On October16, 2015, the Delaware Journal of Corporate Law presented the 31st Annual Francis G. Pileggi Distinguished Lecture in Law.  This year’s lecture featured Professor Jeffrey N. Gordon, the Richard Paul Richman Professor of Law at Columbia Law School.

Professor Gordon’s lecture focused on the transition in Delaware law from the hostile takeovers in the 1980s to the current role of the activist shareholder.  Specifically, Professor Gordon argued that Delaware jurisprudence should celebrate shareholder activism because it focuses governance attention on the board of directors, the leading objective of Delaware’s corporate and takeover law.  In turn, courts should reject the poison pill as a managerial defense against an activist voting campaign. Instead, Professor Gordon contends that the focus should be on broadening the role of directors to become credible managers and defenders of the firm’s business strategy.  According to Professor Gordon, this is the next step in the evolution of directors’ role in the public firm.

Professor Gordon articulated three claims that formed the foundation of his lecture.  First, the current variety of shareholder activism reflects triumph of the Delaware board-centric model and reinforces the importance of director elections.  Second, a reorganization of the board is in order to include more full-time directors, rather than directors whose part-time role requires them to be guided by stock price performance.  The current model, which is made up of mostly part-time directors who merely monitor, but not manage, the firm, is simply an experiment of organizational design that should be reconsidered.  Third, the purported short-termism associated with activist shareholders is a symptom, not a cause, of most directors’ inability to closely monitor their firm’s activities.  As such, restructuring may be necessary to ensure that directors take a “deeper dive” into the firm’s operations, which would help Delaware’s board-centric model continue to thrive.

In questions following the talk, some expressed concern with Professor Gordon’s suggestion to overhaul the current board model.  One question posed the problem of how to avoid having more engaged, full-time directors become essentially members of management and therefore less able to perform a monitoring function.  As Justice Randy J. Holland of the Supreme Court of Delaware has explained, “For the last twenty-five years, the Delaware courts have emphasized the importance of independent directors in safeguarding the interests of shareholders by preserving the integrity of the corporate governance process.”  Another questioner noted the irony that in its judicial opinions in the 1980s and 1990s, the Delaware courts emphasized both the importance of independent/outside directors, who are constrained to rely on stock market prices as a measure of corporate success, while at the same time (in cases like Smith v. VanGorkom) calling into question undue reliance on market prices as a measure of firm value. After a brief discussion, Professor Gordon concluded, “We should not regard governance forms as frozen, but in constant need in reorganization” as time demands.  According to Professor Gordon, Delaware courts should embrace the current trend of shareholder activism because it reinforces the Delaware board-centric model of corporate governance.

Professor Gordon’s Pileggi Lecture will be discussed in great detail in his forthcoming article that will be published in Volume 41 of the Delaware Journal of Corporate Law.

This year’s first installment of the Ruby R. Vale Distinguished Speaker Series was held on September 29, 2015, and featured Justice Randy J. Holland of the Supreme Court of Delaware. Justice Holland’s lecture, “Delaware Fiduciary Duties: Case Dispositive Pre-Trial Motions,” discussed central Delaware decisions establishing how independent directors can prevail on a motion to dismiss or motion for summary judgment, thereby avoiding costly and protracted litigation.

Justice Holland enumerated three variables of a shareholder action that determine the success of directors’ pre-trial motions: the fiduciary duty allegedly breached, the nature of the suit, and the standard of judicial review. As Justice Holland described it, corporate directors owe a triad of fiduciary duties to the corporation and its shareholders: care, loyalty, and good faith. If any of these duties are breached, shareholders may challenge the directors’ actions by way of a direct or derivative suit, which, upon judicial review, will be afforded the deference of the business judgment rule or reviewed under the entire fairness doctrine. Under Aronson v. Lewis, a shareholder plaintiff must present particularized facts contending that a majority of the directors were interested and lacked independence or that the challenged transaction was not the product of a valid business judgment. Justice Holland thus emphasized that if a majority of disinterested directors approves the board’s decision, the defendant corporation will be given the deference of the business judgment rule, and its motion to dismiss will be granted.

Conversely, if the shareholder plaintiff successfully overcomes the business judgment rule’s strong presumption that the board’s action was undertaken with due care, loyalty, and good faith, the court reviews the transaction under the entire fairness doctrine, which requires that the board decision be supported by proof of fair dealing and fair price. The board’s decision in Smith v. Van Gorkom was reviewed under the business judgment rule. Because the directors breached their fiduciary duty of care, the Delaware Supreme Court held that the directors were personally liable. Although holding directors personally liable for such a breach would most certainly discourage companies from incorporating in Delaware, Justice Holland opined that Van Gorkom is but one case of many that illustrates the Delaware Supreme Court consistently remains “above the fray.”

Van Gorkom‘s holding prompted the legislature to swiftly adopt Delaware General Corporation Law (“DGCL”) §102(b)(7), which allows Delaware companies, with shareholder approval, to adopt charter amendments to exculpate directors from personal liability for failure to exercise due care (i.e., acting with gross negligence). Virtually all Delaware corporations have enacted this amendment. While a complaint seeking injunctive relief that alleges nothing more than gross negligence may go forward, such a complaint seeking only monetary damages will be dismissed. To survive dismissal, the complaint must implicate a breach of loyalty or good faith, such as in In re Walt Disney Company Derivative Litigation, where defendants’ motion to dismiss and motion for summary judgment were denied. Justice Holland’s advice to directors was forthright: follow the “best practice” of using special committees to establish a fair dealing price and avoid the fate met by the directors in Disney and Van Gorkom.

The likelihood of defendants’ success at the pre-trial stage is “materially advanced” if the board uses an independent committee to inform its decision. Under Kahn v. Lynch, an independent committee’s decision, when reviewed under the entire fairness doctrine, causes the burden to shift to the shareholders to show there was an unfair deal and unfair price, but the directors’ decision does not automatically receive business judgment rule deference. Alternatively, under In re MFW Shareholders Litigation, directors who condition action on approval by an independent committee and a majority-of-the-minority vote with full disclosure are awarded the great deference of the business judgment rule.

Justice Holland concluded by summarizing the Delaware Supreme Court’s message to shareholders and independent directors over the past decade. The Court recommends that shareholders to “use the tools at hand” to ensure their case survives dismissal, such as filing a DGCL §220 demand to inspect a corporation’s books and records, and instructs that directors make independent decisions and uphold their fiduciary duties. The Delaware Supreme Court has long recognized that shareholders have legitimate expectations that directors will act with care, loyalty, and good faith, and that directors have an equally legitimate expectation that they will not be forced to endure prolonged meritless lawsuits brought by shareholders. Delaware has grappled with these conflicting expectations for decades, and has developed a stable and predictable body of law that informs directors how to avoid protracted litigation, which includes the requisite showings of successful pre-trial motions.

When assessing the factors that make Delaware the favored state for incorporation, the judiciary often overshadows the legislature. Delaware’s legislature is, however, widely recognized for creating necessary flexibility and stability in corporate law. In a blog essay written for the Delaware Journal of Corporate Law, DJCL Editor-in-Chief Jacob Fedechko argues that the recent amendments to DGCL Sections 204 and 205 show how the legislature helps to create such stability.

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

In a blog essay written for the Delaware Journal of Corporate Law, Thibaut Lesure, a French LLM student in corporate law and finance at the Delaware Law School, discusses Vice Chancellor Laster’s recent opinion in El Paso Pipeline.

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

In a blog essay written for the Delaware Journal of Corporate Law, former DJCL staff member Brian King analyzes President Obama’s recent proposal for tax increases on financial institutions, and compares it to Rep. Dave Camp’s proposed tax, and the president’s 2010 proposed tax increase aimed at these firms. Mr. King explores the proposals in detail, and explains why each is as misguided and unlikely to succeed as the others.

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