Stephanie Habelow of Smith, Katzenstein & Jenkins submits the following observations on the fallout from the Delaware Supreme Court’s 2011 opinion in Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, 27 A.3d 531 (Del. 2011):

The standard on a motion to dismiss is a familiar one, well-known to virtually all Delaware lawyers: Well-pleaded allegations shall be accepted as true. Conclusory allegations shall not be. Only allegations that suggest recovery under a reasonably conceivable set of circumstances survive. Or is the standard plausibility?

In its decision in Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, the Delaware Supreme Court emphasized that reasonable conceivability is the only standard Delaware courts should apply in reviewing a motion to dismiss: “the governing pleading standard in Delaware to survive a motion to dismiss is reasonable ‘conceivability.’” This decision reviewed the Court of Chancery’s application of what appeared to be a plausibility standard in dismissing a complaint.

Chancellor Strine, whose use of just such a standard provided the impetus for the decision, explained his perspective on this issue in a detailed footnote in Winshall v. Viacom International, Inc. Seeing little difference between “conceivability” and “plausibility”, the Chancellor questioned the utility of the Supreme Court’s decision and puzzled over the direction of Delaware’s procedural law on this point. The Supreme Court, perhaps by way of tacit reply, released an order recently in Cambium Ltd. v. Trilantic Capital Partners III LP, in which the Court again emphasized that the standard to be applied on a motion to dismiss is one of conceivability. This order reversed Vice Chancellor Laster’s apparent application of a plausibility standard in dismissing a complaint (the order notes that the Vice Chancellor ruled from the bench and used the word plausibility nine times during the hearing). These two judges are not the only ones applying a “plausibility” standard – other members of the Court have done so, as well, and on several occasions, the Court has cited to Bell Atlantic Corp. v. Twombly when setting forth the standard. So how did we get here?

The Court of Chancery’s use of a plausibility standard (or at least, the Court’s use of the word “plausibility”) can be traced back to 2007 in Desimone v. Barrows which cited Twombly and made the following observation: “our nation’s high court has now embraced the pleading principle that Delaware courts have long applied, which is that a complaint must plead enough facts to plausibly suggest that the plaintiff will ultimately be entitled to the relief she seeks.” This suggests that plausibility has always been the standard Delaware courts apply on a motion to dismiss – at the very least it suggests that the Court of Chancery does not distinguish between a conceivability standard versus a plausibility standard. According to the Delaware Supreme Court, the standard has always been one of conceivability and Delaware courts should continue to apply this standard until the Supreme Court has the occasion to determine whether Twombly and Ashcroft v. Iqbal have any bearing on Delaware’s standard. That said, there seems to be a disconnect between the Delaware Supreme Court’s and the Court of Chancery’s view of the direction of Delaware law in this area. As noted, the Court of Chancery had seemed to recognize the federal plausibility standard as following in Delaware’s footsteps (as noted in Desimone). However, in Central Mortgage, the Delaware Supreme Court seemed to find that the opposite was true – that Delaware courts were following their federal counterparts and that they should not be, absent some express affirmation of that standard articulated in Twombly and Iqbal.

Does any of this matter? Is there anything really wrong with applying a slightly higher plausibility standard than a conceivability standard? First, this matters for the obvious reason: lawyers and judges alike appreciate knowing that Delaware Supreme Court’s position and having known standards to apply. However, the Chancellor has a point: there does not seem to be a significant difference between conceivability and plausibility. Admittedly, there does seem to be a perceptible difference between the two (not everything that is conceivable is plausible), however, the Supreme Court’s distinction of the two words seems to elevate conceivability a bit (Central Mortgage described conceivability as similar to “possibility” whereas plausibility is somewhere between possibility and probability). Second, the Central Mortgage opinion stated that vague allegations will be considered well-pleaded if they give the defendant notice of the claim. Although Delaware’s notice pleading standard is clear and well-established, the use of “vague” allegations to accomplish this seems to be a departure. How can vague allegations be considered well-pleaded? Well-pleaded allegations are non-conclusory allegations grounded upon facts that state a cause of action. It seems that because a vague allegation would likely lack any specificity, this would means that a conclusory allegation might in fact be a step up from a vague allegation. Yet, conclusory allegations are not accepted as well-pleaded for purposes of a motion to dismiss.

It is hard to see the import and practicality of applying a standard of reasonable conceivability – if anything, this somewhat lower standard may allow more cases –possibly weak cases – to survive a motion to dismiss, progress farther in litigation, and expend limited judicial resources. Moreover, the Court of Chancery’s apparent use of a plausibility standard on several occasions may have just been a semantic difference instead of a true misapplication of a different standard.

Next week marks the return of the annual Ruby R. Vale corporate moot competition. We obviously hope that the event provides a worthwhile educational experience for the competitors, who hail from 22 law schools throughout the country. But there’s also a little bit of guilty pleasure on my part in watching the final oral arguments, with members of the Delaware Supreme Court and Court of Chancery presiding. It’s a chance to tease out their reactions to knotty legal issues that my colleague Paul Regan or I gin up every year. Next week’s all-star cast of good sports includes Justices Jack Jacobs and Henry Ridgely, Vice Chancellors John Noble and Sam Glasscock, and our distinguished visitor Richard Climan, of Dewey & LeBoeuf in Palo Alto. Along the way to the finals, competitors will encounter daunting questioning from a bevy of Delaware corporate practitioners and academics, including me and my fellow semi-finals judges, former Chief Justice E. Norman Veasey and senior Skadden partner Edward Welch.

This year’s problem (available here) raises an issue I trot out periodically in my business organizations class. We all know at least two things about Delaware corporate law: (1) it’s designed to be flexible and to accommodate a broad range of departures from default legal rules, especially when those departures are specified in the certificate of incorporation; and (2) directors’ fiduciary duties require them to obtain the highest current value reasonably available when the company is sold. What happens when these two principles collide? Specifically, can a charter provision validly require directors to consider nonstockholder interests, and even explicitly permit them to accept a lower takeover bid based on such consideration? Put more succinctly, is Revlon’s key holding a mandatory aspect of Delaware corporate law?

This year’s competition also raises another issue – whether the Delaware Supreme Court’s 2003 ruling in Omnicare should be overruled, particularly in light of subsequent cases limiting its reach and recognizing the validity of mergers approved by rapid written consent by controlling stockholders.

Unfortunately, the only ruling that comes out of the final oral argument is which team wins. But it’s fun to hear the judges kick around the issues. Got an issue you’d like to see mooted next year? Write to Regan – it’s his turn to write the problem next year.

Auriga Capital Corporation v. Gatz Properties, LLC

It is with regret that I find myself compelled to respond to Chancellor Strine’s unfortunate opinion in Auriga v. Gatz. I do so as a result of serving as a legislative drafter for partnerships, limited liability companies and other alternative entities both in Delaware and as a Life Member with the Uniform Law Conference for over two decades.

It is a well-known legal axiom that bad facts make bad law. Following this axiom, in Auriga Chancellor Strine was faced with bad facts – a devilish manager of an LLC who acted every bit the part of Lord Voldemort determined to “do in” his members. Regrettably, the Court defined the legal issue in Auriga as whether default fiduciary duties existed in a Delaware manager-managed LLC, which is not the default form for a Delaware LLC. As provided at 6 Del. Code § 18-101(6), a Delaware limited liability company is defined as “a limited liability company formed under the laws of the State of Delaware and having 1 or more members.” Thus, in the first instance, for the Court to attempt to resolve the important question of the existence of default fiduciary duties for members or managers of Delaware LLCs upon the facts of this case must necessarily muddy the waters of any judicial analysis.

In the second instance, Chancellor Strine relied upon a well-known “catch-all” phrase originally found in UPA (1914) as crafted by the drafters of the Uniform Law Conference as the basis for his finding of a default fiduciary duty in Delaware’s LLC Act. However, in the Comment to § 104 of the Revised Uniform Partnership Act (1997) (“RUPA”) from which all the ULC alternative entity Acts derive the same “law and equity” clause upon which Chancellor Strine places his emphasis, the following is noted:

”The principles of law and equity supplement RUPA unless displaced by a particular provision of the Act . . . Those supplementary principles encompass not only the law of agency and estoppel and the law merchant mentioned in the UPA, but all of the other principles listed in UCC Section 1-103: the law relative to capacity to contract, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other common law validating or invalidating causes, such as unconscionability. No substantive change from either the UPA or the UCC is intended.” (Emphasis is added)

From the Comment to § 104 of RUPA, it is clear that the phrase, “Unless displaced by particular provisions of this [Act], the principles of law and equity supplement this Act,” was never intended to address, much less impose, fiduciary duties on owners or managers in partnerships or limited liability companies.

The third, and most compelling, error in the Auriga opinion is its failure to address the preamble to § 18-1104 that states: “In any case not provided for in this chapter, the rules of law and equity, including the law merchant, shall govern.” According to the prefatory language of § 18-1104, if any provision in the Delaware LLC Act speaks to fill the void of “law and equity,” then § 18-1104 is rendered moot as to that issue. The Delaware LLC Act uniquely, clearly and concisely – since its adoption in 1992 – has specifically expressed the position of the Delaware General Assembly on the policy to be followed for all Delaware LLCs. That policy is found at § 18-1101(b) that unambiguously provides: “It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”

[(Emphasis added) This same language of usurpation over the “catch all” provisions referencing equity appears in each Delaware partnership act as well as the Delaware LLC Act.]

Thus, if the Court of Chancery were to find that a contractual legal issue could not be answered within the tenets of contract law, only then would the language of § 18-1104 have meaning.

It is also noteworthy that apparently Chancellor Strine believes that the failure to include “a general provision stating that the only duties owed by the manager to the LLC and its investors are set forth in the Agreement itself,” leaves the manager with default fiduciary duties, even where the Agreement in Auriga included express provisions for approval of conflicting interest transactions. Upon the Chancellor’s interpretation then, in the absence of a general fiduciary duty provision in an LLC Agreement, all Delaware LLC Agreements will, in essence, be construed as more of a trust document than a contract.

Finally, the most regrettable portion of the Chancellor’s opinion is the dicta stating that the Delaware LLC is, in essence, the same as a Delaware corporation. Delaware’s own law school devotes two independent advanced seminars to the topics of corporations and LLCs respectively in order to examine the rich diversity of these two entities. Having learned LLCs from the ground up instead of the top down, these distinctions are more readily apparent to this author.

It is with due deference to our Chancellor that I respectfully disagree with the necessity for, as well as the legal basis of, his opinion in Auriga.

Respectfully submitted,

Professor Ann E. Conaway

In an opinion issued today addressing the fiduciary duties of managers of Delaware limited liablity companies, Chancellor Strine reiterates and elaborates on the view previously expressed in the Court of Chancery that such duties exist by default under Delaware law and the Delaware Limited Liability Company Act.  The opinion can be reviewed here. For now, it therefore appears that the Delaware Supreme Court may have an opportunity to decide the issue addressed in the on-line symposium elsewhere on this site.

Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law
January 17, 2012

Two ostensibly unrelated events in the last two weeks implicate deep questions about the basic role of private ordering and regulation in relation to publicly traded equity securities.

The first of these events was Vice Chancellor John Noble’s opinion in Gerber v. Enterprise Products Holdings, LLC, et al (Del. Ch. Jan. 6, 2012). The Delaware Corporation & Commercial Litigation Blog has a nice summary of the case here, but the nub of the opinion was its determination to dismiss a claims that a 2009 sale of assets to an affiliated person violated the general partner’s fiduciary duties and that a merger subsequently implemented by the general partner improperly failed to consider the value of that pre-existing derivative claim against the general partner. The reasoning underlying that dismissal was that (i) the asset sale and the merger each received one form of what the limited partnership agreement defined as “Special Approval” (approval by a special committee of independent directors), thereby eliminating any claim of breach of fiduciary duty; and (ii) the residual claim that the general partner violated its implied obligation of good faith and fair dealing was precluded by the provision in the limited partnership agreement that the general partner’s “good faith is conclusively presumed where the general partner relief on the fairness opinion of an independent consultant.” In the case at hand, the general partner had obtained and reasonably relied on fairness opinions from Morgan Stanley.

The court’s opinion seems to chafe, to put it gently, at the contractual and legal strictures imposed by the limited partnership agreement:

The facts of this case take the reader and the writer to the outer reaches of conduct allowable under 6 Del. C. § 17-1101. It is easy to be troubled by the allegations. Alternate entity legislation reflects the Legislature’s decision to allow such ventures to be governed without the traditional fiduciary duties, if that is what the partnership agreement or other governing document provides for, and allows conduct that, in a different context, would be sanctioned. Ultimately, the investor, who is charged with having assessed and accepted the risks of putting his money in an entity without the comfort afforded by fiduciary duties, is left with contractual protections, either those that are expressed or those that are within the implied covenant of good faith and fair dealing. Here, those protections were minimal and did not provide EPE’s public investors with anything resembling the protections available at common law.

As the Vice Chancellor expressed in an extended footnote, minimal contractual protection for public investors may potentially result in one of two consequences – discounted trading of the affected securities, or regulatory intervention:

If the protection provided by Delaware law is scant, then the LP units of these partnerships might trade at a discount or another governmental entity might step in and provide more protection to the public investors in these partnerships. Those issues, however, are not ones that this Court need or should address. The General Assembly has decided that this Court has only a limited role in protecting the investors of publicly traded limited partnerships that take full advantage of 6 Del. C. § 17-1101(d), and that is a role this Court must accept.

Meanwhile, and in a superficially very different context, the Carlyle Group, L.P. filed a January 10, 2012 amendment to its Form S-1 registering a public offering of its limited partnership units. Among other things, this amendment disclosed that the Carlyle limited partnership agreement would contain a fairly unusual provision governing the resolution of disputes involving the limited partnership’s internal affairs. In broad outline, it would provide that all limited partners would irrevocably agree that disputes relating to the limited partnership – including claims of breach of fiduciary duty, breach of the partnership agreement, and violation of the federal securities laws – will be subject to arbitration, and not be litigable, and would be arbitrated before three arbitrators in Wilmington, Delaware [wait, it gets better!] who are U.S. lawyers, retired judges, or [wait for it … ]

U.S. law professors [Law professors in Delaware? Can it get any better than this??].

Would a provision like this be valid if it were in a corporation’s certificate of incorporation? Not sure on that one – but I tend to think that a charter provision selecting the Delaware courts as an exclusive forum for hearing controversies involving internal corporate affairs is probably effective, at least if it’s included in an original (pre-IPO) certificate of incorporation. If that’s right, then it should be even easier to validate such an exclusive forum provision contained in a pre-IPO limited partnership agreement. And would an arbitration selection provision be any less effective? If one believes that organizational governing documents are contracts like all others, even when applicable to (“entered into by”) public investors, the answer has to be no, so at least for non-corporate entities a provision mandating arbitration would be effective.

Is this disturbing?  That depends, I suppose, on whether you believe that, as Vice Chancellor Noble put it, the limited partnership interests (or shares of stock, if we were dealing with a corporation) would “trade at a discount” reflecting a meaningful market assessment of the value (negative, if one presupposes a discount) of the dispute resolution provision.  If one were confident that the market – including the IPO market – would accurately price such provisions (whatever the word “accurately” means), perhaps there’s no real cause for concern: people will get what they pay for. On that view of things, it may not even matter that some investors are individually unaware of what dispute resolution or other rights they may be forgoing. On that view, perhaps even corporations should be allowed to adopt provisions dispensing with fiduciary duties, just as Delaware limited partnerships and LLCs are.

If you lack such abiding faith in market efficiency, however, you are in quite a quandary, because you then have to decide which private ordering innovations to tolerate, and which to regulate. As things stand, Delaware has made that decision, at least in relation to fiduciary duties: if you buy a limited partnership interest, the fiduciary duties you are owed may be limited or eliminated by the limited partnership agreement; if you buy corporate stock, on the other hand, fiduciary duties are mandatory and can’t be eliminated, even by charter provision (although, of course, director monetary liability for breach of the duty of care can be eliminated under Delaware General Corporation Law Section 102(b)(7)).

In regard to fiduciary duties, Delaware could choose to stand by this approach that bifurcates between corporations and other forms of entity. Alternatively, and recognizing that publicly traded noncorporate entities are still a somewhat limited phenomenon, Delaware could at least prospectively put all publicly traded entities on the same footing, by precluding publicly traded limited partnerships and LLCs from limiting or eliminating fiduciary duties. My “alternative entity” friends might gasp at that prospect, but they need to tell me why they are confident that the IPO market for limited partnership interests fairly and accurately prices provisions that limit or eliminate fiduciary duties. And they need to be confident that Vice Chancellor Noble’s concern that “another governmental entity [who ever might he be referring to?] might step in and provide more protections for the public investors” is just remote speculation, or that such regulation would be desirable or at least acceptable.  That said, one can question whether the EPE limited partnership agreement addressed by Vice Chancellor Noble really represents the “outer reaches” of the flexibility afforded under the Delaware limited partnership statute:  the operative provision addressing conflict transactions did not purport to effect a blanket elimination of all fiduciary duties; all it did was define various forms of effective approval for conflict transactions, including approval by a special committee of directors, a form of approval generally viewed as appropriate under corporate law as well.   Likewise, the provision establishing that directors act in good faith when they rely on the opinion of an expert on a matter they reasonably believe to be in the expert’s area of competence doesn’t seem radically different than the rule embodied in Section 141(e) of the Delaware General Corporation Law, protecting directors’ good faith reliance on expert opinions reasonably believed to be within the expert’s professional competence.  Perhaps the biggest difference from the corporate statute is that the partnership agreement provision appears to eliminate the predicate that the director’s reliance be in overall good faith, and not just based on a reasonable belief in the expert’s competence.  Even if the partnership agreement provisions at issue are somewhat more protective than what is available as a matter of corporate law, however, it seems likely to me that those provisions are relatively modest in their impact, at least compared to what the limited partnership statute might actually permit.

In regard to dispute resolution matters, the law is still largely unsettled. Given the Delaware legislature’s explicit embrace of freedom of contract in noncorporate entities, will mandatory arbitration provisions like Carlyle’s be deemed valid and become commonplace in such entities that are publicly held? And do such provisions offend some mandatory aspect of corporation law such that Delaware public companies will be unable to adopt them? Is litigating in the Court of Chancery a fundamental, non-excludable right for stockholders, but litigating in a court outside of Delaware is not? Or if charter forum selection provisions for Delaware public companies become common, will arbitration selection provisions become similarly common?

Is there a comprehensive way to decide what private ordering – which may amount to no more than a take it or leave it investment choice – should allow, and what is off limits?

Last week Jim McRitchie provided a thoughtful response to my post questioning the utility of precatory proxy access proposals.  As you’ll see from his response, he draws on analogies to political democracy, and why “let the people decide” doesn’t mean “let the people decide everything:”

Generally, the “people decide” in democracies by delegating authority to their elected representatives. As voters, we get involved directly in nominating and electing candidates but generally then hope that our representatives will work in our interest. We pass along advice and concerns. If our elected officials fail to represent us, we the people again act more directly through initiatives, recall, etc.

With regard to how “pass[ing] along advice and concerns” should work, McRitchie says: 

Directors have much to add to the debate.  Let’s hear from them.  I’m not opposed to submitting binding bylaws but what’s wrong with asking first?  If our proposals are successfully endorsed by shareholders but ignored by directors then I would be ready to escalate, not only by submitting binding bylaw proposals but also by calling on shareowners to vote against directors who ignore the will of the voters.

I certainly support the idea of constructive engagement before shots are fired, and McRitchie’s commentary certainly persuades me that the precatory aspect of United States Proxy Exchange’s strategy is a reasonable approach.  The new Latham & Watkins model proxy access bylaw and commentary remind me how devilishly complex the details of a proxy access bylaw are (not to mention related matters of advance notice bylaws and qualification bylaws).  So I agree with McRitchie that the precatory approach is a useful way “avoid getting into the weeds on company specific legal issues better left to corporate attorneys.” 

There’s still a residual problem, however, where I suspect that McRitchie and I continue to disagree, namely on how a board of directors should evaluate the results of a vote on a precatory proxy access proposal.   McRitchie is evidently ready to call on shareholders to vote out directors who “ignore the will of the voters,” but how does one discern what that “will” is, when a vote is on general principles and avoids getting “into the weeds” where critical issues lie?  If “[d]irectors have much to add to the debate,” as McRitchie correctly argues, isn’t it implicit that they need to exercise judgment and not accede to what they believe are misguided precatory proposals, especially where there’s no cost to shareholders for voting for a proposal that isn’t adequately thought through? 

The Delaware Supreme Court issued its ruling yesterday in Espinoza v. Hurd, a case in which the plaintiff — an HP stockholder — invoked the Delaware corporate inspection statute (DGCL section 220) to inspect a report by Covington & Burling to the HP board evaluating claims of sexual harrassment by CEO Mark Hurd. 

The opinion by Justice Jacobs is very narrow and very careful. In evaluating the Court’s decision affirming the denial of the plaintiff stockholder’s access to the Covington report, it is important to keep in mind, as the Court’s opinion did, that documents reflecting the actual facts bearing on the issue of whether Mr. Hurd should have been dismissed for cause had already been turned over to the plaintiff. The Court also noted, as a factual matter, that the Covington report didn’t directly address the “for cause” termination issue – and that had it done so, the case might have come out differently.

The Court of Chancery had reached the same result, but in reliance on a claim of attorney-client privilege. As against stockholders, however, that privilege is qualified, and will be applied, or not, depending on factors like the strength of the stockholder’s underlying claim and whether the information in question is otherwise available. The lower court’s result may well mirror the Supreme Court’s reasoning – particularly as it relates to the availability of key information from other sources. The major difference between the Supreme Court and the Court of Chancery, however, appears to be on the question of which mode of analysis – entitlement under Section 220 (the Delaware corporate inspection statute) and under attorney-client privilege (a common law issue) – should be applied first. The Supreme Court chose the former, believing that one should decide whether the stockholder is entitled to review the document under the inspection statute, before deciding whether a claim of privilege bars that inspection. It’s a logical preference, although it’s not clear that the result would or should have been any different, and the Supreme Court disavows any pronouncement about how the privilege issue would have been resolved.

I’d like to think that after the Disney/Ovitz litigation, the HP board devoted specific attention to whether the circumstances warranted dismissing Mr. Hurd for cause. If they did, and in light of the ultimate outcome in the Disney case, it will be a tough slog for the plaintiffs in the underlying derivative suits to win a claim against the HP directors.

United States Proxy Exchange has published a model proxy access proposal under revised SEC Rule 14a-8. I am struck by the fact that it’s precatory, not mandatory: even though Delaware law (DGCL Section 112) clearly permits stockholders to adopt such a bylaw themselves, the USPE model only calls for a vote to recommend that someone else — namely, the board of directors — do the deed that the stockholders could do for themselves.

Can someone tell me why an organization whose motto (“Populus Constituit”) means “the people decide” (“people” presumably meaning stockholders) is apparently so reluctant to actually let “the people decide?”

I have a suspicion about the reason: USPE is probably savvy enough to think that a mandatory bylaw proposal won’t get nearly as high a vote as a diluted, precatory proposal. But if that’s the case, however, won’t it be reasonable for boards of directors not to take even a majority vote on a precatory proposal seriously, in the belief that if real bullets had been at stake the stockholders themselves wouldn’t have voted for it? Why the reluctance to actually find out how stockholders would vote on whether to use the powers that they clearly have under state law?

Widener Law School has initiated a search to fill a newly created faculty position: the Helen S. Balick Chair in Business Bankruptcy Law. Without further editorializing, here’s the text of the job posting:

* * *

WIDENER UNIVERSITY SCHOOL OF LAW invites applications for the newly established Helen S. Balick Chair in Business Bankruptcy Law. That Chair honors Judge Balick’s pivotal role in the national development of business bankruptcy proceedings, and is intended to stimulate and coordinate constructive debate on issues germane to business bankruptcy law. It is contemplated that the occupant of the Chair will take advantage of her or his prior experience and scholarship, together with proximity to the Delaware bench and bar, to advance the law school’s contributions to the field of business law through its Institute of Delaware Corporate and Business Law. The Helen S. Balick Chair will hold the following responsibilities:

1. Publishing scholarly articles on the subject of business bankruptcy;
2. Facilitating research relating to business bankruptcy issues;
3. Promoting the teaching and training of students, judges, and practicing lawyers in the business bankruptcy field;
4. Developing print and web-based publications on business bankruptcy topics for use by the local and national bench and bar; and
5. Organizing periodic seminars and symposia on current and important issues in business bankruptcy law and practice.

A record of scholarly achievement is required. Although our search is focused on those working in the field of business bankruptcy law, accomplished scholars in other areas involving business law are invited to apply. Women, members of minority groups, and others whose backgrounds will contribute to the diversity of the faculty are encouraged to apply. Nominations for the Chair are also welcome.

Contact: Lawrence A. Hamermesh, Chair, Balick Chair Search Committee, Widener University School of Law, 4601 Concord Pike, Wilmington, Delaware 19803, lahamermesh@widener.edu.

* * *

Ann E. Conaway, Professor of Law
Widener University School of Law

To clear the air, my “nice, short” treatment of Abolishing Piercing for LLCs in Delaware under an Alter Ego Theory is nothing akin to Professor Bainbridge’s article. As for what Professor Bainbridge seems to espouse – the total elimination of veil piercing for LLCs because of judicial subjectivity and the agency costs of such unpredictability – I say not so! The Delaware Court of Chancery and Supreme Court of Delaware have for over 250 years, in the aggregate, dealt with “subjective” and “equitable” issues that have lead to the most predictable business law in the United States. My premise is for Delaware only. My thesis is rather simple. Delaware’s unincorporated entities operate under a stated public policy of freedom of contract. Freedom of contract does not have fiduciary duties – corporate law does. The alter ego doctrine of veil piercing in corporate law in Delaware inevitably comes back to proof of fraud and illegality. The alter ego doctrine is a corporate doctrine that, like fiduciary duties, meshes with a corporate paradigm. The alter ego principle has no place in entities that operate from a basis of a policy of freedom of contract where owners may or may not have an economic interest in the entity. Therefore, it is my proposal that alter ego should be abolished for Delaware LLCs – not all veil piercing! My proposal is that alter ego should be replaced by a rigorous judicial inquiry into fraud or illegality into the use of the LLC franchise by those upon who creditors or others wish to impose personal liability. This proposal is not that of Professor Bainbridge – however “nice” and “short” my premise may be. I trust our Delaware judiciary to recognize fraud and illegality and to maintain the predictability for which the State of Delaware has become known.