2016 Ruby R. Vale Corporate Moot Court Competition

Nugent

From Thursday March 10, 2016 to Sunday March 13, 2016, the Widener University Delaware Law School Moot Court Honor Society hosted the 28th Annual Ruby R. Vale Interscholastic Corporate Competition.  The competition is named for Ruby R. Vale, who lived in Milford, Delaware and practiced law in Philadelphia, specializing in corporation, banking, and insurance law.  It introduces participants to the cutting edge of corporate law, and as Delaware’s only law school, Delaware Law School is in a unique position to draw on the resources and experience of the distinguished Delaware corporate legal community.

Professor Lawrence Hamermesh authored this year’s competition problem, which focused on stockholder appraisal rights and the related, recent cases of Merion Capital LP v. BMC Software, Inc., In re Appraisal of Ancestry.com, and In re Appraisal of Dell Inc.  The issues centered around the question of the appropriate interpretation of the statutory term “stockholder of record,” and its effect on so-called “appraisal arbitrage,” in which purchasers of shares after the record date for voting on a merger seek judicial appraisal of their shares.  Eighteen teams from seventeen schools participated in the competition, which is the only corporate moot court competition in the country. The Ohio State University’s Moritz College of Law took home this year’s title, edging out a team from Mercer University School of Law before a panel comprised of Delaware Supreme Court Justice James T. Vaughn, Jr., Vice Chancellor Sam Glasscock of the Delaware Court of Chancery, and former Delaware Supreme Court Justice Jack B. Jacobs.  The winning team comprised of Patrick Schlembach and Susan Restrepo, who was also the Best Oral Advocate.   Marquette University School of Law won the Best Brief Award.

An integral part of the competition is the Distinguished Scholar Lecture.  The 2016 Distinguished Scholar was Eileen T. Nugent, Esquire, the co-head of Skadden, Arps, Slate, Meagher & Flom’s Global Transactions Practice.  As a mergers and acquisitions partner in the firm’s New York office, she has worked on a wide range of some of the most significant public and private M&A transactions since the mid 1980s.  Ms. Nugent is also the co-author of a well-known M&A treatise and is an adjunct professor at University of Virginia School of Law.

In her lecture entitled Living a Law School Exam Question: Issues Faced by a Practitioner in Applying Selected Provisions of Delaware Jurisprudence in Real Time, Ms. Nugent addressed the need for M&A practitioners to keep abreast of Delaware cases due to their “real time” application in structuring deal transactions.  Specifically, Ms. Nugent discussed the enforceability of fraud and non-reliance provisions as a remedy in acquisition agreements, and reviewed recent case law developments affecting disclosure-based settlements of stockholder class actions.  Ms. Nugent discussed how recent cases in those realms have shaped how buyers and sellers approach the issues when drafting merger agreements and proxy statements, and the perhaps peculiar outcomes they have created going forward, including the possibility that planners will have an incentive to withhold more important information so that it can justify settlement of litigation challenging the deal.

Affordable Care Act Creates Incentives for Small Businesses to Provide Health Benefits

In a blog post for the Delaware Journal of Corporate Law, DJCL Staff Member Samantha Darrow Osborne discusses how the Affordable Care Act’s recent substantial increase in individual penalties has created an incentive for small businesses to partake in offering health benefits to their employees.  She argues that small businesses that offer coverage will receive tax advantages and a generous tax credit, and will attract and retain more qualified employees.

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.”

Considerations in Implementing Country-by-Country Reporting

The OECD’s final BEPS report proposes country-by-country reporting to increase transparency with transfer pricing.  In a blog post for the Delaware Journal of Corporate Law, DJCL Staff Member John Brady explains that country-by-country reporting leaves some unanswered questions about how these reports will be exchanged with foreign jurisdictions while maintaining adequate protections to safeguard this information.  He argues that the U.S. should implement an objective privacy standard with specific safeguards prior to implementing information exchanges.

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

Delaware Supreme Court Finds Third-Party Advisor Liable for the Board’s Breach

In RBC Capital Markets, LLC v. Jervis, the Delaware Supreme Court held that a third-party financial advisor was liable for aiding and abetting a Board of Directors’ breach of fiduciary duties.  In a blog post written for the Delaware Journal of Corporate Law, DJCL staff member Michael Laukaitis explains that to be found liable for such conduct, third-party advisors must knowingly aid the board’s breach and may protect themselves by fully disclosing any possible conflicts to the board.

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

Fine-Tuning Revlon: The Consequence of Fair and Fully Informed Stockholder Votes

The recent Delaware Supreme Court decision of Corwin v. KKR Financial Holdings, LLC held that in the event of a fair and fully informed stockholder vote, a court will apply the business judgment standard instead of Revlon‘s increased scrutiny.  In a blog post written for the Delaware Journal of Corporate Law, DJCL staff member Nicholas Picollelli, Jr.  explains that because a conflict-free vote puts stockholders in the best position to evaluate a proposed transaction, heightened Revlon scrutiny is unnecessary.

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

The U.S. Government and Corinthian Colleges, Inc.: Picking Winners and Losers

Corinthian Colleges, Inc., a for-profit career-college, closed its doors amid allegations of predatory student loan practices and fraud and misrepresentation surrounding graduation rates and job placement statistics.  In a blog post written for the Delaware Journal of Corporate Law, DJCL staff member Chris Kephart describes the unprecedented decision of the federal government to facilitate the forgiveness of close to $1 billion in public and private student loans, by negotiation with the holder of the private student loans and directly providing debt relief for students who took federal student loans to attend Corinthian.

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

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.

The 31st Annual Francis G. Pileggi Distinguished Lecture in Law: “Shareholder Activism: the Triumph of Delaware’s Board-Centered Model and the New Role for the Board of Directors”

GordonOn 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.

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.