DELAWARE’S GUIDANCE: ENSURING
EQUITY FOR THE MODERN WITENAGEMOT
J.W. Verret,
George Mason University School of Law
Myron T. Steele, Government of the State of
Delaware – Supreme Court of Delaware
Virginia Law and Business Review, Vol. 2, No. 2,
pp. 189-219, Fall 2007
George Mason University Law and Economics
Research Paper Series
09-60
This paper can be downloaded without charge from the Social Science
Research Network at http://ssrn.com/abstract_id=1130088
Electronic copy available at: http://ssrn.com/abstract=1130088
189
VIRGINIA LAW & BUSINESS REVIEW
VOLUME 2 FALL 2007 NUMBER 2
DELAWARE’S GUIDANCE: ENSURING EQUITY
FOR THE MODERN WITENAGEMOT
Myron T. Steele†
J.W. Verret‡
I
NTRODUCTION......................................................................................................190
I. A
CADEMIC COMMENTARY ON INDETERMINACY IN
D
ELAWARE’S CORPORATE CODE ................................................................193
II. S
PEECHES AND ARTICLES AS ELEMENTS OF THE
G
UIDANCE FUNCTION ...................................................................................196
III. D
ICTA AS AN ELEMENT OF THE GUIDANCE FUNCTION ........................207
IV. P
ARTICIPATION IN FORMAL COMMITTEES AND POLICY ANALYSIS
AS AN ELEMENT OF THE GUIDANCE FUNCTION .....................................213
C
ONCLUSION ..........................................................................................................214
† Chief Justice of the Delaware Supreme Court. LL.M. 2005, J.D. 1970, B.A. 1967,
University of Virginia.
‡ Associate with Skadden, Arps, Slate, Meagher & Flom LLP in Washington, D.C.; Law
Clerk at the Delaware Court of Chancery 2006–07. J.D. 2006, Harvard Law School; M.P.P.
2006, John F. Kennedy School of Government; B.S. 2002, Louisiana State University.
The authors thank Pauletta Brown for her contributions in preparing this Article.
Copyright © 2007 Virginia Law & Business Review Association
Electronic copy available at: http://ssrn.com/abstract=1130088
Virginia Law & Business Review 2:189 (2007)
190
I
NTRODUCTION
HE board of directors is the central focus of corporate law. This
institution is a structure inherent to the governance of collective human
enterprise. History recurrently offers the paradigm of a single executive,
supervised and selected by a board of advisers that itself serves a larger
group.
1
One interesting example of this historical phenomenon is the English
Witenagemot, or Witan Council. An Anglo-Saxon import to the British Isles,
it selected the English King (or confirmed a generally accepted successor),
advised him in the perils of state, and represented the interests of the landed
gentry that stood to profit from his munificence. The Witenagemot was, in
many ways, the precursor to the larger and more powerful English
Parliament, and it controlled the bulk of socioeconomic wealth of the period.
Turning to the present day in America, economic resources are controlled
overwhelmingly by publicly traded corporate entities, the majority of which
are incorporated in Delaware. Delaware’s sophisticated judiciary is widely
recognized as one reason incorporators choose Delaware as the home for
their charters.
Social animals have the evolutionary advantage of specialization, the
economic value of which is well explored in Adam Smith’s Wealth of Nations.
2
Yet, the social group, when acting collectively, must negotiate both over the
allocation of the spoils of victory and the risk of new ventures. The board, the
council, or the Witenagemot is the locus of this negotiation throughout
history. It exhibits a useful symmetry; representation distills the various
factions into a small enough number of individuals to be cohesive enough to
debate contested matters efficiently, while still fairly representing the
potentially disparate interests of their constituencies. The board, typically
ranging from six to twelve members, represents this critical mass of collective
action.
3
Another developmental step in the evolution of social groups is the
invention of nonviolent means for dispute resolution. Law students may be
1. For instance, the Shogunate of Japan relied on the Han Daimyo, and the Roman Catholic
Papacy has the College of Cardinals. See Ardath W. Burks, Administrative Transition from
Han to Ken: The Example of Okayama, 15 [No. 3] F
AR E.Q. 371, 375–77 (1956); John Paul II,
Apostolic Constitution Universi Dominici Gregis, 88 A
CTA APOSTOLICAE SEDIS, Feb. 22, 1996.
2. A
DAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS
(Edwin Cannan ed., Methuen & Co. Ltd. 1904) (1776), available at http://www.econlib.org/
LIBRARY/Smith/smWN.html.
3. See Charlie Deitch, Recipe for Logjam: Start With Too Many Cooks, C
ORP.BOARD MEMBER
MAG., Nov./Dec. 2002, available at http://www.boardmember.com/issues/archive.pl?article_
id=11284.
T
2:189 (2007) Delaware’s Guidance
191
familiar with the torts history lesson of how the wergeld evolved in ancient
Germany.
4
Damages awards fulfill a societal need for restitution and create
incentive for responsible participation in the societal enterprise, even when
individual interest may, at times, be otherwise more rationally anti-social. As
the institutions of judicial authority developed, a method for controlling the
anti-social actions of those before it arose in the form of the injunction.
5
The
English High Court of Chancery is the historical foundation for that power in
Delaware law.
6
The work of the Delaware Court of Chancery and the Delaware Supreme
Court in the arena of corporate law, focusing as it does on the relationship
between shareholders, management, and the board of directors, represents a
fusion of these two social constructs. This fusion is exhibited in the Courts’
review of director and management decisions that control the daily life of the
modern, corporate version of the Witenagemot. The two distinct joints in the
corporate law system are the points at which responsibility coalesces from the
large group to the smaller collective, and from the collective into the singular.
These points serve as the foci of judicial interest as courts design legal
incentives for the collective negotiation process, through neutral arbitration.
In this process of arbitration, judges have created different standards of
review and conduct for each of the groups defined by these points. Moreover,
this development is further complicated in Delaware’s corporate law because
the disputes are primarily economic, and thus require increased predictability
and efficiency—since all parties typically hope to get back to the business of
profit as quickly as possible, there is great benefit in being able to predict
future outcomes.
The Delaware Court of Chancery, as an equity court, has wide latitude to
craft remedies and mold precedent to fit particular fact patterns in the
tradition of the English High Court of Chancery.
7
This fact has allowed the
4. Anglo-Saxon legal codes consisted “mainly of schedules of payments for common types
of wrongs. . . . They specified gelds, which fixed the value of things destroyed, and bots,
which fixed payments for damage, including bodily harm. The payment due for killing a
person was the wergeld (or wergild), or man-price.” Emily Sherwin, Compensation and
Revenge, 40 S
AN DIEGO L. REV. 1387, 1398 (2003).
5. See generally David W. Raack, A History of Injunctions in England Before 1700, 61 I
ND. L.J. 539,
539–40 (1986).
6. “The rules of injunctions, like the rules of equity generally, were a product of the
institution of the Court of Chancery.” Id. at 539.
7. The Delaware Court of Chancery “stands as one of the few remaining separate courts of
general equity jurisdiction in the nation. It continues to claim essentially the same subject
matter jurisdiction possessed by the High Court of Chancery of Great Britain as of the
time of the separation of the American colonies in 1776.” D
ONALD J. WOLFE,JR.&
Virginia Law & Business Review 2:189 (2007)
192
Court of Chancery to maximize efficiency in resolving disputes, while
undercutting the future applicability of precedent, which has led to a tension
between efficiency and predictability. If precedent were followed absolutely, it
would be highly predictable but not flexible, and thus could not deal with
difficult problems efficiently. Were courts to read precedent more loosely to
respond to unique situations, it would become less predictable. One
commentator has argued that this indeterminacy in the Delaware courts is
purposeful;
8
yet, it would be more accurate simply to characterize this
indeterminacy as a natural drawback to the tension between efficiency and
predictability that plagues all courts of equity.
9
Many of the activities
undertaken by members of the Delaware judiciary in their unofficial capacity
as commentators and observers of corporate adjudication, which we have
termed the “Guidance Function,” seek to minimize this element of
uncertainty.
The purpose of this Article is to examine some of the extrajudicial
activities in which members of the Delaware judiciary engage to minimize the
systemic indeterminacy that results from the resolution of economic disputes
by a court of equity.
10
Such activities come in three unique forms: 1) the
frequent speeches and articles issued by the judges about the direction and
patterns they perceive in case law from their unique vantage point at the
center of the maelstrom; 2) the analysis in the judges’ opinions that, though
technically dicta, provides useful insight into how open questions not part of
the ruling might be expected to play out in the future; and 3) the roles the
judges often undertake as formal policy makers, as members of committees of
the American Bar Association (“ABA”) and other model rule making bodies.
MICHAEL A. PITTENGER,CORPORATE AND COMMERCIAL PRACTICE IN THE DELAWARE
COURT OF CHANCERY § 1-1 (2005).
8. See Ehud Kamar, A Regulatory Competition Theory of Indeterminacy in Corporate Law, 98 C
OLUM.
L. R
EV. 1908 (1998).
9. For a similar observation that is over 300 years old, see J
OHN SELDEN, Equity, in TABLE
TALK (1689), as cited in WOLFE &PITTENGER, supra note 7, at vii (opening quotation):
Equity is a rougish [sic] thing. For Law we have to measure, know
what to trust to; Equity is according to the conscience of him that
is Chancellor, and as that is larger or narrower, so is equity. ‘Tis all
one as if they should make the standard for the measure we call a
“foot” a chancellor’s foot; what an uncertain measure this would
be! One Chancellor has a long foot, another a short foot, a third an
indifferent foot. ’Tis the same thing in the Chancellor’s conscience.
10. Though the Delaware Supreme Court is not itself a court of equity, as a court of appellate
jurisdiction over a court of equity it is appropriately analyzed together with the Court of
Chancery for the purposes of this Article.
2:189 (2007) Delaware’s Guidance
193
I. A
CADEMIC COMMENTARY ON INDETERMINACY IN
D
ELAWARE’S CORPORATE CODE
The intent of this Article is, in part, to address the views of a few scholars
who argue that Delaware’s dominance in the interstate competition for
corporate charters is the result of the indeterminacy of Delaware corporate
law. Professors Jonathan Macey and Geoffrey Miller argue that the
indeterminacy of corporate law accrues to the benefit of the Delaware bar,
keeping its members employed with bountiful litigation.
11
Moreover,
Professor Ehud Kamar posits that Delaware purposefully maintains a level of
indeterminacy for an advantage in the interstate competition for corporate
charters, which prevents other states from effectively challenging Delaware’s
primacy as the source of American corporate law.
12
However, the Delaware
judiciary’s exhaustive extrajudicial activities to minimize the level of
uncertainty in corporate law, especially in those areas subject to principle-
based governance standards,
13
argue against the validity of either of these views.
A review of Kamar’s work is appropriate. Kamar’s contribution to the
competition debate is to highlight what he calls “the well-documented
indeterminacy of Delaware corporate law, which is evident in the state’s
ample use of vague standards that make prediction of legal outcomes
difficult.”
14
He presents three examples of these “vague standards”: the
reasonableness test for deal protection measures; the doctrine of corporate
opportunity; and the two-fold Aronson test of a special committee’s decision
to dismiss derivative litigation.
15
As an example of similar cases that seem to
diverge from a principle, he compares Paramount v. Time
16
with Paramount v.
QVC
17
to show that distinctions in the case law can sometimes only be
resolved by limiting the holdings to their particular facts.
18
Granted, the standards are not exact. The predictability of judicial
response to each permutation of a certain deal measure or structure is not
absolute. Yet, any resulting vagueness is not part of an effort to entrench
11. See Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest-Group Theory of Delaware
Corporate Law, 65 T
EX.L.REV. 469, 491–98 (1987).
12. See Kamar, supra note 8.
13. For an examination of how Delaware switches from principles-based oversight to rules-
based, in requisite need, see Sean Griffith & Myron T. Steele, On Corporate Federalism:
Threatening the Thaumatrope, 61 B
US.LAW. 1 (2005).
14. Kamar, supra note 8, at 1909.
15. Id. at 1915–17.
16. Paramount Commc’ns, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990).
17. Paramount Commc’ns, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994).
18. Kamar, supra note 8, at 1918.
Virginia Law & Business Review 2:189 (2007)
194
Delaware as a state of incorporation without care for the erosion of
shareholder wealth by artificial uncertainty in the code. Certainly, bright-line
rules could be drafted that would make this indeterminacy disappear, but
bright lines do not always lend themselves to this field of law, which is
fraught with fiduciary duties that rise and fall with the tides of human
conscience. The words of Judge Benjamin Cardozo are here appropriate:
[Certain] relations in life . . . impose a duty to act in
accordance with the highest standards which a man of the
most delicate conscience and the nicest sense of honor
might impose upon himself. . . . Whether novel situations are
to be brought within [this] class of relations . . . must be
determined, as they arise, by considerations of analogy, of
convenience, of fitness, and of justice.
19
More recently, former Delaware Chief Justice E. Norman Veasey
reminded us that “[t]he expectations for director conduct evolve over time as
business mores evolve, with courts applying the evolving expectations in a
common law process in deciding the proper standard of review to apply in
specific circumstances.”
20
19. BENJAMIN N. CARDOZO,THE NATURE OF THE JUDICIAL PROCESS 109–10 (Yale Univ.
Press, 8th ed. 1938) (1921) (emphasis added).
20. E. Norman Veasey & Christine T. Di Guglielmo, What Happened in Delaware Corporate Law
and Governance from 1992–2004? A Retrospective on Some Key Developments, 153 U. P
A.L.REV.
1399, 1405 (2005). In more detail, he later adds:
In fact, criticism of Delaware fiduciary duty law because it is
indeterminate is misplaced or disingenuous. A flexible or
indeterminate regime, such as we have had in Delaware, is distinct
from a rigid codification system that prevails in many systems
outside the United States. That is part of the genius of our law.
Life in the boardroom is not black and white; directors and
officers make decisions in shades of gray all the time. A “clear”
law, in the sense of one that is codified, is simply not realistic, in
my view. There can be no viable corporate governance regime that
is founded on a “one size fits all” notion. Fiduciary law is based on
equitable principles. Thus, it is both inherently and usefully
indeterminate, because it allows business practices and
expectations to evolve, and enables courts to review compliance
with those evolving practices and expectations.
The judicial articulation of fiduciary duty law in Delaware is
constantly evolving and has developed over about eight or nine
decades. It is the quintessential application of the common law
process. Directors are fiduciaries, duty-bound to protect and
2:189 (2007) Delaware’s Guidance
195
Kamar argues, however, that the specter of indeterminacy affects a
corporation when it is unable to account sufficiently for judicial response to a
considered business decision, has to incur costs for legal advice, and faces the
risk of litigation over its decision.
21
His main justification for the presence of
artificial indeterminacy is the network externality of Delaware corporate law.
22
The network externality of incorporation in one state is the increasing benefit
realized by all participants as more firms incorporate in that state. As more
firms begin using the same code, more attorneys are able to specialize in that
corporate code, and thus more firms are able to take advantage of that
specialized body of knowledge in business planning. This benefits the chosen
state as well as the attorneys who regularly refer to that state’s code. Kamar
argues that if Delaware corporate law decisions were more determinate, then
other states would be able to replicate Delaware’s corporate code and thereby
tap into Delaware’s network externality benefit.
23
Because Delaware maintains
indeterminacy through the judiciary’s interpretation of the code, however,
firms incorporated in other states cannot reliably look to Delaware corporate
law for guidance about the law in their state of incorporation. Thus, Kamar
argues, copying Delaware becomes impossible because the code is
purposefully ill-defined at any point which another state’s copycat code might
mimic.
24
Thus, the other state’s code cannot simply plagiarize the Delaware
General Corporation Law (“DGCL”).
But even if a robust law-and-economics analysis of Delaware corporate
law, which Kamar does not offer, would evince an advantage to Delaware
from indeterminate standards, it still does nothing to show that the
indeterminacy is purposeful or contrived. Specifically, the Guidance Function,
which this Article explores, indicates exactly the opposite. The Delaware
judiciary is cognizant of the effect on business planning that any systemic
advance the best interests of the corporation. When those interests
conflict—or may conflict—with the personal interests of the
fiduciaries, the fiduciaries’ interests must be sublimated to those of
the corporation. The evolution of fiduciary principles occurs not
only because courts must decide only the cases before them, but
also because business norms and mores change over time.
Id. at 1412–13.
21. Kamar, supra note 8, at 1919.
22. Id. at 1923. Network externalities are an economic concept that describes how some
benefits to a product that may be unappreciated in its initial demand could increase as
more people use the product, thus generating a higher product value to the initial
consumer who has already obtained full use of it. Id.
23. Id. at 1924.
24. Id. at 1928–29.
Virginia Law & Business Review 2:189 (2007)
196
uncertainty in an equity court’s rulings may have and, therefore, vigorously
attempts to minimize that uncertainty for the benefit of business planners.
Indeed, Kamar notes that part of Delaware’s network externality is buttressed
by the fact that, with one distinct winner of the incorporation competition,
“[l]awyers can also refer to the legal commentary, reference tools, and
professional symposia that proliferate around a commonly used law.”
25
That
observation misses a vital fact: Delaware judges are major contributors to
those secondary sources. Indeed, they contribute to Delaware’s network
externality advantage by decreasing the level of indeterminacy inherent to
Delaware law, which is further evidence that the indeterminacy of Delaware
corporate law is an unintended product of arbitration through courts of equity.
II. S
PEECHES AND ARTICLES AS ELEMENTS OF THE
G
UIDANCE FUNCTION
Members of the Delaware judiciary frequently speak at conferences
hosted by the ABA, law schools, and a variety of other legal institutions.
26
Many of these speeches form the basis for articles that are published in
academic or peer-reviewed journals, which collectively serve as a secondary
source for American common law.
27
Any analysis of the Guidance Function that focuses on the use of
speeches and articles to signal the evolutionary direction of Court of
Chancery and Delaware Supreme Court jurisprudence, must necessarily begin
with former Chancellor William T. Allen. No one better articulated why
corporate law is so naturally fluid:
The law, like ourselves, is always in flux, always becoming.
We accept, or invent, or reconstitute structures in the flux
because we want order (some of us more than others) and
predictability. The concept of the corporation is such a
structure. For a long period it seemed settled, although it was
not; it seemed known, even boring. The concept of the
corporation became problematic only because real world
economic forces changed, and those changes exerted
25. Id. at 1924.
26. For a compilation of some of those appearances, see Lawrence A. Hamermesh, The Policy
Foundations of Delaware Corporate Law, 106 C
OLUM.L.REV. 1749, 1788 (2006).
27. Such articles have appeared in the Virginia Law & Business Review and many other law
journals, including The Business Lawyer, Delaware Journal of Corporate Law, Harvard Law Review,
New York University Law Review, Northwestern University Law Review, and Virginia Law Review.
2:189 (2007) Delaware’s Guidance
197
pressures that forced legal change. But the ever-emergent
quality of law suggests that the resolution of the conceptual
conflict that was reached in the late 1980s by the
endorsement of the entity concept, will not be a final answer
to the question, what is a corporation.
28
One of the valuable insights that readers of the Delaware judges can gain,
as we shall see, is a window into the courts’ thoughts on an issue. Former
Chancellor Allen provided one of the first examples of this fact in 1990 in an
article based on a speech he gave at the University of California
–San Diego’s
Seventh Annual Securities Regulation Institute, about the role of independent
directors in management buy-out transactions. With candor, he admits:
[A]s one who has reviewed in one way or another a fair
number of special committees in a sale context, I remain
open to the possibility that such committees can be
employed effectively to protect corporate and shareholder
interests. But I must confess a painful awareness of the ways
in which the device may be subverted and rendered less than
useful. I conclude, as well, that it is the lawyers and the
investment bankers who in many cases hold the key to the
effectiveness of the special committee.
29
Yet, he also advises:
The factor that distinguishes those circumstances in which
the decision of a committee of outside directors has been
accorded respect and those in which its decision has not, is
not mysterious. The court’s own implicit evaluation of the
integrity of the special committee’s process marks that
process as deserving respect or condemns it to be ignored.
When a special committee’s process is perceived as reflecting
a good faith, informed attempt to approximate aggressive,
arm’s-length bargaining, it will be accorded substantial
importance by the court. When, on the other hand, it
28. William T. Allen, Our Schizophrenic Conception of the Business Corporation, 14 CARDOZO L.
R
EV. 261, 279 (1992).
29. William T. Allen, Independent Directors in MBO Transactions: Are They Fact or Fantasy?, 45 B
US.
LAW. 2055, 2056 (1990).
Virginia Law & Business Review 2:189 (2007)
198
appears as artifice, ruse or charade, or when the board
unduly limits the committee or when the committee fails to
correctly perceive its mission—then one can expect that its
decision will be accorded no respect.
. . . .
. . . [T]he court will be mindful that claims of so-called
structural bias in the process are plausible; and, that the
court’s own power of perception is limited. Thus, in a sale
context, counsel for a special committee must accept from
the outset that as a practical matter she will have to
demonstrate that the special committee’s process had
integrity; that the committee was informed, energetic and
committed in this transaction to the single goal of
maximizing the shareholders’ interest.
Please don’t mistake me. This is not a call to pay even
greater attention to appearances; it is advice to abandon the
theatrical and to accept and to implement the substance of
an arm’s-length process.
30
A mere four years later, the Kahn v. Lynch opinion’s enhancement of the
review of independent director bargaining on behalf of minority shareholders
made former Chancellor Allen’s observations especially prescient.
31
The
following two excerpts from the Supreme Court’s opinion, when contrasted
with former Chancellor Allen’s analysis from the secondary source cited
above, provides a uniquely insightful exercise for developing an appreciation
for the Delaware Guidance Function:
The power to say no is a significant power. It is the duty of
directors serving on [an independent] committee to approve
only a transaction that is in the best interests of the public
shareholders, to say no to any transaction that is not fair to
those shareholders and is not the best transaction available.
It is not sufficient for such directors to achieve the best price
that a fiduciary will pay if that price is not a fair price.
32
30. Id. at 2060, 2062.
31. Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994).
32. Id. at 1119.
2:189 (2007) Delaware’s Guidance
199
. . . .
The Court of Chancery’s determination that the
Independent Committee appropriately simulated a third-
party transaction, where negotiations are conducted at arm’s-
length and there is no compulsion to reach an agreement, is
not supported by the record. Under the circumstances
present in the case sub judice, the Court of Chancery erred in
shifting the burden of proof with regard to entire fairness to
the contesting Lynch shareholder-plaintiff, Kahn. The record
reflects that the ability of the Committee effectively to
negotiate at arm’s length was compromised by Alcatel’s
threats to proceed with a hostile tender offer if the $15.50
price was not approved by the Committee and the Lynch
board. The fact that the Independent Committee rejected
three initial offers, which were well below the Independent
Committee’s estimated valuation for Lynch and were not
combined with an explicit threat that Alcatel was ready to
proceed with a hostile bid, cannot alter the conclusion that
any semblance of arm’s length bargaining ended when the
Independent Committee surrendered to the ultimatum that
accompanied Alcatel’s final offer.
33
This accurately reflected an increasing willingness on the part of
Delaware judges to look beyond mere technicalities when assessing the
independence of directors. This lesson would become all the more relevant
for assessing independence in the context of reviewing dismissal of litigation.
This growing line of thought can be seen culminating nearly thirteen years
later in the decision of In re Oracle, in which Vice Chancellor Leo E. Strine, Jr.
held, in the context of director independence for the purposes of dispensing
with the demand requirement for derivative litigation, that
[s]ummarized fairly, two Stanford professors were recruited
to the Oracle board in summer 2001 and soon asked to
investigate a fellow professor and two benefactors of the
University.
. . . .
33. Id. at 1121.
Virginia Law & Business Review 2:189 (2007)
200
It seems to me that the connections outlined in this
opinion would weigh on the mind of a reasonable special
litigation committee member deciding whether to level the
serious charge of insider trading against the Trading
Defendants. As indicated before, this does not mean that the
SLC would be less inclined to find such charges meritorious,
only that the connections identified would be on the mind of
the SLC members in a way that generates an unacceptable
risk of bias.
34
Note that the Delaware courts maintain a common sense, flexible view of
independence. The relevant facts, not an impractical bright-line test, control
the determination. The idea is not that a lawyer can read the tea leaves in
former Chancellor Allen’s article to predict the outcome in Oracle or Kahn. It
need not be that precise to add value. Attorneys for the Oracle special
litigation committee or the Lynch negotiating committee, after reading the
Chancellor’s warning from the preceding cite, should have been able to raise a
red flag to their respective committee that its decision would face more
scrutiny than reading previous case law alone might suggest.
More recently, Chancellor William B. Chandler III and Vice Chancellor
Strine reminded us that the New York Stock Exchange (“NYSE”) reforms
that define director independence are separate and distinct from Delaware’s
definition. They analyze the distinction succinctly:
The 2002 Reforms’ tightening of the definitional standards
for independent directors will exert leverage on Delaware
and other state courts in a less obvious, but quite important,
way. The momentum in favor of the independent director
concept has, at times, led courts to be less than careful about
terminology and about separating out a director’s status for
purposes of articulating the appropriate standard of review
to apply to a transaction from the distinct question of
whether that director in fact breached his fiduciary duties in
a manner that subjects him to monetary liability. Not only
that, many corporate decisions involve a court’s examination
of whether a particular transaction should be enjoined or
rescinded, and do not involve claims for monetary damages
against specific directors. The rhetoric used in such decisions
34. In re Oracle Corp. Derivative Litig., 824 A.2d 917, 946–47 (Del. Ch. 2003).
2:189 (2007) Delaware’s Guidance
201
is situation-specific and is of doubtful utility when extended
to decisions requiring a director-by-director determination of
culpability.
35
This is the very kind of revelation that evinces intent on the part of
Delaware judges to clarify a looming ambiguity in the law, and is entirely
inconsistent with Kamar’s thesis of purposeful indeterminacy. If the judges of
the Court of Chancery somehow benefited from ambiguity, why would they
take time out of their busy lives to produce scholarship that counsels against
the erroneous assumption that Delaware’s definition of independence will be
informed by the NYSE’s, immediately after the NYSE instituted the “reform”?
As a second and more recent instance of this phenomenon, we look to a
group of co-authors who have earned the affectionate appellation of the
“Three Tenors” of corporate law. Former Chancellor (now Professor) Allen,
Justice (and former Senior Vice Chancellor) Jack B. Jacobs, and Vice
Chancellor Strine have co-authored numerous pieces that form the bedrock
of Delaware’s Guidance Function. Consider, for instance, their summation of
due care jurisprudence and their attendant warning from 2002:
This de facto departure from the gross negligence review
standard in Van Gorkom and Cede prompts us to suggest that
the time has come to reexamine the appropriate standard of
review in due care cases.
. . . .
The Cede II court cited no precedent nor offered any
explanation for why, on policy grounds, duty of care claims
should receive the same searching substantive review
traditionally reserved for duty of loyalty claims. We submit
that no reason in law or policy justifies that result.
. . . .
. . . [T]he Cede II doctrine—that a director found to have
breached his duty of care must demonstrate the entire
35. William B. Chandler III & Leo E. Strine, Jr., The New Federalism of the American Corporate
Governance System: Preliminary Reflections of Two Residents of One Small State, 152 U. P
A.L.REV.
953, 996 (2003).
Virginia Law & Business Review 2:189 (2007)
202
fairness of the challenged transaction—has resulted in
another unintended (and, we suggest, unfortunate)
consequence: the rule, announced in Emerald Partners v. Berlin,
that an exculpation defense based on a charter provision
authorized by section 102(b)(7) is an affirmative defense that
the directors must bear the burden of establishing.
Presumably that burden includes the obligation to negate the
statutory categories of excepted-out conduct—specifically,
breaches of the duty of loyalty to the corporation or its
stockholders, acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of
law, and transactions from which the director derived an
improper personal benefit.
. . . .
Requiring directors accused of a due care violation to
prove that they did not act disloyally imports to yet another
context the fairness and policy concerns previously discussed
in connection with Cede II. That is, the Emerald Partners
doctrine undercuts the policies sought to be achieved by the
gross negligence standard of review applicable in due care
cases.
36
Allen, Jacobs, and Strine have highlighted for readers an important, and
thus far unresolved, issue in the corporate jurisprudence. The policy decision
to allow directors absolution from good-faith duty of care violations through
Delaware General Corporate Law section 102(b)(7) risks being subverted if
the proper pleading mechanism is not established. A warning has been issued
that corporate advisers would do well to heed. Moreover, this valuable insight
into the views of the two courts suggests that final resolution of the question
is eventually likely. Sometimes, all a judge is capable of doing through the
Guidance Function, as one of the authors of this Article noted in a recent
speech, is to “rais[e] some issues that [the judge] think[s] are going to come
36. William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of
Director Due Care with Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a
Standard of Review Problem, 96 N
W.U.L.REV. 449, 459–60, 461, 463–64 (2002) (citations
omitted).
2:189 (2007) Delaware’s Guidance
203
before [the court], and give [readers] some idea of a doctrinal framework
within which [they] can work.”
37
Former Chief Justice Veasey’s opus
38
is the most recent cornerstone in
the edifice of judicial and academic writings that support the Delaware
Guidance Function. In it, he provides numerous examples of the Guidance
Function in action. For instance, a number of law firm white papers
39
and
academic articles
40
responded to Disney
41
with the observation that good faith
might become a separate fiduciary duty with the established independent
duties of loyalty and care, and thus Disney could be read to expand the reach
of directors’ fiduciary duties. Yet, Veasey counseled in this article that the
emphasis on good faith in the then-ongoing Disney litigation would not
represent a major shift in the Delaware view of the good faith duty, and that
good faith has always represented a foundation of the business judgment
presumption.
42
One of the authors of this Article made a similar observation
in October 2006.
43
Those two observations can be read to comport with Stone
v. Ritter,
44
in which the Delaware Supreme Court clarified its holding in Disney
that good faith, in the context of oversight, should be viewed merely as a
subset of the duty of loyalty.
37. Myron T. Steele, Remarks at the Third Annual Symposium on the Law of Delaware
Business Entities: Is Good Faith a Viable Standard of Conduct for Corporate
Governance, or Vehicle for Second-Guessing by Hindsight? (Oct. 5, 2006) (transcript
available at http://blogs.law.harvard.edu/corpgov/files/2007/05/20070523%20Transcript
%20of%20Remarks%20of%20Chief%20Justice%20Steele.pdf).
38. See Veasey & Di Guglielmo, supra note 20.
39. See, e.g., White Paper, Potter Anderson & Corroon LLP, Disney Affirmed: The Delaware
Supreme Court Clarifies the Duty of Directors to Act in Good Faith (June 9, 2006),
available at http://www.potteranderson.com/news-firm-42.html.
40. See, e.g., Hillary A. Sale, Delaware’s Good Faith, 89 C
ORNELL L. REV. 456 (2004).
41. In re Walt Disney Co. Derivative Litig., 906 A.2d 27 (Del. 2006).
Cases have arisen where corporate directors have no conflicting
self-interest in a decision, yet engage in misconduct that is more
culpable than simple inattention or failure to be informed of all
facts material to the decision. To protect the interests of the
corporation and its shareholders, fiduciary conduct of this kind,
which does not involve disloyalty (as traditionally defined) but is
qualitatively more culpable than gross negligence, should be
proscribed.
Id. at 66.
42. Veasey & Di Guglielmo, supra note 20, at 1442.
43. See Steele, supra note 37.
44. Stone v. Ritter, 911 A.2d 362 (Del. 2006).
Virginia Law & Business Review 2:189 (2007)
204
Veasey also responds to Emerging Communications,
45
a case which, he writes,
has been read by some to stand for the proposition that a lack of
independence and special financial expertise is sufficient to attribute to a
director knowledge that a merger price was wholly unfair and was enough to
make him personally liable.
46
Veasey candidly notes that “[s]ome practitioners
and directors have become concerned that, as a result of Emerging
Communications, Delaware jurisprudence is moving toward a generalized
heightened standard of liability for directors who have special expertise. I do
not share that view.”
47
Again, one article by a former justice is far from the
final word on this topic. It is, however, useful evidence of an inside view that
is not implicated in a case holding but should nevertheless be afforded
significant weight in gauging prospective liability.
Veasey also makes a point of addressing the controversial holding in
Omnicare v. NCS Healthcare.
48
Decided by a rare 3–2 vote, in which Veasey and
one of the authors of this Article dissented, Veasey notes how a subsequent
holding in Orman v. Cullman
49
might signal a shift in a different direction from
Omnicare, and also offers some guidance for designing appropriate deal
protection measures, when he writes:
Orman indicates a possible trend toward limiting the majority
holding in Omnicare to its facts. Whether and how far that
trend will continue and what the Delaware Supreme Court
itself will do, if given the opportunity, remain to be seen,
leaving dealmakers and deal lawyers to proceed with caution.
. . . .
I will suggest some principles that might guide an
analysis of whether particular measures will pass muster.
First, the courts are likely to limit and not expand the reach
of Omnicare. I think most objective observers believe that the
majority decision was simply wrong. Second, practitioners
should not count on the court to overrule the decision—not
only because of stare decisis but also because, if the reach of
45. In re Emerging Commc’ns, Inc. S’holder Litig., No. Civ.A. 16415, 2004 WL 1305745 (Del.
Ch. May 3, 2004).
46. Veasey & Di Guglielmo, supra note 20, at 1445.
47. Id.
48. Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).
49. Orman v. Cullman, No. Civ.A. 18039, 2004 WL 2348395 (Del. Ch. Oct. 20, 2004).
2:189 (2007) Delaware’s Guidance
205
the decision is limited, it will not become necessary or
practical for the court to overrule it. . . . Reasonable deal
protection measures are often necessary to achieve a deal. . . .
A deal protection measure that makes good business sense
should pass muster if it allows the board to follow a best
practices process. I caution, however, that a disingenuous
attempt to use some transparently artificial measure that is
too-clever-by-half in order to try to get around Omnicare in a
superficial way while maintaining an ironclad lockup with no
realistic wiggle room is inviting trouble.
50
The Guidance Function is not limited to the corporate arena. Business
lawyers play a vital role in the formation of alternative entities, including
LLCs, LLPs, and general partnerships. One of the authors of this Article has
offered guidance to the evolution of case law for this more recent trend in the
hope that it may be of some use to attorneys in predicting how similar
partnership/LLC duties are to corporate fiduciary duties. To briefly
summarize the thesis of that piece:
I suggest that although current judicial analysis seems to
imply that fiduciary duties engrained in the corporate law
readily transfer to limited partnerships and limited liability
companies as efficiently and effectively as they do to
corporate governance issues, that conclusion is flawed.
. . . .
Courts should recognize the parties’ freedom of choice
exercised by contract and should not superimpose an overlay
of common law fiduciary duties, or the judicial scrutiny
associated with them, where the parties have not contracted
for those governance mechanisms in the documents forming
their business entity.
51
50. Veasey & Di Guglielmo, supra note 20, at 1461–62.
51. Myron T. Steele, Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited
Liability Companies, 32 D
EL.J.CORP. L. 1, 4 (2007).
Virginia Law & Business Review 2:189 (2007)
206
Former Chief Justice Veasey also reminds us that Delaware judges “have
had a substantial role in shaping best practices in corporate governance.”
52
This statement speaks to the evolution of standards of conduct, rather than
standards of review,
53
but that does not make the communication any less
valuable. Standards of conduct are also in flux; the community of corporate
scholars and practitioners is frequently divided about which practices are
useful. The Delaware judges, from their vantage point at the center of the
corporate governance arena, offer their insights to the community of those
who regularly think about best practices, and in doing so can help to bring
certain questions to the forefront of the collective mind on these issues.
Consider, for instance, Veasey’s list of important best practices:
• Define and monitor director independence
• Recommend whether to combine or separate the CEO position from
chair of the board or to install a “lead director” or to rotate that role
• Assure a system of executive sessions of independent directors
• Develop and monitor law compliance systems
• Instill internal controls
• Develop business ethics code drafting and compliance
• Review, update, and enforce compliance with charters of all board
committees
• Review and evaluate board schedules, quality of board meetings, and
workload of committees and individual directors
• Ensure director responsibility for disclosure documents
• Identify conflicts of interest and corporate opportunity issues
• Report malfeasance, misfeasance, or nonfeasance within the
corporation
• Anticipate and deal with insider trading issues
• Maintain effective stockholder relations and communications
• Ensure effective systems for evaluation and succession planning for
officers
• Instill an evaluation process for directors, the board as a whole, and
board committees
• Ensure that management has the proper operational structures in
place and functioning
54
52. Veasey & Di Guglielmo, supra note 20, at 1404.
53. Id. at 1417 (highlighting the difference between standards of conduct and standards of
review).
54. E. Norman Veasey, Policy and Legal Overview of Best Corporate Governance Principles, 56 SMU L.
R
EV. 2135, 2145–46 (2003).
2:189 (2007) Delaware’s Guidance
207
This does not guarantee a court response, and it does not offer a
particular best practice as a “get out of jail free” card. Those who counsel
boards and managers, however, have more force behind their
recommendations when a judge that stands as the potential reviewer of their
decisions has expressed support for the practice.
We have covered a variety of examples of secondary source writings that
fulfill the Delaware Guidance Function of establishing a useful basis of
informative precedent for counselors of Delaware corporate law, and will
now turn to the rich body of guidance in the court opinions themselves.
III. D
ICTA AS AN ELEMENT OF THE GUIDANCE FUNCTION
Legal scholars generally distinguish between dicta and the holdings of
judicial opinions in case law analysis. Admittedly, dicta is not always easily
identifiable, but its conventional definition is as analysis in an opinion not
required to support the holding.
55
One academic commentator has observed
that the distinction between holding and dicta is on the wane, owing to the
ease of electronic research and the inclination of some judges to ignore the
distinction.
56
Despite any such trend, the distinction is still observed in
Delaware, and the Delaware judges have frequently crafted dicta to give
valuable guidance to deal lawyers on unanswered questions. The Delaware
courts recognize the need to wait for a live controversy to resolve an issue
definitively, but fortunately they also recognize that this does not mean that
they cannot, or should not, use the attention paid to a published opinion to
offer guidance on uncertain but vital areas of corporate law.
Consider the recent example of In re Toys “R” Us, in which Vice
Chancellor Strine addressed whether stapled financing—where an investment
bank advising the board of directors may also be permitted to offer financing
to the acquirer after the deal has been approved by the board—may serve as a
basis to challenge the board’s reliance on the advisory opinion of that bank in
approving the sale of a company.
57
Strine writes:
I do not want to be perceived as making a bright-line
statement. One can imagine a process when a board decides
to sell an entire division or the whole company, and when
the board obtains a commitment from its financial advisor to
55. Michael Abramowicz & Maxwell Stearns, Defining Dicta, 57 STAN.L.REV. 953, 953 (2005).
56. Thomas L. Fowler, Holding, Dictum . . . Whatever, 25 N.C. C
ENT. L.J. 139, 140–43 (2003).
57. In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975 (Del. Ch. 2005).
Virginia Law & Business Review 2:189 (2007)
208
provide a certain amount of financing to any bidder, in order
to induce more bidders to take the risk of an acquisition.
These and other scenarios might exist when roles on both
sides for the investment banker would be wholly consistent
with the best interests of the primary client company. In
general, however, it is advisable that investment banks
representing sellers not create the appearance that they desire
buy-side work, especially when it might be that they are
more likely to be selected by some buyers for that lucrative
role than by others.
58
Strine’s dicta guidance was quickly noted in a Practising Law Institute
(“PLI”) publication on ethics in deals.
59
The dicta observation, then, provides
guidance to boards in the form of a warning: to gauge the liability of stapled
financing, boards should be aware that there may be situations in which the
incentives of stapled financing negate the value of a fairness opinion from the
board’s investment bank. How much more information has been added than
would have been if the Vice Chancellor had offered no observation at all?
There is no quantifiable answer to such a question, but in making subjective
judgments about deal provisions, lawyers are now aware that the interest of
the court has been raised. The negotiated acquisitions bar will begin to pay
more attention to this aspect of deal structure, if for no other reason than
that, after being mentioned by the Vice Chancellor, commentators and
practitioners then discuss it in articles and practice guides. So we see here that
Delaware’s Guidance Function has value, even if a stapled financing deal is
never successfully challenged on that basis. Thus, the court focused
negotiated acquisitions practitioners on stapled financing as a result of the
dicta in In re Toys “R” Us, and the advisers who craft deals have justification
for urging caution to those they advise.
58. Id. at 1006 n.46.
59. Stephen M. Besen & Kevin M. Schmidt, Ethical Issues in Private Equity, 1549 PLI/C
ORP.
123, 129 (2006).
Stapled financing . . . may create appearance of, if not actual,
conflict. See In Re Toys “R” Us, Inc. (the Delaware Chancery Court
noted, in dicta, that, although stapled financing may not actually
effect a seller’s process, it can create the appearance of impropriety
and should generally be avoided when the financial advisor might
be chosen by certain buyers).
Id. (citation omitted).
2:189 (2007) Delaware’s Guidance
209
For another example, we need only look to recent shareholder litigation
against Caremark Pharmacy Services. Chancellor Chandler elucidated a multi-
factor test for the reasonableness of deal protection measures:
That analysis will, by necessity, require the Court to consider
a number of factors, including without limitation: the overall
size of the termination fee, as well as its percentage value;
the benefit to shareholders, including a premium (if any) that
directors seek to protect; the absolute size of the transaction,
as well as the relative size of the partners to the merger; the
degree to which a counterparty found such protections to be
crucial to the deal, bearing in mind differences in bargaining
power; and the preclusive or coercive power of all deal
protections included in a transaction, taken as a whole. The
inquiry, by its very nature fact intensive, cannot be reduced
to a mathematical equation. Though a “3% rule” for
termination fees might be convenient for transaction
planners, it is simply too blunt an instrument, too subject to
abuse, for this Court to bless as a blanket rule. Nor may
plaintiffs rely upon some naturally occurring rate or
combination of deal protection measures, the existence of
which will invoke the judicial blue pencil. Rather, plaintiffs
must specifically demonstrate how a given set of deal
protections operate in an unreasonable, preclusive, or
coercive manner, under the standards of this Court’s Unocal
jurisprudence, to inequitably harm shareholders.
60
Chandler goes on to note that, because of the fully informed shareholder
vote that was expected after his ruling, he need not rule on whether the
particular deal protection measure was valid in that case.
61
Why go to such
lengths to discuss the multiple factors that determine whether the measure is
permitted? Perhaps the Chancellor did so because of his pragmatic awareness
that boards and deal lawyers, when crafting deal protection measures, hope to
structure negotiated deals that are advantageous to parties involved without
running afoul of their fiduciary duties, yet face overwhelming uncertainty of
the line that divides measures protected by the business judgment rule from
60. Louisiana Mun. Police Employees’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1181–82
n.10 (Del. Ch. 2007).
61. Id.
Virginia Law & Business Review 2:189 (2007)
210
those that violate fiduciary duties. This footnote represents the Chancellor’s
informed decision to provide guidance on that question, even though it is not
necessary to the particular case at hand, in order to minimize the uncertainty
boards face in this area. Sometimes uncertainty is, nevertheless, unavoidable
in corporate law, and an honest admission of where those areas lie can
provide valuable warning to those who tread into the perilous arena of
corporate litigation. Consider Chandler’s observation on the challenges facing
the Court of Chancery in administering the appraisal remedy guaranteed by
DGCL:
[I]t is one of the conceits of our law that we purport to
declare something as elusive as the fair value of an entity on a
given date . . . . Experience in the adversarial[ ] battle of the
experts’ appraisal process under Delaware law teaches one
lesson very clearly: valuation decisions are impossible to
make with anything approaching complete confidence.
Valuing an entity is a difficult intellectual exercise, especially
when business and financial experts are able to organize data
in support of wildly divergent valuations for the same entity.
For a judge who is not an expert in corporate finance, one
can do little more than try to detect gross distortions in the
experts’ opinions. This effort should, therefore, not be
understood, as a matter of intellectual honesty, as resulting in
the fair value of a corporation on a given date. 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 . . . based on considerations of fairness.
62
At first blush, it may seem that this statement merely adds to the
uncertainty, or indeterminacy, that Kamar identifies, but nevertheless, the
Chancellor’s observation is worth appreciation. Appraisals are a risky
business. Litigants would do well to realize that, despite the Court of
Chancery’s exhaustive dedication to the minutiae of the valuation models,
there is a significant element of subjective judgment inherent to the financial
modeling process. That risk should be taken into account in, for instance,
settlement talks in advance of trial on the appraisal. It also means that litigants
62. Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at 2 (Del. Ch. 2003), amended and
superseded by 884 A.2d 26 (Del. 2005).
2:189 (2007) Delaware’s Guidance
211
are well advised not to get too caught up in the minutiae of the variables, lest
they miss the bigger picture of equity in the case.
Best-practices analysis can also make its way into the dicta aspect of the
Delaware Guidance Function. Justice Jacobs could not resist reminding
readers of what best practices would have counseled for in the actions leading
up to the Disney case:
In a “best case” scenario, all committee members would
have received, before or at the committee’s first meeting on
September 26, 1995, a spreadsheet or similar document
prepared by (or with the assistance of) a compensation
expert (in this case, Graef Crystal). Making different,
alternative assumptions, the spreadsheet would disclose the
amounts that Ovitz could receive under the OEA in each
circumstance that might foreseeably arise. One variable in
that matrix of possibilities would be the cost to Disney of a
non-fault termination for each of the five years of the initial
term of the OEA. The contents of the spreadsheet would be
explained to the committee members, either by the expert
who prepared it or by a fellow committee member similarly
knowledgeable about the subject. That spreadsheet, which
ultimately would become an exhibit to the minutes of the
compensation committee meeting, would form the basis of
the committee’s deliberations and decision.
63
The lesson for compensation committees: prepare a Monte Carlo
sensitivity analysis that includes a number of material possibilities and
contingent payments, with expected probable values for each scenario, for
board review before approving any compensation package, and you will
perhaps avoid running afoul of your fiduciary duties in the approval. Does a
best practices reference have more force if it appears in an opinion rather
than in merely a journal article or speech? Perhaps, especially if it is in a
Delaware Supreme Court opinion joined by the full panel. Either way, a
Delaware judge’s public focus on a particular best practice can add significant
weight to its salience.
Consider also how the Delaware Supreme Court handled the question of
overlap between the duty of care and the question of good faith in Disney. The
following excerpt reads more like a philosophical treatise than a legal opinion:
63. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 56 (Del. 2006).
Virginia Law & Business Review 2:189 (2007)
212
The conduct that is the subject of due care may overlap with
the conduct that comes within the rubric of good faith in a
psychological sense, but from a legal standpoint those duties
are and must remain quite distinct. Both our legislative
history and our common law jurisprudence distinguish
sharply between the duties to exercise due care and to act in
good faith, and highly significant consequences flow from
that distinction.
. . . .
An example of such overlap might be the hypothetical
case where a director, because of subjective hostility to the
corporation on whose board he serves, fails to inform
himself of, or to devote sufficient attention to, the matters
on which he is making decisions as a fiduciary. In such a
case, two states of mind coexist in the same person:
subjective bad intent (which would lead to a finding of bad
faith) and gross negligence (which would lead to a finding of
a breach of the duty of care). Although the coexistence of
both states of mind may make them indistinguishable from a
psychological standpoint, the fiduciary duties that they cause
the director to violate—care and good faith—are legally
separate and distinct.
64
The distinction may seem academic at first, but the court must elaborate
on the reasoning that supports its decision through the use of hypothetical
scenarios. While some may dismiss this as a mere semantic exercise, all
opinions applying standards are, at their very heart, based on questions of
semantics. The elaborate, almost philosophical investigation seen in the Disney
opinion—a discussion blending psychology, law, and policy—is uniquely
scholarly. This is the result of a court mindful of how imprecision in word
choice can accrete into the tapestry of case law in a way that confuses the
function of the standards of care.
64. Id. at 65, n.104.
2:189 (2007) Delaware’s Guidance
213
IV. P
ARTICIPATION IN FORMAL COMMITTEES AND POLICY ANALYSIS
AS AN
ELEMENT OF THE GUIDANCE FUNCTION
Many Delaware judges consider participation in improvement of the
administration of justice to include active, not simply nominal, involvement in
committee work of law-related professional organizations.
Justice Jacobs and others have served on the Corporate Laws Committee
of the ABA Section of Business Law; Chancellor Chandler is a founder and
active member of the American Academy of Business Court Judges; one of
the authors serves currently as an advisor to the Business Section of the ABA
and judicial liaison to both the Negotiated Acquisitions and Business and
Corporate Litigation Committees of the Section; Justices Carolyn Berger and
Randy J. Holland of the Delaware Supreme Court participate in American
Law Institute activities focused on substantive law; Vice Chancellor Stephen
P. Lamb plays an active role in the PLI.
The preceding list is representative of Delaware judges’ direct
involvement with constituencies interested in the development of the law at a
practical, as well as at a theoretical level. Hands-on participation in
discussions about current issues in corporate law allows judges insight into
broader ramifications of the tensions at play in corporate transactions and in
litigation practices. It is as difficult to imagine sportswriters critiquing athletes’
performance without ever having seen a game as it is to imagine judges
comprehending the business environment without the opportunity to
participate on panels, listen to practitioner discussions, and hear directly how
problems evolve from the application of doctrine to real world scenarios.
While these experiences do not translate directly into dispositions of
particular cases, they do provide opportunities to inform judges about real
and potential consequences that flow from the evolution of best governance
practices in the field.
Delaware judges also play an active role in policymaking. For instance, in
an article just after the Sarbanes-Oxley reforms were instituted, Chancellor
Chandler and Vice Chancellor Strine urged a Delaware legislative reform to
execute adequate service of process on corporate executives in Delaware
fiduciary duty actions: “[S]ection 3114 could also be amended to clarify that
any person who aids and abets a breach of fiduciary duty against a Delaware
corporation is subject to jurisdiction in Delaware so long as Delaware’s
exercise of jurisdiction is consistent with federal constitutional standards of
due process.”
65
65. Chandler & Strine, supra note 35, at 1004.
Virginia Law & Business Review 2:189 (2007)
214
In response, the Delaware legislature adopted their recommendation, and
corporate executives are now deemed to consent to service of process in
Delaware when they accept appointment as a corporate officer of a Delaware
corporation.
66
For a more international flavor, we can look to Justice Jacobs’s
scholarship analyzing the burgeoning growth of a distinct corporate
jurisprudence in Japan. He uses the history of Delaware’s corporate law
development and draws a comparison to Japan’s Guidelines on Takeover
Defenses (adopted by the Japanese Ministry of Justice).
67
Jacobs’s advice:
The lesson that the Delaware experience teaches, I submit, is
that we should not expect the Japanese “fair” rules, whatever
form they may take, to remain static. . . . Japanese policy
makers have made a judgment to transplant portions of
Delaware takeover jurisprudence to Japan. . . . If history is
any guide, Japan, in developing “fair” takeover rules, will
undergo its own unique evolutionary experience.
68
The overarching lesson from Justice Jacobs is that some level of
indeterminacy in any viable corporate code is unavoidable.
C
ONCLUSION
Critics might assert that communication outside the four corners of legal
holdings, especially in the form of speeches and articles, risks running afoul of
the canons of judicial ethics. One counter argument to this line of thought is
that the Delaware courts are not unique in their desire to guide thinking about
the law outside the context of written decisions. Judge Richard Posner of the
United States Court of Appeals for the Seventh Circuit is a prolific author,
commenting on legal concepts that fall under the appellate jurisdiction of his
court. Indeed, Justice Oliver Wendell Holmes, Jr. was a noted author
throughout his service as one of the most notable United States Supreme
Court justices, as was Chief Justice William Rehnquist.
69
Neither the court’s
66. DEL.CODE ANN. tit. 10, § 3114 (2004).
67. See Jack B. Jacobs, Implementing Japan’s New Anti-Takeover Defense Guidelines, Part I: Some
Lessons from Delaware’s Experience in Crafting “Fair” Takeover Rules, 3 U. T
OKYO J.L. & POL.
83 (2006).
68. Id. at 85.
69. In a timely example of the prescience of judicial writings to future judicial inquiry at the
federal level, then-Chief Justice Rehnquist wrote a book entitled All the Laws but One: Civil
Liberties in War Time, on the habeas corpus rights of enemy combatants throughout U.S.
history, just a year before the 9/11 tragedy and a few years prior to the advent of a torrent
2:189 (2007) Delaware’s Guidance
215
flexibility nor its credibility in later decisions is limited by such secondary
precedents. Secondary sources are relevant merely as informative precedent,
and are most effective in the absence of other justification to rule in a specific
direction. In effect, the real cost of analysis in secondary sources that is later
directly and patently rejected by the court in a decision is not exhibited in the
primary source at all; rather, the cost is in the future effectiveness and
credibility of the secondary source writings. The judge thus has the incentive
to accurately reflect the landscape of corporate law evolution in his secondary
writings, so that the effort would not be in vain. In the event that a party cites
his secondary writings in a brief, a judge is certainly free to ignore that writing,
as he is free to ignore any secondary source material due to lack of binding
authority on his decision. The Three Tenors remind readers in a recent article:
“Since our views are expressed only in our capacity as lay commentators,
nothing in this Article should be regarded as an opinion or prediction of how
we would decide particular issues presented to us in our official capacity.”
70
The secondary source, however, does hold a place within the law. The judge
as an academic thinker is a relatively recent development of the last two
centuries, one which Delaware has embraced to the benefit of its Guidance
Function specifically, and to the body of decisions that constitute corporate
law more generally.
An analogy can be drawn to the Federal Reserve’s process, as that
institution faces a similar tightrope walk in its communication role. The
Federal Reserve Open Market Committee votes on decisions of bond sales
and purchasing policy that governs open market operations, which result in
changes to interest rates that ripple out into the economy to affect short-term
economic growth. To be sure, the analogy is limited, as one institution sets a
single variable (i.e., interest rate policy) using elaborate econometrics, while
the other uses broad legal standards potentially applied to limitless fact
patterns. Yet there are a number of important similarities. Both the Federal
Reserve and Delaware courts issue unofficial guidance so that experts—
economists in one case and corporate lawyers in the other—can themselves
counsel decision makers—the investing public on one hand and corporate
boards on the other. Such expert guidance has a real effect on the economy,
of litigation on that issue. Amicus briefs in some of the litigation cited to Chief Justice
Rehnquist’s book. See, e.g., Amicus Curiae Brief of the American Center for Law and
Justice at 4, Hamdi v. Rumsfeld, 542 U.S. 507 (2004), available at
http://www.jenner.com/files/tbl_s69NewsDocumentOrder/FileUpload500/208/Amicus
Curiae_AmericanCenter_LawJustice_Hamdi.pdf.
70. William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., The Great Takeover Debate: A
Meditation on Bridging the Conceptual Divide, 69 U.
C
HI.L.REV. 1067, 1068 n.1 (2002).
Virginia Law & Business Review 2:189 (2007)
216
as it can limit the need for subsequent official action. Communication from
the Federal Reserve can ease investor insecurity and limit inflation pressures
that may otherwise result in a need for policy shifts.
71
In the corporate sphere,
legal counsel can minimize the incidence of board decisions that result in
subsequent litigation or liability. Thus, communication in both spheres serves
to increase valuable efficiency.
This comparison holds equally for dicta, speeches, and articles. The
Federal Reserve originally only issued statements accompanying and
explaining its policy actions based on economic data pre-dating the policy
decision. In 1998, it implemented a change to offer policy guidance in written
statements on future policy courses to minimize uncertainty surrounding its
future policy decisions.
72
Additionally, Federal Reserve Chairman Alan
Greenspan gave 123 speeches between 1996 and 2003, averaging eighteen a
year.
73
Professor Lawrence Hamermesh tallied oratory appearances by the
Delaware judiciary, totalling seventy-one from 2003 to 2006.
74
While not all of
these speeches will eventually grow into substantive law review articles, many
that touched on substantive corporate law questions have already done so.
Communications to experts and decision makers, however, must be
circumspect in both instances; both judges and Fed officials want to minimize
the possibility that their flexibility to respond to unforeseen difficulty will be
foreclosed. Additionally, the analogy holds in that, for both institutions, no
single member can speak for the collective organization. This often results in
the unofficial communication being vague, yet this does not negate its value.
For the Federal Reserve, the economic advantage resulting from a
communication can be quantitatively shown.
75
For the Delaware courts, the
ability to measure such benefits is much more difficult, since one cannot
easily measure the value of board liability that did not occur because of sound
advice from informed corporate counsel.
There may nevertheless be a way to empirically demonstrate the utility of
the Delaware Guidance Function. We counted citations over the last fifteen
years to the three most prolific Delaware judges as based on the number of
71. See Donald L. Kohn & Brian P. Sack, Central Bank Talk: Does it Matter and Why?, at 1
(Federal Reserve Board, Finance & Economics Discussion Series No. 2003-55, 2003),
available at http://www.federalreserve.gov/Pubs/feds/2003/200355/200355pap.pdf.
72. Id. at 4.
73. Id. at 5.
74. See Hamermesh, supra note 26, at 1788.
75. See generally Kohn & Sack, supra note 71 (showing through a regression on market returns
correlated with significant policy shifts that speeches and policy statements by members
of the Federal Reserve Open Market Committee have a statistically significant, positive
effect on market interest rates).
2:189 (2007) Delaware’s Guidance
217
corporate law articles published (former Chief Justice Veasey, former
Chancellor Allen, and Vice Chancellor Strine).
76
We included only citations to
journal articles focusing on Delaware corporate law topics. Secondary source
writings by these three judges were cited seventy-one times in PLI
publications. They were cited thirty-eight times in legal opinions, the vast
majority issued by the Delaware Court of Chancery or Delaware Supreme
Court., and were also cited thirty-six times in briefs before one of these two
Courts. Finally, there were 939 citations to the three judges by other authors
in other journal articles.
One criticism of this method of measuring the relevance of this aspect of
the Guidance Function could be that it does not prove that secondary judicial
writings add value, but merely that corporate lawyers and academics believe
they have value. But perhaps this is as close as one can come to quantifying
such an amorphous concept. One can trust the notion, however, that deal
lawyers are highly sophisticated in their approach; if they cite Delaware judges
with such frequency, then one can feel comfortable with the assertion that the
extrajudicial activities are worth the effort.
The dicta element of the Delaware jurisprudence is more easily defended.
The analysis leading to a holding can take many twists and turns, and
necessary digressions can assist in analyzing and appreciating the holding.
Dicta is an omnipresent and long-standing phenomenon in the American
common law system, and thus not as controversial as secondary writings. Its
quantitative utility in Delaware is tremendous, as quantified by citations to
dicta in practice guides—a Westlaw search for Delaware /s Dicta in the “all law
reviews and texts” (TP-ALL) database (including practice guides) yields 610
results.
77
To offer an idea of how Delaware dicta is used in the practice
76. Note that, though these three authors have published numerous articles on related topics,
only articles focusing on Delaware corporate law were included in this tally. Furthermore,
only articles written while the author was on the bench or co-authored with a sitting judge
were included. The following totals are current as of May 16, 2007:
• All citations, including other academic articles, to Former Chancellor Allen: 472;
Citations in PLI: 18; Citations in BNA: 10; Citations in ALI/ABA: 5; Legal
Opinion Citations: 10; Citations in Case Briefs: 6; Citations in Am. Jur.: 5.
• All citations, including other academic articles, to Vice Chancellor Strine (note
that articles co-authored with Allen were not included to prevent double
counting): 266; Citations in PLI: 19; Citations in BNA: 3; Citations in ALI/ABA:
6; Legal Opinion Citations: 12; Citations in Case Briefs: 16.
• All citations, including other academic articles, to Former Chief Justice Veasey
(note that Veasey’s Retrospective piece, completed just after the end of his tenure, is
included in this tally): 346; Citations in PLI: 34; Citations in BNA: 20; Legal
Opinion Citations: 16; Citations in Case Briefs: 14.
77. As of December 2, 2007.
Virginia Law & Business Review 2:189 (2007)
218
guides, we have quoted from the following five citations, which are but a few
examples of the many found throughout corporate law practice guides since
the 1980s:
1. Fliegler v. Lawrence contained dicta to the effect that even
if the safe harbor tests of § 144 were satisfied, the
transaction in question could still be attacked on fairness
grounds.
78
2. The “preponderance of evidence” standard has, it should
be noted, been endorsed in dicta by the Delaware
Supreme Court. See Unocal Corp. v. Mesa Petroleum Co.
79
3. However, the Delaware Chancery Court indicated in
dicta that Revlon duties may apply in the context of a
merger in which over 30% of the consideration was the
acquirer’s stock and the remainder was cash.
80
4. In Tafeen v. Homestore, Inc., the Delaware Chancery Court
noted in dicta that Sarbanes has created uncertainty as to
whether corporations may continue to advance costs.
The court questioned whether Sarbanes’ prohibition of
personal loans preempts the Delaware Code’s provisions
that expressly allow corporations to advance attorney’s
fees.
81
5. In a ruling in 2005, Chancellor Strine, albeit in dicta,
suggested that Delaware courts may be willing to
eventually reconcile the different standards of review for
the different approaches and extend the business
judgment rule’s protection in negotiated going-private
deals with controlling shareholders where the controlling
shareholders proposes a transaction that is subject to (1)
special committee negotiation and approval and (2)
approval by a majority of disinterested stockholders,
78. 1 LOU R. KLING &EILEEN T. NUGENT,NEGOTIATED ACQUISITIONS OF COMPANIES,
S
UBSIDIARIES AND DIVISIONS § 4.02, at n.33 (2006) (citation omitted).
79. D
AVID A. DREXLER ET AL., DELAWARE CORPORATION LAW AND PRACTICE, § 15.09
(1991) (citation omitted).
80. 1 M
ARTIN LIPTON &ERICA H. STEINBERGER,TAKEOVERS AND FREEZEOUTS § 5A.01[2],
at 5A-16 (2006) (1978) (citation omitted).
81. Paul S. Diamond & Mathieu J. Shapiro, Director and Officer Liability, in 6 B
USINESS AND
COMMERCIAL LITIGATION IN FEDERAL COURTS § 63:21 (Robert L. Haig ed., Thomson
West 2nd ed. 2005) (1998).
2:189 (2007) Delaware’s Guidance
219
while also tightening the conditions for avoiding entire
fairness review through the Siliconix approach.
82
In conclusion: the extrajudicial activities undertaken by the judges of the
Delaware Court of Chancery and the Delaware Supreme Court contribute to
a more informed understanding of the state’s corporate jurisprudence. The
intellectual effort has not been in vain. This should finally put to rest the
notion that Delaware, or at least the Delaware judiciary, seeks to obtain some
advantage from encouraging an artificial indeterminacy in its jurisprudence.
The Delaware Guidance Function is an important element of Delaware’s
unique advantage as a forum for the resolution of the disputes of business
entities, and has helped the Delaware judiciary earn its place as the arbiter of
equity for the modern corporate Witenagemot.
82. Theodore N. Mirvis, What All Business Lawyers & Litigators Must Know About Delaware Law
Developments 2007, 1599 PLI/CORP. 147, 217–18 (2007).
