At the 30^th annual Francis G. Pileggi Distinguished Lecture in Law, Brian R. Cheffins, the S.J. Berwin Professor of Corporate Law at the University of Cambridge, evaluated Delaware’s contribution to the development of corporate governance over the past forty years.  Professor Cheffins posited that although Delaware is often identified as having a substantial impact in the field of corporate governance, it has not been the sole player and has not always been the dominant player in the development of corporate law.  Yet, any analysis of the historical development of corporate governance would be seriously incomplete without a consideration of Delaware and Delaware courts.

In the lecture, Professor Cheffins first asserted that due to the nature of the legislature and the judiciary, Delaware’s key corporate players, expectations concerning Delaware’s potential impact should be kept in check.  He then explained his position that Delaware has not been as impactful in the areas of shareholder activism and executive pay, but has made substantial contributions in the development of boards of directors and takeovers.

Delaware’s Key Corporate Players—the Legislature and the Judiciary

Beginning with the Delaware General Corporation Law (“DGCL”), which has been identified as the formal apex of the structure of Delaware Corporate Law, Professor Cheffins noted that the DGCL has not been overhauled since 1967, before corporate governance became prominent.  Therefore, it was not likely to be the “first mover” on corporate governance; put differently, Professor Cheffins asserted that because the DGCL predated the prominence of corporate governance, it cannot be said to have had a transformative effect on the development of governance standards.  He further noted that Chief Justice Strine has stated that the “Delaware Model” for corporation law makes the DGCL an unlikely foundation for the imposition of governance standards.

Next, in analyzing the role of the Delaware judiciary, Professor Cheffins observed that because of Delaware’s approach to corporate law, Delaware courts have a broad scope to define director’s duties.  This discretion has created the potential for the Delaware judiciary to play a significant role in the development of corporate governance.  But while they have had a profound impact on changes in corporate governance law, Delaware Courts tend to reinforce already-existing trends, rather than foster radical change.

In comparing the legislature and the judiciary, Professor Cheffins explained that with the judiciary, cases tend to be skewed because most filings involve one type of case: a class action challenging actions taken by directors in an acquisition.  Nevertheless, Delaware judges are skilled at creating broad rules and exerting influence on matters not specifically raised by litigants and not before the courts.  The legislature, on the other hand, is not constrained by doctrine and precedent, and can create wide regulatory schemes.  Where courts are constrained, the legislative body can open up doctrine and theoretically investigate and formulate new doctrine.

Delaware’s Influence on Areas of Corporate Governance

After summarily concluding that Delaware’s contribution to shareholder activism has been marginal largely because of institutional constraints, and that Delaware played a largely peripheral role in the transformation of executive pay in the late 20^th century, Professor Cheffins, examined Delaware’s role in the development of corporate boards and the decline of hostile takeovers.

Regarding the board of directors, Professor Cheffins set forth that Delaware played a substantial role in rise of independent directors and in establishing standards of deliberation.

Citing Delaware cases in which the independence of the board was seen as a factor in the outcome—Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), Moran v. Household Int’l, Inc., 500 A.2d 1346, 1349 (Del. 1985), and Paramount Comm’ns, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1989)—Professor Cheffins observed that an indication by Delaware courts that decisions by independent directors would be less scrutinized than decisions by interested parties helped lead to a rise in the importance of independent directors. Yet, despite acknowledging that Delaware courts contributed to the rise of the independent director, Professor Cheffins maintained that Delaware courts were merely reinforcing already occurring key trends in changes to the board.  He further explained that Sarbanes-Oxley and other regulatory reforms in the early 2000s were not transformative because they largely conformed to corporate governance norms shaped by Delaware case law.  Delaware courts had helped transform the legal landscape, and the regulatory reforms went a long way towards mandating the numerical dominance of independent directors and independent committees on boards.

As to the standards of deliberation, Professor Cheffins acknowledged the influence of Delaware case law, but maintained that Delaware’s impact could have been more extensive.  Noting that Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), a case where outside directors of a publicly traded company faced out-of-pocket liability, was widely credited with sensitizing the business community to the deliberative responsibilities of boards, Professor Cheffins expressed that the fears of personal liability may not have been well-founded because a statutory amendment, DGCL § 102(b)(7), permitted restrictions on board liability in the corporation’s charter.  Later, the Disney/Ovitz litigation, In re Walt Disney Co. Derivative Litig., 907 A.2d 693 (Del. Ch. 2005) aff’d, 906 A.2d 27 (Del. 2006), further eased the fears of growing liability risks in Delaware courts.  According to Professor Cheffins, Disney, characterized as “the corporate governance case of the century,” provided Delaware courts with a fresh opportunity to adjudicate on directors’ responsibilities to be more attentive; but the court’s ruling of no liability on the directors likely muted its impact.

Regarding takeovers, Professor Cheffins contended that factors outside of Delaware must have helped to prompt the switch in emphasis from the market for corporate control to internal governance mechanisms.

Observing that Delaware courts were “in the center of the action” during the Deal Decade,[1] Professor Cheffins acknowledged that Delaware rulings that upheld defensive steps taken by boards may have helped bring the deal decade to a close.  He nevertheless put forth that while the Paramount decision, Paramount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1142 (Del. 1989), is largely credited for helping to bring the deal decade to an end, Delaware case law was only one component of a legal matrix that worked to the disadvantage of a hostile bidder.  Explaining that changing market conditions at the end of the 1980s made banks reluctant to lend to those seeking to carry out takeovers, Professor Cheffins posited that other factors must have helped to prompt the switch to internal governance mechanisms at the close of the deal decade.

To further support his contention that factors outside of Delaware must have helped to prompt the switch to internal governance mechanisms, Professor Cheffins examined DGCL § 203, Delaware’s anti-takeover law.  He noted the general thinking that § 203 was of limited practical importance so long as boards had substantial discretion to adopt poison pills.  He then asserted that Delaware case law indicating that boards had substantial discretion to deploy poison pills was not decisive because poison pills are relatively harmless unless coupled with a staggered board, and only a subset of Delaware companies had staggered boards combined with the poison pill.  Therefore, a poison pill did not necessarily render § 203 moot.

Conclusion

Professor Cheffins concluded the lecture by emphasizing that any discussion of the development of corporate governance in the United States would be seriously incomplete without accounting for Delaware’s role.  Nevertheless, other players and factors were at play, and even in the areas where Delaware was most influential, it tended to reinforce trends rather than foster radical change.

In response to a question posed by Professor Lawrence Hamermesh, director of the Institute of Delaware Corporate and Business Law, Professor Cheffins explained that the ability of Delaware to accept certified questions was not crucial to past developments but could be significant moving forward.