Category Archives: Corporations

In re Appraisal of Dell Inc.: Eliminating the Tension Between a Share-Tracing Requirement and the Continuous Record Holder Requirement

In a blog post written for the Delaware Journal of Corporate Law, DJCL Articles Editor Ashley Callaway discusses a resolution to the tension between the Continuous Holder Requirement and the 262 requirement that the shareholders voted not in favor of the merger.

Read more at http://www.djcl.org/blog.

Section 141(k) Mandatory Prohibition of For-Cause Removal of a Declassified Board

In a blog post written for the Delaware Journal of Corporate Law, DJCL Staff Member Kendra Rodwell discusses the Delaware Court of Chancery ruling that Delaware corporations with provisions in their corporation’s bylaws and charters directly conflicting with Delaware law would be stuck down.  In In re Vaalco Energy Shareholder Litigation, the Court of Chancery was asked to determine whether the Vaalco Energy’s provision that made directors of a non-classified board removable only for cause was valid in light of DJCL section 141(k) that required non-classified boards to be removed without cause.

Read more at http://www.djcl.org/blog.

“Adding Ethics to the Fiduciary Relationship”

Rick Alexander

This year’s second installment of the Ruby R. Vale Distinguished Speaker Series was held on February 18, 2016 and featured Frederick H. Alexander. Mr. Alexander is the Head of Legal Policy at B Lab and Counsel to Morris, Nichols, Arsht & Tunnell LLP. His lecture, “Adding Ethics to the Fiduciary Relationship,” discussed the importance of developing rules throughout the governance system that allow corporations to act in a responsible and ethical manner.

It is well established that fiduciaries manage the corporation and act on its behalf for the sole benefit of its investors. To remedy the potential agency problem that may stem from this fiduciary relationship, fiduciary duties were created to mitigate the risk of misappropriation of corporate assets. As Mr. Alexander described it, however, fiduciary duties protect only stockholder interests, while ignoring the interests of all other stakeholders in the governance system, such as employees, customers, and the community. Further, Delaware jurisprudence reinforces this notion, especially by imposing a Revlon duty on directors to perform their fiduciary duties in the service of maximizing the corporation’s sale price. Sale price thus remains the most widely accepted measurement of a corporation’s success.

This creates a “shareholder primacy” paradigm where directors’ only responsibility is to increase profits for the stockholders’ benefit. As a result, any corporate action that benefits employees, customers, or the community must first benefit stockholders to be a valid use of the corporation’s assets. The shareholder primacy paradigm creates several problems, not only for society, but also for investors. First, shareholder primacy restricts management’s ability to pursue a variety of commitments on behalf of the corporation. It is evident that any commitment entered into by the corporation will be contingent upon creating value for shareholders. This creates a trust problem within a corporation, either between the employer and its employees or between the current stockholders and future stockholders. Second, primacy causes negative externalities to be passed from one company to another, which affects universal investors’ diversified interests in the general market. These two problems unite to form the overall problem with shareholder primacy: management’s goal is to obtain as much value as possible, but that is not always the best way to measure a corporation’s worth. Instead, Mr. Alexander argued that a corporation should be measured by its shared real value created when a corporation takes on certain commitments, thereby creating trusting relationships with stakeholders other than just stockholders.

Traditionally, the Delaware General Corporation Law (“DGCL”) mandated that shareholder-elected directors manage the company carefully and loyally pursuant to their fiduciary duties and for the sole purpose of creating shareholder value. However, the DGCL now provides an option for corporations to elect to be a benefit corporation. In addition to creating value for its shareholders, a benefit corporation may also consider the interests of all stakeholders. Under DGCL § 362, a Delaware benefit corporation must operate in a “responsible and sustainable manner.” A “public benefit” is a “positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological nature.” Today, thirty-two states have adopted provisions allowing for the option to become a benefit corporation, thus creating a new path for investment channels to follow.

In conclusion, Mr. Alexander emphasized that there is more to be done to encourage corporations to act in a socially responsible way. Because becoming a benefit corporation is still optional, corporations should adopt a set of fiduciary laws that recognize the interests of all stakeholder values and not just stockholder interests. In addition, investors should cease seeking short-term gains and instead invest private capital in avenues that result in positive social gains that benefit all stakeholders. Overall, Mr. Alexander urged that corporations should “stop competing to take and start competing to make.”

Director Independence Analysis Refined

In a rare reversal of a Chancery Court decision, the Delaware Supreme Court revived a pension fund’s derivative complaint, holding that demand on the board would have been futile.  In a blog post written for the Delaware Journal of Corporate Law, DJCL External Managing Editor Sabrina Hendershot discusses Delaware County Employees Retirement Fund v. Sanchez, where the Court held that a director’s quarter-century friendship and significant business ties supported a pleading-stage inference that the director lacked independence.  Though, this opinion was decided in the context of the defendants’ motion to dismiss, and it is thus still unknown how the Court of Chancery will hold on remand with a more developed record, this opinion serves as an important reminder for boards to be mindful of personal relationships in assessing director independence.

Read more at http://www.djcl.org/blog.

Bargaining Away Fiduciary Duty: Considering Partnership Agreements After Kinder Morgan

The recent Dole and Kinder Morgan Court of Chancery opinions highlight the differing roles of fiduciary duties in corporations and limited partnerships.  In a blog post written for the Delaware Journal of Corporate Law, DJCL staff member Donald Huddler  summarizes the basic fiduciary duties of corporate fiduciaries and limited partnership fiduciaries and considers how the facts in Dole would be treated if they were governed by the terms of the Kinder Morgan partnership agreement, thus probing the outer limits of permissible conduct under limited partnership agreements.

Read more at http://www.djcl.org/blog.

Chancery Court Issues Discretionary Remedy to Dole Shareholders in Fraud

The Delaware Court of Chancery issued a damages award of $148 million to Dole Food Company shareholders after CEO David Murdock and President and COO C. Michael Carter intentionally and fraudulently misrepresented company performance in an attempt to undervalue Dole stock.  In a blog post written for the Delaware Journal of Corporate Law, DJCL staff member Brandon Harper explains how Vice Chancellor Laster determined that shareholders were entitled to what he declared a “fairer price.”

Read more at http://www.djcl.org/blog.

Peeling Back the Business Judgment Rule: Corporate Responsibility After Chiquita

By Matthew Goeller
Articles Editor, Delaware Journal of Corporate Law

Enacted in the first Judiciary Act of 1798, the Alien Tort Statute (“ATS”) provides federal jurisdiction to aliens alleging violations of international law. What remained a largely unused statute, the ATS reemerged in 1980 as a creative tool to hold violators of international law liable in U.S. courts, even when those violations occurred abroad or the actors were foreign citizens. As ATS jurisprudence unfolded over the last thirty years, the statute’s jurisdictional grant extended first to foreign state actors, then to private citizens, and eventually even to corporations. The Supreme Court’s decision in Kiobel v. Royal Dutch Petroleum Co., however, seemed to narrow the scope to which the ATS applies to corporations. Despite the Supreme Court’s holding, many circuit courts and commentators maintained that ATS liability is nonetheless still possible for corporations.

In Cardona v. Chiquita, Colombian citizens brought suit against Chiquita under the ATS, claiming that Chiquita’s support of known terrorist groups funded a brutal campaign of torture, drug trafficking, and imprisonment. The Eleventh Circuit’s holding that the ATS does not reach corporations highlights the current uncertainty as to whether the statute applies to corporations.

Adding to this uncertainty is an emerging concern that participation in international law violations might perhaps implicate a breach of fiduciary duties. Corporate directors, whose business decisions directly or indirectly involve the corporation with violators of international law, might ordinarily seek the protection of the deferential business judgment rule. However, more nuanced interpretations of fiduciary duties and more probative efforts of understanding the precise nature of those business decisions might well evince a breach of fiduciary duty. This analysis, coupled with the already present uncertainty as to the applicability of the ATS, should encourage directors of corporations to adopt more stringent governance policies that provide structural mechanisms to ensure compliance with internationally recognized legal norms.

Download the full article Peeling Back the Business Judgment Rule – Corporate Responsibility After Chiquita.

Suggested Citation: Matthew B. Goeller, Peeling Back the Business Judgment Rule: Corporate Responsibility After Chiquita, INST. DEL. CORP. & BUS. L. (May 28, 2015), http://blogs.law.widener.edu/delcorp/#sthash.7Nk3jxjd.dpbs

Evidence Relating to the Effect of Prescribing Majority Voting in the Election of Directors as the Default Voting Standard

Prof. Lawrence A. Hamermesh
Ruby R. Vale Professor of Corporate and Business Law
Widener University School of Law, Wilmington, Delaware

[Professor Hamermesh is a member of the Delaware State Bar Association’s Council of the Corporation Law Section (the “Delaware Council”). Nevertheless, nothing stated here represents the views of that group.]

On August 11, 2011, the Council of Institutional Investors (“CII”) requested that the Delaware Council promote the revision of the Delaware General Corporation Law (“DGCL”) to alter the default rule governing the required vote in the election of directors. Specifically, CII asks that the default rule – currently that a plurality vote is sufficient to elect directors – be amended to require some form of majority vote, at least in the absence of a contested election. (CII’s letter was published on its web site more or less concurrently with its submission to the Delaware Council, and is available here).

In its letter, CII asserts that “many corporations incorporated in Delaware adopt the plurality voting standard by default.” This is an empirically testable assertion: to “adopt the plurality voting standard by default,” a company’s bylaws would have to be silent on the question of the required vote to elect directors. If the bylaws prescribed a voting standard (either the plurality standard or some form of majority vote standard), the default rule under Section 216 of the DGCL would be displaced and would not control. The bylaws, and not the statutory default provision, would prescribe the voting standard.

It therefore seemed appropriate to evaluate whether and to what extent Delaware public company bylaws actually do or do not prescribe a voting standard for electing directors. Because of CII’s focus on smaller public companies that have not adopted majority voting bylaws, I (with the assistance of George Codding, Widener Law ‘2012) examined a sample of 150 Delaware companies in the Russell 2000 small cap index. 142 of the 150 companies in that sample (95%) have bylaws prescribing a voting standard.

This result comes with one caveat. 21 of the 150 sampled companies (14%) have a bylaw provision to the effect that a majority in interest of the combined voting power of the issued and outstanding shares of stock entitled to vote represented at the meeting shall decide any question or matter brought before such meeting. Because of their typical comprehensiveness (governing votes on “all matters” or “all actions” subject to stockholder vote), I would be inclined to interpret such a provision as defining a general voting standard applicable in all voting situations, including the election of directors, absent some specific provision requiring a different standard for the election of directors. There are arguments to the contrary, however, which, if successful, would leave the statutory default standard to govern director elections, and would result in an amendment to that standard having a somewhat greater formal impact.

On balance, the information generated from our review indicates that, contrary to CII’s assertion, very few Delaware public companies – and certainly not “many” – “adopt the plurality voting standard by default.” Thus, in the large majority of Delaware companies, a change in the default rule governing the required vote to elect directors would have no formal effect at all. Barring a statutory amendment mandating some form of majority vote standard (rather than merely prescribing that standard as a default), any change in the voting standard in most of the sampled companies would have to arise through amendments to the governing bylaw provisions. Such amendments can be accomplished by unilateral stockholder vote under the DGCL, and adoption of a bylaw prescribing a majority vote standard precludes subsequent amendment by the directors (DGCL Section 216).