll figure out some sort of remedy maybe via fee-shifting." But I haven't seen anything else. Assuming a Revlon breach--let's say pre-Corwin, or Corwin cleansing isn't available, how would one compute, say, what the price would have been with a better process?

I'm not sure which case she's referring to. But I would begin by disentangling two questions. First, what happens if there is a Revlon claim to which Corwin cleansing is unavailable. (If you need to know more about what Revlon claims entail or how Corwin cleansing works, you need my book, Mergers & Acquisitions.)

As I understand the law, where a Revlon claim is found because the board used a flawed sale process, the damage remedy would be determined using quasi-appraisal. In RBC Capital Markets, LLC v. Jervis, 129 A.3d 816 (Del. 2015), for example, the court held that:

The Court of Chancery concluded that the “quasi-appraisal value for Rural as of the Merger date [was] $21.42 per share. The members of the Class received $17.25 in the Merger and therefore suffered damages of $4.17 per share.” It also determined, in Rural I, that “exclusive reliance on the negotiated deal price [was] inappropriate” in its attempt to determine damages, in part, because, “[w]hen the sale process started, the market did not understand Rural's prospects.” Further, the trial court determined that “RBC's faulty [sale process] design prevented the emergence of the type of competitive dynamic among multiple bidders that is necessary for reliable price discovery.... If RBC had not run the Rural process in parallel with the EMS process, other private equity players with ... large funds [equal to that of Warburg] could have participated, forcing up the price.” Similarly, the competitive dynamic was inhibited by the fact that potential strategic bidders for Rural were themselves tied up in change of change of control transactions at the time the Company was exploring a sale.

In Americas Mining Corp. v. Theriault, we explained that, “[i]n making a decision on damages, or any other matter, the trial court must set forth its reasons. This provides the parties with a record basis to challenge the decision. It also enables a reviewing court to properly discharge its appellate function.” Here, the Court of Chancery explained the reasons for its calculation of damages in great detail. The trial court applied the quasi-appraisal remedy to conclude that Rural's stockholders were denied $4.17 per share in the Warburg deal. In addition to an actual award of monetary relief, the Court of Chancery had the authority to grant pre- and post-judgment interest, and to determine the form of that interest. Here, the court below awarded pre- and post-judgment interest at the legal rate, running from June 30, 2011 until the date of payment.

The record reflects that the Court of Chancery properly exercised its broad discretionary powers in fashioning a remedy and making its award of damages. The trial court's judgment awarding damages is, accordingly, affirmed.

Id. at 868. See also Eric L. Talley, Finance in the Courtroom: Appraising Its Growing Pains Increasingly Complex and Technical M&A Economic Tools Have Become Essential in the Modern Courtroom, 35 Del. Law. 16, 18 (Summer 2017) (observing that the Chancery Court has frequently resisted enjoining a deal on Revlon grounds (thereby side-stepping auction theory) if the transaction is also eligible for appraisal or quasi-appraisal later on (where valuation takes center stage)”).

Of course, "Corwin largely shut the door to most post-closing damages and quasi-appraisal claims." Alex Peña & Brian JM Quinn, Appraisal Confusion: The Intended and Unintended Consequences of Delaware's Nascent Pristine Deal Process Standard, 103 Marq. L. Rev. 457, 468 (2019). Corwin did so in part because Revlon and the other enhanced scrutiny cases "were not tools designed with post-closing money damages claims in mind. " Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015).

Revlon, of course, is not an entire fairness standard. Rather, Revlon is an aspect of intermediate review a.k.a. enhanced scrutiny. "Thus, although the level of judicial scrutiny under Revlon is more exacting than the deferential rationality standard applicable to run-of-the-mill decisions governed by the business judgment rule, at bottom Revlon is a test of reasonableness; directors are generally free to select the path to value maximization, so long as they choose a reasonable route to get there." In re Dollar Thrifty Shareholder Litig., 14 A.3d 573, 595–96 (Del. Ch. 2010).

Turning to entire fairness, MFW has provided a route for cleansing many of these cases. (MFW and Corwin have a lot in common, as both provide for cleansing of conflicted interest transactions.) But let's assume there has been no cleansing.

Recall that entire fairness is not a bifurcated test. As such, it is (probably) improper for a court to say "well, I found unfair dealing but by some miracle the defendants paid a fair price, so no harm, no foul."

I base this on that Delaware Supreme Court's explanation that “[e]vidence of fair dealing has significant probative value to demonstrate the fairness of the price obtained.” Americas Mining Corp. v. Theriault, 51 A.3d 1213, 1244 (Del. 2012). My sense is that a court that finds unfair dealing will have a thumb on the scale of finding an unfair price. After all, because "the entire fairness analysis is not a bifurcated one as between fair dealing and fair price," "[a]ll aspects of the issue must be examined as a whole since the question is one of entire fairness." Id. (internal quotation marks removed).

In the related context of directors' conflict of interest transactions, former Vice Chancellor Strine explained that:

On the record before me, I obviously cannot conclude that HMG received a shockingly low price in the Transactions or that the prices paid were not within the low end of the range of possible prices that might have been paid in negotiated arms-length deals. In that narrow sense, the defendants have proven that the price was “fair.” But that proof does not necessarily satisfy their burden under the entire fairness standard. As the American Law Institute corporate governance principles point out:

A contract price might be fair in the sense that it corresponds to market price, and yet the corporation might have refused to make the contract if a given material fact had been disclosed.... Furthermore, fairness is often a range, rather than a point, so that a transaction involving a payment by the corporation may be fair even though it is consummated at the high end of the range. If an undisclosed material fact had been disclosed, however, the corporation might have declined to transact at that high price, or might have bargained the price down lower in the range.

The defendants have failed to persuade me that HMG would not have gotten a materially higher value for Wallingford and the Grossman's Portfolio had Gray and Fieber come clean about Gray's interest. That is, they have not convinced me that their misconduct did not taint the price to HMG's disadvantage.

HMG/Courtland Properties, Inc. v. Gray, 749 A.2d 94, 116–17 (Del. Ch. 1999) (citations omitted). Gray and Fieber were directors of HMG. HMG was considering some major transactions. Unbeknownst to the rest of HMG's board, Gray and Fieber had serious conflicts of interest in connection with the proposed transaction. Strine concluded that, as a result, "[t]he process was thus anything but fair." Id. at 115. So, Strine put his thumb on the scale of saying that even though the price may have been fair in a technical sense, he believed that "had Gray disclosed his interest, ... HMG would have terminated his involvement in the negotiations and have taken a much more traditional approach to selling the affected properties. To the extent that HMG continued to consider a sales transaction, I believe it would have commissioned new appraisals and would have sought purchasers other than Fieber." Id. at 118 (citation omitted).

Remember, there is no such thing as "a" fair price. There is a "range" of fair prices. See Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 367 (Del. 2013) (noting that "a limited partnership's value is not a single number, but a range of fair values"). As Chancellor William Allen explained: The value of a corporation is not a point on a line, but a range of reasonable values, and the judge's task is to assign one particular value within this range as the most reasonable value in light of all of the relevant evidence and based on considerations of fairness." Cede & Co. v. Technicolor, Inc., CIV.A. 7129, 2003 WL 23700218, at *2 (Del. Ch. Dec. 31, 2003), aff'd in part, rev'd in part, 884 A.2d 26 (Del. 2005).

Hence, my view that a judge who finds unfair dealing is likely to select a "particular" value within the range of fair values that would exceed whatever price the plaintiffs got in the transaction and, as a result, award damages.

Update: The friend who posed the question identified In Re Nine Systems Corporation Shareholders Litigation, C.A. No. 3940-VCN, 2014 WL 4383127 (Del. Ch. Sept. 2014), as the case in question. I think it supports my interpretation:

The board decisions and stockholder actions at the heart of this lawsuit present one of the long-standing puzzles of Delaware corporate law: for a conflicted transaction reviewed by this Court under the entire fairness standard, “[t]o what else are shareholders entitled beyond a fair price?” The entire fairness standard of review has long mandated a dual inquiry into “fair dealing and fair price” that this Court should weigh as appropriate to reach a “unitary” conclusion on the entire fairness of the transaction at issue. Delaware courts have contemplated this issue before.4 What unites the resulting range of explications of this area of Delaware law is the principle that the entire fairness standard of review is principally contextual. That is, there is no bright-line rule on what is entirely fair.

Here, the Court concludes that a price that, based on the only reliable valuation methodologies, was more than fair does not ameliorate a process that was beyond unfair. At least doctrinally, stockholders may be entitled to more than merely a fair price, but the difficulty arises in quantifying the value of that additional entitlement.

Id. at *1 (footnotes omitted).

The court went on to observe that:

Here, the Court is reluctant to conclude that the Recapitalization, even if it was conducted at a fair price, was an entirely fair transaction because of the grossly inadequate process employed by the Defendants....

If the oft-repeated holding of the Delaware Supreme Court’s decision in Weinberger regarding the entire fairness standard—that the analysis is not bifurcated but is to be a unitary conclusion—has any purchase, then, even if the fair price component “may be the preponderant consideration” for most nonfraudulent decisions or transactions, it must hold true that a grossly unfair process can render an otherwise fair price, even when a company’s common stock has no value, not entirely fair. It is not unprecedented for this Court to conclude that a price near the low end of a range of fairness, coupled with an unfair process, was not entirely fair. After a careful and reflective weighing of the procedural and substantive fairness of the Recapitalization, the Court concludes that the Defendants (other than Dwyer and CFP) have not carried their burden of proof. Those Defendants breached their fiduciary duties because the Recapitalization was not entirely fair. ...

Id. at *47 (footnotes omitted).

But the court concluded that the remedy would be merely an award of fees:

As the Plaintiffs’ theories demonstrate, it is difficult to assess damages for the unfair Recapitalization in January 2002, when the fair price of the Company’s equity was zero, without reference to (and a fair bit of bias from) the $175 million Akamai Merger in November 2006. It is likewise difficult to conclude that disloyal conduct when the Company’s equity was worth nothing should now be remedied by an award of damages in the tens (or hundreds) of millions of dollars, especially where the trial record strongly suggests that it was Snyder’s management of NaviSite SMG’s Stream OS business—not the Company’s legacy business—that drove the Company’s growth after the Recapitalization. In other words, but for the Recapitalization, there is little evidence to suggest that the Company would have been worth any amount approaching what the Plaintiffs seek in damages. For these and related reasons, because the unfair Recapitalization was nonetheless effected at a fair price in which the Plaintiffs’ stock had no value, the Court concludes, in its discretion, that it would be inappropriate to award disgorgement, rescissionary, or other monetary damages to the Plaintiffs “because of the speculative nature of the offered proof.

”That is not to say, however, that the Plaintiffs are wholly without a remedy. Based in part on its inherent equitable power to shift attorneys’ fees and its statutory authority to shift costs, this Court has exercised its discretion and concluded that, even where a transaction was conducted at a fair price, a finding that the transaction was not entirely fair may justify shifting certain of the plaintiffs’ attorneys’ fees and costs to the defendants who breached their fiduciary duties.

Id. at *51-52 (footnotes omitted).

The Restatement of the Business Judgment Rule: The Question of Rationality

Regular readers know I am working on a couple of projects dealing with the forthcoming Restatement of the Law of Corporate Governance. Not everything I think about the restatement will make it into a law review article, but they will make great blog fodder.

To with, the drafters have restated the business judgment rule in section 4.02 as follows (in pertinent part):

A director or officer who makes a business judgment is not liable to the corporation or its shareholders if the director or officer: ... (4) rationally believes that the business judgment is in the best interests of the corporation.

Reporter's Note 1 to that section explains that:

Delaware incorporates the fourth component of the black letter by explaining: “where the business judgment presumptions are applicable, the board’s decision will be upheld unless it cannot be attributed to any rational purpose.” . . . A line of cases decided under Delaware law support the test that under the business judgment rule, a corporate decision will be upheld unless it cannot be attributed to any rational business purpose.

I agree with everything the drafters say. But I would like to add a friendly amendment, which I hope they will consider incorporating into the text. I take the following from Stephen M. Bainbridge, Corporation Law and Economics (2002), at 274-75:

In Sinclair Oil Corp. v. Levien, the Delaware supreme court held that so long as the board’s decision could be attributed to any rational business purpose the business judgment rule precluded the court from substituting its judgment as to the merits of the decision for those of the board.[1] Similarly, in Brehm v. Eisner, the court held that the business judgment rule does not apply when the board has “act[ed] in a manner that cannot be attributed to a rational business purpose.”[2]

The reference to a “rational business purpose,” properly understood, does not contemplate substantive review of the decision’s merits. As Professor Michael Dooley observes, “Sinclair’s use of [the word] rational is to be equated with conceivable or imaginable and means only that the court will not even look at the board’s judgment if there is any possibility that it was actuated by a legitimate business reason. It clearly does not mean, and cannot legitimately be cited for the proposition, that individual directors must have, and be prepared to put forth, proof of rational reasons for their decisions.”[3] Consequently, as Chancellor Allen has stated:

[W]hether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through “stupid” to “egregious” or “irrational”, provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests. To employ a different rule—one that permitted an “objective” evaluation of the decision—would expose directors to substantive second guessing by ill-equipped judges or juries, which would, in the long-run, be injurious to investor interests.[4]

Instead, as Chancellor Allen observed elsewhere, “such limited substantive review as the rule contemplates (i.e., is the judgment under review ‘egregious’ or ‘irrational’ or ‘so beyond reason,’ etc.) really is a way of inferring bad faith.”[5]

Put another way, inquiry into the rationality of a decision is a proxy for an inquiry into whether the decision was tainted by self-interest. In Parnes v. Bally Entertainment Corp., for example, the Delaware supreme court stated that: “The presumptive validity of a business judgment is rebutted in those rare cases where the decision under attack is ‘so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.’”[6]In that case, Bally’s CEO allegedly demanded bribes from prospective takeover bidders and, moreover, allegedly received such a bribe from the successful bidder. In holding that the plaintiff shareholder had stated a cause of action, the court observed that “it is inexplicable that independent directors, acting in good faith, could approve the deal” when it was so tainted.

Litwin v. Allen is often cited as an exception to the foregoing proposition.[7] Put another way, Litwin supposedly creates an “incredible stupidity” exception to the business judgment rule. Under this reading of the opinion, it stands as an example of a board decision so irrational as to not deserve the protection of the business judgment rule. One problem with this analysis is that Litwin involved the directors of a bank, who are typically held to a higher standard of accountability than directors of other corporations. Another is that Litwin is a sport—a case that falls well outside the norm. It is cited so often, because it stands alone as plausible precedential support for the irrationality exception to the business judgment rule. Finally, consistent with our hypothesis that courts use rationality as a code word for self-dealing, the Litwin court found the transaction in question to be “so improvident, so risky, so unusual, and unnecessary as to be contrary to fundamental conceptions of prudent banking practice.” Although the court expressly declined to find a violation of the duty of loyalty, it seems fair to ask whether “we have reason to disbelieve the protestations of good faith by directors who reach ‘irrational’ conclusions?”[8]

In sum, it may be that there are some board decisions that are so dumb that the business judgment rule will not insulate them from judicial review.[9] Even if the set of such decisions is not an empty one, however, the tail ought not wag the dog. Because a prerequisite of rationality easily can erode into a prerequisite of reasonableness, courts must tread warily here. If they want to persist in requiring that there be a rational business purpose, at least they can ensure that that requirement lacks teeth.

The Restatement of The Geography of Revlon-Land

As regular readers know, I am working on several projects relating to the tentative draft of the restatement of the Law of Corporate Governance. As I've plowed through the draft, I noticed that the drafters touch in passing on the geography of Revlon-land.

Reporter’s Note 3 to Section 2.01 comments in passing on the issue of when Revlon duties trigger, suggesting that “when a corporation is sold for cash” and “all of the shareholders will be cashed out” “the board may not balance the interests of shareholders against the interests of other stakeholders. This is the clear holding of Delaware’s Revlon case and a long line of other cases.” It is true that Revlon clearly held that when Revlon duties have triggered, there can be no consideration of interests other than those of the shareholders.

The implicit suggestion that Revlon is always triggered by a sale for cash, however, is controversial. True, dictum in some Delaware Chancery Court decisions suggest that that all cash and some mixed consideration sales trigger Revlon.[1]I have elsewhere argued that those decisions are inconsistent with controlling Delaware Supreme Court precedent.[2] In my view, the relevant Supreme Court precedents clearly indicate “that an acquisition by a publicly held corporation with no controlling shareholder that results in the combined corporate entity being owned by dispersed shareholders in the proverbial “large, fluid, changeable and changing market” does not trigger Revlon whether the deal is structured as all stock, all cash, or somewhere in the middle. The form of consideration is simply irrelevant.”[3]

I have also argued that the Chancery Court dicta is inconsistent with the policy concerns that motivated Revlon.[4]The Chancery Court dicta is premised on the notion that Revlon is concerned with “whether there will be a tomorrow for the shareholders,” but Revlon was mainly concerned with whether the structure of the transaction allows the market to redress any conflicts of interest on the part of the target directors.[5] As long as the acquirer is publicly held, the conflict of interest concerns are muted and “diversified shareholders will be indifferent as to the allocations of gains between the parties. In turn, those shareholders also will be indifferent as to the form of consideration.”[6] It is that approach to Revlonduties that the drafters should restate.

Scalia on Restatements of the Law

I am working away at a couple of law review articles about the tentative draft of the Restatement of the Law of Corporate Governance. In doing so, a friend pointed me to a great quote from Justice Scalia:

[M]odern Restatements . . . are of questionable value, and must be used with caution. The object of the original Restatements was “to present an orderly statement of the general common law.” Over time, the Restatements' authors have abandoned the mission of describing the law, and have chosen instead to set forth their aspirations for what the law ought to be. . . . Restatement sections such as that should be given no weight whatever as to the current state of the law, and no more weight regarding what the law ought to be than the recommendations of any respected lawyer or scholar. And it cannot safely be assumed, without further inquiry, that a Restatement provision describes rather than revises current law.

Kansas v. Nebraska, 574 U.S. 445, 475–76 (2015) (Scalia, J., concurring in part) (citations omitted). I concur.

Do we need a Restatement of the Law of Corporate Governance? (No.)

In 1978, the American Law Institute authorized a project originally intended to result in a restatement of corporate law.[1] As the decade long process of reaching consensus on the corporate governance project dragged on, it became what is still one of the most controversial projects the ALI ever attempted.[2] Indeed, one highly respected commentator went so far as to describe the project as “the most controversial event in the history of American corporate law.”[3] Perhaps because of the controversy surrounding the project, it has had little influence on judicial development of corporate law.[4]

Despite this dubious precedent the ALI has returned to the corporate governance field with a proposed Restatement of the Law of Corporate Governance (Restatement).[5] At the ALI’s 2022 annual meeting, the membership considered Tentative Draft No. 1, which contained provisions defining various terms, discussing the duties of care and loyalty, and the social purpose of the corporation.[6] Except for one of the duty of loyalty provisions, the membership approved the draft.[7]

It is probably too late to stop the Restatement project from going forward. The ALI membership voted to approve the idea of a Restatement and subsequently voted to approve most of the first tentative draft. The project has three reporters, all well respected corporate law academics.[8] There are dozens of very prominent and very influential attorneys, judges, and academics acting as advisers to the project.[9] There are 170 ALI members serving as a consultative group.[10] So the project has a lot of inertia and a lot of powerful individuals with a stake in seeing the project come to fruition. Granted, the time and effort expended to date are sunk costs that logically should be ignored in deciding whether to continue the project, but people are not very good at ignoring sunk costs.[11] The train has left the station and is unlikely to be derailed.

Nonetheless, to borrow a phrase from William F. Buckley, it is sometimes necessary to stand “athwart history, yelling Stop,’ especially “when no one is inclined to do so, or to have much patience with those who so urge it.”[12]

Courts are the main audience for Restatements and, as such, their content is “generally common law.”[13] The purpose of a restatement is to clarify “the underlying principles of the common law” that have “become obscured by the ever-growing mass of decisions in the many different jurisdictions, state and federal, within the United States.”[14]

It is here that we come to the crux of the matter. Unlike most common law topics, corporate law is not troubled by the potential for confusion that arises when many competing jurisdictions are all contributing to the development of the law with more or less equal claims to authority.[15] The law of corporate governance, especially that applicable to public corporations, is dominated by a single Leviathan.

Delaware is home to more than half of the public corporations listed for trading on U.S. stock exchanges.[16]Delaware’s share of large public corporations is even higher, with almost two-thirds of Fortune 500 corporations.[17] As far as the larger universe of business entities is concerned, Delaware is home to over 1 million, which consistently places it in the top 5 states of organization.[18] Most business entities form under the laws of their home state, of course, but Delaware is the leading choice of businesses that opt to incorporate outside their home state.[19] Because of the generally accepted choice of law principle known as the internal affair doctrine Delaware law will govern corporate governance disputes regardless of which U.S. jurisdiction in which the dispute is litigated.[20]

Delaware’s dominance of the corporate law field is further enhanced because many state courts follow Delaware law when their own state law does not provide an answer to the question at bar.[21] They presumably do so because of Delaware’s widely acknowledged mass of high-quality corporate law.[22] Even federal courts may look to Delaware law for assistance in interpreting federal law, as the Third Circuit observed in a case interpreting Bankruptcy Code § 328’s requirement that indemnification provisions in employment agreements be reasonable:

We look to Delaware corporate law as a guide primarily because it offers time-tested insights on how courts should best evaluate an issue similar to the one before us. Additionally, Delaware's law often cues the market.[23]

Accordingly, a Restatement of the Law of Corporate Governance is unnecessary. Courts and lawyers will look to the well spring of corporate law for guidance, rather than the product of an unelected think tank whose drafters lack the powerful incentives to get it right to which the Delaware legislature and courts are subject.[24]

Accordingly, I quipped on Twitter that:

We don't need a Restatement of Corporate Governance. We already have one. Folk on the Delaware General Corporation Law: Fundamentals, 2021 Edition . . ..[25]

Either the Restatement of Corporate Governance will restate Delaware law (in which case who needs it) or it will not restate the law but rather propose changes (in which case it will be ignored).[26]

 

Another Comment on Eric Orts' Comment on the ALI's Restatement of Corporate Purpose: Do Constituency Statutes Allow Consideration of Environmental Factors?

A few days ago, I directed your attention to a short article by Professor Eric Orts at the CLS Blue Sky Law Blog, in which he criticized the corporate objective provision of the forthcoming Restatement of the Law of Corporate Governance. (Go read Orts' article and come back.) As I noted, the article is thoughtful, as is typical of Professor Orts' work, for which I have considerable respect, but I disagreed with a couple of points (as is often the case because we have rather different normative priors).

I've decided to do an article on the Restatement provision and in working on it today, I realized I had a couple of other thoughts about Professor Orts' article. In a prior post, I addressed his criticism of the framing of the Restatement's approach whether directors may depart from shareholder value maximization norm. In this post, I address his criticism of the Restatement drafters' treatment of so-called constituency statutes.

The Restatement expressly splits out what it calls “stakeholder jurisdictions” from what it calls “common-law jurisdictions.”[1] Since Pennsylvania adopted the first constituency statute in 1983,[2] thirty states have adopted constituency statutes (a.k.a. non-shareholder constituency statutes or stakeholder statutes).[3] Although the details vary somewhat, the statutes generally authorize directors to consider various factors other than shareholder value maximization when making corporate decisions.[4] Massachusetts’ statute is typical:

(a) A director shall discharge his duties as a director, including his duties as a member of a committee: . . . (3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.[5]

The Principles’ drafters did not address these statutes, instead relegating them to the comments, where the drafters opined that “it is clear that such statutes can be interpreted so as to be consistent with § 2.01.”[6]

In the Restatement, constituency statutes are promoted to the black letter law. Oddly, however, the black letter text of § 2.01(a)(2) suggests that in states with a constituency statute it is only licit for directors to consider the interests of various constituencies.[7] As even a cursory reading of the Massachusetts statute suggests, however, the name constituency statutes is somewhat of a misnomer. Massachusetts allows directors to consider such factors as the economy of the state or nation and “societal considerations,” for example, neither of which fit within a conventional definition of constituency.[8] Thirteen other states contain similar provisions.[9]

In contrast, § 2.01(a)(1) explicitly contemplates that directors of corporations in common law jurisdictions may go beyond the interests of the corporation’s constituencies to consider environmental and ethical concerns.[10] This difference led Professor Orts to complain that Restatement § 2.01 “misinterprets the legal import of corporate constituency statutes in a manner that unduly narrows the discretion of corporate directors and managers.”[11]

For example, “the environment” and “ethical considerations” are explicitly included as allowable decision-making factors in common-law jurisdictions but omitted in stakeholder jurisdictions (§ 2.01(a)).  Surely corporate decisionmakers in stakeholder jurisdictions may also take account of environmental and ethical considerations even if they are not specified as stakeholder interests.[12]

I respectfully disagree with Professor Orts’ reading of the constituency statutes. The factors most commonly authorized for director consideration by the statutes are the long-term interests of the corporation, firm profitability, growth prospects, employees, customers, supplies, creditors, and communities.[13] No state explicitly lists the environment as a factor directors are authorized to continue.[14] Only 10 states authorize directors to consider “any other appropriate factors,”[15] which may implicitly authorize consideration of environmental concerns. In this regard, the Restatement drafters got the law right.

Another Comment on Eric Orts' Comment on the ALI's Restatement of Corporate Purpose: Can Directors Act Ethically Without Regard to Profit?

A few days ago, I directed your attention to a short article by Professor Eric Orts at the CLS Blue Sky Law Blog, in which he criticized the corporate objective provision of the forthcoming Restatement of the Law of Corporate Governance. (Go read Orts' article and come back.) As I noted, the article is thoughtful, as is typical of Professor Orts' work, for which I have considerable respect, but I disagreed with a couple of points (as is often the case because we have rather different normative priors).

I've decided to do an article on the Restatement provision and in working on it today, I realized I had a couple of other thoughts about Professor Orts' article. In this post, I address his criticism of the framing of the Restatement's approach whether directors may depart from shareholder value maximization norm.

The ALI's 1994 Principles of Corporate Governance  § 2.01(b) obliged the corporation to obey the law, allowed it to consider appropriate ethical concerns, and allowed to engage in philanthropic activities, in all cases even if doing do did not promote shareholder value or corporate profit. In contrast, in Restatement § 2.01, engaging in philanthropic activities is the only action expressly permitted “whether or not doing so enhances the economic value of the corporation.”[1] The framing by the Restatement’s drafters led Professor Orts to object that:

Allowing only an “economic objective” forces out any ethical or environmental consideration that does not technically qualify as a long-term economic rationalization.  The Restatement’s § 2.01 departs from the recognition in the Principles that ethical considerations may conflict with the economic objective, and that directors and officers may nevertheless follow their consciences in these situations.  (Principles, § 2.01 & cmt. h.)  Even Milton Friedman, a famous (or infamous) champion of the economic objective in business corporations, conceded that profit-seeking must “conform[] to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”  To employ an updated example, doing the right thing with respect to the climate emergency may require a particular firm (such as a big oil company) to sacrifice some profits even as calculated over the long term. The Restatement’s § 2.01 seems instead to require big oil companies to maximize their long-term profits even it means burning our planet beyond all recognition.  It seems also to require a corporation adopting an anti-racist personnel policy to justify it with an economic or “business case” rationale rather than an appeal to an ethics of mutual respect and equal treatment.[2]

It seems unlikely, however, that the drafters intended thereby to effect any substantive change vis-à-vis the Principles. Comment e to § 2.01, for example, states without limitation to specific jurisdictional types that “corporations may take into account their effects on the environment, as well as the social impact of their operations.”[3] Comment e also states that “the economic objective does not imply that the corporation must extract the last penny of profit out of every transaction in which it is involved.” Illustration 6 states that in all jurisdictions it would be licit for a corporation to adopt a mission statement committing the company “to creating a sustainable, low-carbon future, advancing equality and diversity, and fostering employee success.”[4] Illustrations 27 and 28 both involve hypothetical oil companies that voluntarily reduce oil production claiming that doing so will both save the planet and be profitable in the long term.[5] In both, the drafters conclude that § 2.01 is not violated.[6] Given that the business judgment rule almost certainly would protect an informed decision by the board that the reduction would produce sustainable, long-term profits,[7] Professor Orts’ concern seems misplaced.

 

Delaware Vice Chancellor Travis Laster versus Corwin Cleansing

Corwin cleansing is a corporate law doctrine providing that:

the “business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.”¹³ The Corwin doctrine is premised on the view that, “[w]hen the real parties in interest—the disinterested equity owners—can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them.”¹⁴ The same is true of stockholders deciding whether to tender their shares, and the Corwin doctrine has been extended to these circumstances.

Morrison v. Berry, 191 A.3d 268, 274 (Del. 2018).

I was reading a new opinion by Delaware Vice Chancellor Travis Laster today (Goldstein v. Denner, CA No 2020-1061-JTL (May 26, 2022), in which VC Laster held that defendants were not entitled to Corwin cleansing. 

As I was reading, it occurred to me that I could not remember a Laster opinion finding that defendants were entitled to Corwin cleansing. Having a little time on my hands, I did a Westlaw search. I found 4 other cases in which Laster addresses Corwin cleansing defenses.

1. In re Columbia Pipeline Group, Inc., CV 2018-0484-JTL, 2021 WL 772562, at *36 (Del. Ch. Mar. 1, 2021)
2. Firefighters' Pension System of City of Kansas City, Missouri Tr. v. Presidio, Inc., 251 A.3d 212, 263 (Del. Ch. 2021)
3. In re PLX Tech. Inc. Stockholders Litig., CV 9880-VCL, 2018 WL 5018535, at *39 (Del. Ch. Oct. 16, 2018), aff'd, 211 A.3d 137 (Del. 2019)
4. Voigt v. Metcalf, CV 2018-0828-JTL, 2020 WL 614999, at *10 (Del. Ch. Feb. 10, 2020)

In every one of them, he found that defendants were not entitled to Corwin cleansing.

In sum, defendants are 0-5 in VC Laster's court on Corwin cleansing. Granted, it's a small sample. But I still find it rather curious.

One possible explanation is that cases in which Corwin cleansing is available are easier to dispose of and end up getting dismissed using oral bench opinions. In which case, the sample is simply a selection bias issue.

Congratulations to new Delaware Vice Chancellor Nathan A Cook

Chancery Daily announced:

The Chancery Daily notes that on Friday, June 3, 2022, Delaware Governor John Carney nominated Nathan A. Cook to serve as Vice Chancellor on the Delaware Court of Chancery. Governor Carney Announces Judicial Nominations. Mr. Cook graduated from the University of Virginia Law School, clerked for Vice Chancellor Noble, and spent his subsequent legal career focused on Delaware corporate litigation. Mr. Cook will fill a vacancy left by Vice Chancellor Joseph R. Slights III, who announced his intent to retire in January 2022 (TCD offers the retiring Vice Chancellor gratitude for his service and best wishes as he embarks on new adventures). 

Kudos.

Do we really need a Restatement of Corporate Governance?

Either the Restatement of Corporate Governance will restate Delaware law (in which case who needs it) or it will not restate the law but rather propose changes (in which case it will be ignored). But I'll be waiting. pic.twitter.com/XXCuzWgMhF

— Steve Bainbridge (@PrawfBainbridge) May 17, 2022

Actually, I already weighed in: The American Law Institute is going to try writing a Restatement of Corporate Governance. Again. Oh joy. https://t.co/YZfbMnmnkU

— Steve Bainbridge (@PrawfBainbridge) May 18, 2022

California trial court strikes down gender quota statute (SB 826)

The WSJ reports and provides a link to the opinion. The decision is entirely based on equal protection considerations. No discussion of the internal affairs issue.

Director independence inquiries vary by context

In Sciabacucchi v. Liberty Broadband Corp.,[1] Delaware Vice Chancellor Glasscock explained that the independence inquiry varies by context:

Where the independence inquiry relates to special litigation committees, it requires a showing of independence by the special litigation committee, having displaced the common-law presumption of director independence. . . .

The independence inquiry as it relates to demand futility arises in the context where the challenged directors are not themselves interested in the question posed in the demand, but are alleged not to be independent of those who are. Where the latter are fellow directors, the required demonstration appears to be the easiest for a plaintiff to clear, given the natural reluctance of directors to take the action demanded—ultimately, choosing to sue fellow directors. If . . . the difficulty of impartially assessing a demand to sue fellow board members (or to sue business associates, friends, family, etc.), is high, it follows that a plaintiff would find it easier to impugn a director's independence in the context of demand futility. Successfully impugning a director's independence with respect to voting on transactions, conversely, should be more difficult than challenging that same independence with respect to assessing a demand. The ultimate factual burden upon a plaintiff to prove a director's lack of independence at trial will vary accordingly. The important point is that the decision in question must be viewed in the context of the director's relationship and her ability, in light of that relationship, to apply her business judgment thereto. . . .

“Delaware law does not contain bright-line tests for determining independence but instead engages in a case-by-case fact specific inquiry based on” the facts. Facts submitted to rebut the presumption of independence should be reviewed “holistically, because they can be additive.” Plaintiffs seeking to show that a director was not independent must demonstrate that the director in question had ties to the “person whose proposal or actions he or she is evaluating;” ties so substantial that she could not “objectively discharge ... her fiduciary duties.” The inquiry is whether those ties were material such that they displace the impartiality of the individual director.

 

[1] CV 11418-VCG, 2022 WL 1301859 (Del. Ch. May 2, 2022).