Category Archives: Corporations

No Longer an Existential Threat: Minimizing Cybersecurity Risks and Upholding Duties

Cybersecurity risks, one of the most serious risks facing the world today, have consequences extending far beyond a corporation’s IT department.   In a blog post written for the Delaware Journal of Corporate Law, DJCL Staff member, Kacee Benson, explains Delaware caselaw relating to the duty of directors in the realm of corporate risk as a duty of oversight, part of the fiduciary duty of loyalty.  The SEC issued guidance on cybersecurity risk disclosure earlier this year, and previous commentary from SEC officials reinforces the importance of director involvement in their corporation’s cybersecurity risk management strategy.

Read Kacee’s post on the DJCL Blog.


2018 Amendments to Section 262 of the DGCL

In a blog post written for the Delaware Journal of Corporate Law, DJCL Editor-in-Chief, Zachary J. Schnapp, discusses recent statutory amendments to Section 262 of Delaware’s General Corporation Law.  The 2018 amendments rectify inconsistencies with how appraisal rights are applied to intermediate-form mergers pursuant to Section 251(h). These sections now comport with how practitioners have understood and interpreted Section 262 in context of minority appraisal rights associated with long-form mergers prior to the implementation of the recent amendments.

Read Zak’s post on the DJCL Blog.

The Tax Cut and Jobs Act: What It Means for Business

In a blog post written for the Delaware Journal of Corporate Law, DJCL Copy Editor and Schmutz Fellow, Joseph Farris, discusses the Congressional tax legislation, H.R. 1, also known as the Tax Cut and Jobs Act (“TCJA”), signed into law by President Trump in December 2017, and how it affects various businesses—regardless of whether they are a nonprofit, partnership, corporation, or LLC.

Read Joseph’s post on the DJCL Blog.

The Materiality of Opinions: Appel v. Berkman

In a blog post written for the Delaware Journal of Corporate Law, DJCL Staff Member, Colleen Degnan, discusses Appel v. Berkman, No. 316, 2017 (Del. Feb. 20, 2018) in which the Delaware Supreme Court reversed the Delaware Court of Chancery’s dismissal of a stockholder challenge to a two-step merger transaction.  Plaintiff stockholders challenged the merger, claiming that they were misled by the proxy statement, which failed to disclose the Chairman’s views regarding the timing of selling the company.  The Delaware Supreme Court concluded that the omission of the Chairman’s opinions from the 14D-9 proxy statement was materially misleading to stockholders when deciding to vote for the merger or to seek appraisal.

Read Colleen’s post on the DJCL Blog.

The Chancery Court Strictly Adheres to the Proper Purpose Requirement in 220 Actions in Two Recent Decisions

In a blog post written for the Delaware Journal of Corporate Law, DJCL Staff Member Katelyn Tuoni discusses two Delaware Court of Chancery’s decisions that focus on the substantive sufficiency of books and records demands in regards to Section 220’s proper purpose requirement.

Read Katelyn’s post on the DJCL Blog.

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.


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.


“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.