M&A Litigation: Standards of Review

A member of the Delaware Court of Chancery has penned a chapter for an upcoming book on stockholder litigation. An overview of the chapter was recently published on the Harvard Law School Corporate Governance Blog. This scholarly writing by Vice Chancellor J. Travis Laster is entitled: Changing Attitudes: The Stark Results of Thirty Years of Evolution in Delaware M&A Litigation. As the title suggests, the work provides an overview of the past and present standards the Delaware courts apply to various types of mergers and acquisition.

When a member of the Delaware court speaks publicly about, or publishes an articulation of, Delaware law on M&A standards, those who toil in the vineyards of corporate and commercial litigation would be well advised to pay close attention.

Challenge to State Bid Dispute Denied

Justin M. Forcier, an associate in the Delaware office of Eckert Seamans, prepared this overview.

A recent Chancery decision provides guidance for attorneys seeking injunctive relief in connection with a bid dispute for a state contract pursuant to 9 Del. C. § 4725.  Charlie’s Waste Services, LLC v. Kent County Levy Court, C.A. No. 2017-0283-JRS (Del. Ch. June 1, 2017).

Background:  After Kent County began soliciting bids for trash collection, Plaintiff Charlie’s Waste Services, LLC (“Charlie’s”) filed an action against the Kent County Levy Court (“County”), Waste Industries of Delaware LLC (“Waste Industries”), and BFI Industries, LLC d/b/a Republic Services of Delmarva (“Republic”) in which Charlie’s sought to enjoin the County from awarding those contracts to Waste Industries or to Republic.  (The Kent County Levy Court is not a real “court,” and is akin to the New Castle County Counsel as a governing body)  Charlie’s contended that it was the lowest bidder and the County was statutorily obligated to award the contract to it pursuant to 9 Del. C. § 4725.

In an attempt to improve trash collection, the County required those companies interested in bidding on contract to show: (1) a history of providing similar equipment and services; (2) a method for addressing customer service issues; (3) bid price and structure; and (4) a bid bond, references, and an insurance policy of $5 million.  After three evaluators who were designated by the County scored the bids and made their recommendations, the Levy Court made the final determination.  The Levy Court overwhelmingly agreed with the evaluators’ recommendations, and the contract was awarded to both Waste Industries and Republic.

Charlie’s filed this action for injunctive relief alleging that the County violated Section 4725 because its bid was lower than Republic’s and Waste Industries’ bids, and the statute requires contracts to be awarded to the “lowest responsible bidder.”

Analysis:  The court began its analysis by observing that “lowest responsible bidder” is not defined in Section 4725.  Therefore, the court stated that the term “lowest responsible bidder” means “lowest bidder unless that bidder is found not responsible, i.e., not qualified to perform the particular work.”  The court also reiterated the broad discretion that is afforded to agency decisions and that any decision made by that agency complies with the law unless it was made arbitrarily, capriciously, or in bad faith.

The court held that the County acted within the confines of Section 4725 because the bid that Charlie’s submitted contained incorrect insurance information; none of the required financial information except a listing of M&T Bank as a reference; and no letters of recommendation or bid bonds as was required.  The court noted in its analysis of the County’s actions that despite these deficiencies, the County decided to consider Charlie’s bid.

The court also observed that each of the County evaluators had concerns regarding the age of Charlie’s equipment as well as its ability to maintain that equipment with its current staff.  Furthermore, the size of this contract was greater than any previous contract that Charlie’s had undertaken and there was concern about its ability to handle such a large undertaking.

Court’s Holding:  The court found that Charlie’s failed to meet its burden of showing that the County acted arbitrarily, capriciously, or in bad faith; and therefore, Charlie’s request for a permanent injunction was denied and judgment was entered in favor of the defendants.

Call for Scholarship on New Legal Ethics Rule

Some readers may be aware that for the last 20 years, I have written an ethics column for The Bencher, a publication of the American Inns of Court. One of my recent columns, on the newly adopted Model Rule of Professional Conduct 8.4(g), generated an unusual “letter to the editor” from the current president of the American Bar Association. A much more scholarly follow-up, so to speak, was recently published as a law review article entitled: New Model Rule of Professional Conduct 8.4(g): Legislative History, Enforceability Questions, and a Call for Scholarship, by Andrew F. Halaby and Brianna L. Long, which can be found at 41 J. Leg. Prof. 201 (2017). The authors of the law review article agree more with the views articulated in my article than those expressed in the letter to the editor from the current head of the left-leaning national lawyers’ group. A few highlights from the law review article:

  • New Model Rule of Professional Rule 8.4(g) “suffers from substantive infirmities”
  • There is “considerable doubt whether the new model rule could be enforced in a real world setting against a real world lawyer”
  • The “model rule’s afflictions derive in part from the indifference on the part of the rule change opponents, and in part form the hasty manner in which the rule change proposal was pushed through to passage.”
  • “Absent rigorous resolution of the many questions, the new model rule cannot be considered a serious suggestion of a workable rule of professional conduct to which real world lawyers may be fairly subjected.”

The authors of the law review article explain the need for further scholarship on the issues raised by this new model rule, which in some circles appears to be motivated more by progressive politics than by the typical motivation for new or updated rules of legal ethics.

Chancery Clarifies Distinction Between Defective Corporate Acts and Unauthorized Corporate Acts

A recent Delaware Court of Chancery decision addressed an issue of first impression in connection with the types of “defective” corporate actions that initially were not approved properly, for example, due to lack of stockholder approval, but in some instances can still be ratified. Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. June 6, 2017).  In this recent decision, the court denied relief because the “unratified” corporate acts were not simply defective, they also were unauthorized and rejected by the majority stockholder at the relevant time. The parties relied on Section 205, which allows a party to seek ratification from the Court of Chancery, but in this opinion the Court focuses on Section 204 which applies to those situations for which self-help and a safe harbor may be available.

Key Issue Presented:  Whether an act that the majority stockholder entitled to vote at the relevant time deliberately declined to authorize, but the corporation nevertheless determined to pursue, may be deemed “a defective corporate act” under Section 204 that is subject to later validation by ratification of the stockholders.  The short answer is no.

Key Legal Principles: A few years ago, Sections 204 and 205 of the Delaware General Corporation Law  (DGCL) were passed to address situations somewhat similar to those presented by this case. Section 204 is essentially a self-help provision that allows a company in some situations to “go back and fix”, for example, a stock issuance that could have received proper authorization–but the requisite consents were not properly obtained. DGCL Section 204 reversed the decisions in STAAR Surgical and Blades that “interfered” with the ability to retroactively make such corrections, and now provide a clear procedure for correction of defective corporate acts that were not properly approved initially. Section 205 provides corporations with an option to petition the Court of Chancery to validate corporate acts that would otherwise be void or voidable.  See footnote 22, 28 and 32 (regarding legislative history).

At the time the defective corporate acts at issue in this case were taken, however, the company did not have the power to take the actions because its majority stockholder had declined to approve them.  Thus, the court describes the difference between “failure of authorization” and “rejection by stockholders.” Nothing in the text of the statutes or their legislative history suggest that the General Assembly intended to facilitate the ratification of a corporate act that had been expressly rejected by the stockholders.  See footnote 46.

Notwithstanding the capacious remedial powers of a court of equity, “rewriting history” is not one of the available remedies that is available in Chancery. Section 204 is not a license to cure any defect.  Based on the facts of this case, neither Section 204 nor Section 205 were available to backdate a corporate act that was expressly rejected by a majority stockholder.  Nor could the remedial statutes be used to retroactively approve a transaction that converted preferred stock into common stock, which would have diluted the majority stockholder who opposed the transaction at issue, especially in light of the many intervening years during which preferred stockholders had enjoyed the benefits that attached to their stock.

Chancery Clarifies Nuances of Indemnification for Corporate Officers

In a recent Delaware Chancery opinion, the court clarified that a corporate officer who was “successful on the merits or otherwise in the defense of an action” need not show good faith in order to be entitled to mandatory indemnification.  Meyers v. Quiz-Dia LLC, C.A. No. 9870-VCL (Del. Ch. June 6, 2017). See also DGCL Section 145(c).

Key Aspects of the Decision:  Many cases highlighted on this blog have addressed the various permutations of indemnification and advancement for officers and directors, so this decision will be limited to the nuances that make this ruling noteworthy (and “blog-worthy”).

The court explained that when mandatory indemnification is provided to the fullest extent permitted by applicable law, that includes the fees incurred to investigate claims  prior to a lawsuit.  In particular, in this matter, former officers had reason to believe that they would be sued, and thus began an investigation of those potential claims in order to prepare their defense.  Fees for that investigation are included in the indemnification rights to which they were entitled.
Although the indemnification provisions in this case were in the LLC context, because the language used in the LLC documents mirrored DGCL Section 145(c), the case law and statutory interpretation approach that construed that language was applicable.

The phrase in Section 145(c) that provides mandatory indemnification when a former director or officer has been “successful on the merits or otherwise in defense of any action . . ..”, has been interpreted very broadly to include almost anything short of a complete loss.  It permits an indemnitee to be indemnified as a matter of right even if the success includes, for example, dismissal without prejudice of a federal action – – and the same claims are later asserted again in a state court action.

Notably, the good faith requirement does not apply under Section 145(c) to a director or an officer who is “successful” in defending a claim.  See footnotes 39 and 40 and accompanying text.

Section 220 Decision Imposed Conditions on Production of Corporate Documents

A multitude of decisions and commentary about DGCL Section 220 have filled these pages over the last 12 years.  This recent Court of Chancery decision is an example of a condition that the Court of Chancery has somewhat recently imposed as part of its grant of some requests for books and records under Section 220.  Elow v. Express Scripts Holding Company, C.A. No. 12721-VCMR (Del. Ch. May 31, 2017). I have often suggested in connection with Section 220 cases that they are often expensive and unsatisfying, but this decision might not be the best example to support that argument.

Procedural Overview:  The trial in this case took place on March 3, 2017 after a complaint was filed on August 12, 2016.  The two consolidated cases were the subject of a one-day trial based on stipulations and 74 exhibits.  A thoughtful and detailed decision issued approximately ten months after the complaint was filed is still fast by most litigation reference points.  Notwithstanding the grant of a right to obtain some documents, the fees incurred, one can surmise, must not have been inconsiderable.

Key Takeaway:  As a condition of the court granting some documents, after an extensive recitation of the nuances and prerequisites for a Section 220 demand, and how they applied to the facts of this case, the court conditioned the grant of documents pursuant to Section 220 based on the “incorporation by reference doctrine.”  As explained in the Yahoo opinion, (a veritable magnum opus on Section 220) highlighted on these pages, the doctrine “permits a court to review the actual document” referenced in a complaint that is later filed after a Section 220 demand is vindicated.

Specifically, as applied in a 220 case, if the plaintiff files a plenary complaint based on the documents obtained in the 220 case, it must incorporate documents received into any subsequent derivative complaint.  The “Incorporation Condition” ensures:  “That the plaintiff cannot seize on a document, take it out of context, and insist on an unreasonable inference that the court could not draw if it considered related documents.”

The court also imposed a routine condition that a confidentiality agreement also be entered into as part of the production.



Chancery Explores Limits of Forward-Looking Injunctive Relief

A recent decision from the Delaware Court of Chancery addresses an issue that may be rarely encountered but nonetheless will be a useful decision to be aware of when needed. Organovo Holdings, Inc. v. Dimitrov, C.A. No. 10536-VCL (Del. Ch. June 5, 2017).  The opinion features a “deep dive” into the doctrinal and historical basis of equitable jurisdiction, with extensive footnotes to decisions of several centuries ago in England, as well as decisions from various states and the U.S. Supreme Court.  In addition, multiple treatises and law review articles are cited to support the conclusion that “a court of equity cannot issue an injunction in a defamation case.” This opinion also explored the limits of forward-looking injunctive relief.

Basic Overview: This opinion granted a motion to vacate a default judgment based on Court of Chancery Rule 60(b).  This ruling in particular found that there was no equitable jurisdiction for the default judgment that was entered.  This decision also features a very thorough analysis to explain why the Court of Chancery does not have the authority to grant a preliminary injunction to enjoin defamatory statements.  Part of that reasoning is based on constitutional principles. See pages 17 to 21 and footnotes 52 and 53.

Of potentially more widespread application is the court’s discussion of the limits on the scope of “forward-looking” injunctive relief. The court noted two exceptions to the lack of equitable jurisdiction over defamation claims.  Neither of those exceptions was applicable based on the facts.  One exception relates to business disputes and is now mostly codified in statutes that allow a court to enjoin deceptive trade practices.  Similarly, federal law such as the Lanham Act allows for injunctive relief in connection with trademark infringement.

Notably, this limitation should be distinguished from equitable relief that may be available to enjoin tortious interference with prospective economic advantage. See pages 33 to 37.

Chancery Denies Motion for Expedited Proceeding on Preliminary Injunction Due to Absence of Irreparable Harm

This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans.

The Court of Chancery recently denied a plaintiff’s motion to expedite her preliminary injunction motion, which sought to delay a June 8, 2017 stockholders’ vote on Yahoo’s decision to sell its operating business to Verizon for $4.8 billion.  In Buch v. Filo, C.A. No. 10933-VCL (transcript)(Del. Ch. May 26, 2017), after conducting a telephonic hearing, Vice Chancellor Laster denied the motion for expedited relief, and effectively denied the preliminary injunction motion by finding that Plaintiff had failed to establish a colorable claim and irreparable harm.

Factual Background:  Plaintiff, a Yahoo shareholder, asserts both direct and derivative claims in her underlying suit based upon the Yahoo Board of Directors’ alleged breach of duty for failure to adequately disclose the severance terms of a terminated executive employee, Henrique de Castro.  De Castro’s termination resulted in a severance package of $58 million after fifteen months of service as Yahoo’s Chief Operating Officer.  A prior Chancery decision involving that severance package was highlighted on these pages.  Plaintiff’s suit had survived an earlier motion to dismiss about which Vice Chancellor Laster commented that a potential remedy for the inaccurate severance disclosure in 2014 could be the subsequent compelled disclosure in a proxy statement of the prior misrepresentation.

Plaintiff’s motion to delay the June 2017 shareholder vote rested upon an alleged deficiency in Yahoo’s 2017 proxy statement, which failed to disclose the prior 2014 “misdisclosure” with respect to de Castro’s severance. Specifically, plaintiff asserted that the June 8, 2017 shareholder vote would be the last opportunity for Yahoo CEO, Marissa Mayer, and Board Chairman Emeritus, Maynard Webb, to remedy their 2014 misdisclosure, as well as the shareholders’ last opportunity to vote on Mayer’s compensation.  Plaintiff asserted that her claim for expedited relief was colorable because the Court did not dismiss the Complaint upon Defendants’ earlier motion.  Plaintiff also argued that her claim was colorable because Yahoo’s Board Chairman Emeritus had stated by email that it’s “[h]ard to believe we got a hall pass on this one” with respect to Institutional Shareholder Services’ comments regarding the 2014 de Castro severance proxy disclosure.

Plaintiff further contended that she demonstrated irreparable harm because the June 8, 2017 shareholder vote would be the last chance for Mayer and Webb to remedy their inadequate disclosure from 2014. In response to Defendants’ claims of undue delay by Plaintiff in seeking injunctive relief eight months after the announcement of the “say on pay” vote, Plaintiff noted that the parties had been engaged in settlement talks.

Defendants countered Plaintiff’s assertion of colorable claim by arguing that there was no allegation of an inadequate disclosure in the proxy statement with respect to the matters to be voted upon on June 8, 2017.  Defendants next countered the immediate irreparable harm prong by noting that the only alleged harm had occurred years ago in connection with the severance paid to de Castro and the alleged misdisclosure of same.

Analysis:  The Court of Chancery found both the Plaintiff’s colorable claim and irreparable harm arguments to be lacking.  After noting that the decision whether to grant expedited relief is discretionary, the Court ruled that the likelihood that it would ultimately grant injunctive relief was “remote” at best.  Specifically, Vice Chancellor Laster noted that he contemplated the relief in the underlying action “as some type of post-adjudication remedy.”  The Court dispensed with the irreparable harm prong by finding that the connection between the 2014 de Castro severance “misdisclosure” and the June 8, 2017 acquisition and “say on pay” vote was not sufficiently strong to warrant equitable relief.  Moreover, the Court commented that the plaintiff’s desired disclosure would be of “relatively minimal importance” in light of the extensive news coverage of the “boiling soup of issues surrounding Ms. Mayer and Yahoo!”

The Court of Chancery also effectively denied Plaintiff’s underlying motion for preliminary injunction by taking it “out of the queue because it’s just not going to happen in light of my ruling on the motion to expedite.”

Take Away:  Litigants are cautioned against filing motions to expedite requests for injunctive relief to halt a stockholder vote with respect to alleged “misdisclosures” which occurred years earlier and especially when such “misdisclosure” is only “remotely” linked to the pending vote.

Unocal Claim Does Not Satisfy Rule 23.1

The Court of Chancery recently issued a thorough opinion explaining why a complaint that pleads a Unocal claim does not, per se, satisfy the pre-suit demand excusal requirements of Rule 23.1.  In Ryan v. Armstrong, Del. Ch., C.A. No. 12717-VCG (Del. Ch., May 15, 2017), the court addressed a claim related to the failed transaction between The Williams Companies (TWC) and Energy Transfer Equity (ETE), L.P., several Delaware decisions about which have been highlighted on these pages.

Brief Background:  The prior Delaware decisions involving TWC highlighted on these pages that addressed the failed transaction between TWC and ETE included issues much different than the one involved in this decision.  In this matter, the court addressed a claim against the directors of TWC in connection with a transaction with an entity that was affiliated with TWC, it allegedly was a transaction designed to make it more difficult for ETE to consummate a deal.  Ultimately, prior to the failed merger, TWC accepted an offer from ETE that was contingent upon the deal with the affiliated company being terminated.  As a result of that termination with the affiliated company, TWC was required to pay a $410 million break-up fee.  The claim in this case was based on the theory that it was a breach of fiduciary duties of the directors of the TWC to enter into a transaction for which they ultimately paid a break-up fee because that terminated transaction was entered into as an unreasonable defensive tactic in violation of the standard described by the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

Legal Analysis:  This 46-page opinion carefully examines the applicable Delaware case law and the Vice Chancellor in this opinion ultimately decides that he would not follow several prior Chancery decisions that could be read to support a different conclusion.  The opinion was based on a motion to dismiss for failure to satisfy the pre-suit demand excusal requirements of Court of Chancery Rule 23.1.  The court provided an extensive explanation of the policy underpinnings of Rule 23.1 and the case law interpreting the procedural prerequisites for derivative cases.

Notably, the court explained that this was not a case subject to the so called Corwin doctrine because the facts did not involve a fully informed, non-coerced shareholder vote that invoked the Business Judgment Rule.  Rather, this case involved a defensive measure theoretically designed by the director defendants to prevent a transaction that they initially spurned, but eventually approved, though it nonetheless eventually failed.  This derivative action seeks to recoup on behalf of the company the break-up fee and other monetary damages that allegedly were incurred by the company by the director defendants in connection with an improper defensive measure that they employed.

The primary ground on which the plaintiff argued that Rule 23.1 was satisfied, was because that he plead a viable claim for review under Unocal, and therefore, he argued that the majority of the board could not properly evaluate a pre-suit demand.

The court noted that Unocal claims are generally presented prior to a deal closing and are presented in the context of a request for preliminary injunction.  By contrast, this claim was presented after the deal was terminated, and sought damages only.

Unocal Standard:  The court ultimately did not need to decide whether Unocal applies in a damages-only action.  The court explained that Unocal requires enhanced scrutiny and is primarily a tool for providing equitable relief were defensive measures by directors threatened the right of the stockholders to approve a value-enhancing transaction.  Where the directors cannot show that a defensive measure is reasonable, a plaintiff has satisfied the first prong of the injunctive relief analysis which permits the court to impose injunctive relief to remove an unreasonable impediment to a transaction if irreparable harm and the balance requirement are also satisfied.  In other words, the court explained that enhanced scrutiny under Unocal allows injunctive relief without a showing by the plaintiff that it is probable that a defendant has breached a fiduciary duty.

Key Highlights:  This opinion provides an exemplary explanation of the requirements under Rule 23.1, as well as the interfacing between the articulation of those requirements in the Aronson and Rales cases.

The court explained that the wide deference to director decisions provided by the Business Judgment Rule does not apply in certain situations where directors take measures to fend off a potential acquisition, which raises entrenchment concerns.  The Delaware Supreme Court has explained that enhanced judicial scrutiny under Unocal applies whenever the record reflects that a board took defensive measures “in response to a perceived threat to corporate policy and effectiveness which touches upon issues of control.”  Unocal applies to a preemptive defensive measure even where the corporation was not under immediate attack.  See footnotes 81 to 83 and accompanying text.  The court discusses the progeny of Unocal and the various nuances of a well pleaded Unocal claim.

The court explained that Unocal, like Revlon, is not a “duty” per se – – rather it is a standard of review.  Nonetheless it does not change the fact that a duty of loyalty violation is required to recover damages where a board is protected by an exculpatory charter provision.

The court cited the recent Delaware Supreme Court decision of In re Cornerstone Therapeutics, Inc., Stockholder Litigation, 115 A.3d 1173, 1175 – 76 (Del. 2015), for the proposition that whether Revlon or Unocal or the entire business standard or the Business Judgment Rule applies, a plaintiff seeking only monetary damages must still plead non-exculpated claims against the director who is protected by an exculpatory charter provision to survive a motion to dismiss.

Bottom Line:  The court in this case reasoned that the inference of an entrenchment that arises under Unocal falls short of demonstrating a disabling interest that raises a “substantial likelihood of liability” of directors such that pre-suit demand would be excused as required under Rule 23.1.

Importantly, the author of this decision explained that other decisions from the Court of Chancery that found pleadings invoking Unocal claims sufficient to excuse demand under Rule 23.1 would not be followed in this ruling.  The court explained that the Supreme Court decision in Cornerstone cannot be squared with a per se rule that defendant directors are incapable of evaluating a demand solely because a well plead Unocal claim exists.  The court explained further what is necessary in order for specific pleadings to demonstrate that a majority of directors were motivated by entrenchment, or other non-corporate considerations – – as well as what the Delaware decisions have defined as “a substantial likelihood of liability” such that the director would be disabled from considering a non-exculpated claim to the extent that pre-suit demand would be excused under Rule 23.1.  See footnote 153 and accompanying text.

In conclusion, the Unocal claims did not plead sufficient particularized facts that implied a substantial likelihood of liability for damages arising out of those actions on the part of a majority of the directors.  Therefore, Rule 23.1 pre-suit demand was not excused and the case was dismissed.

Scholarship on Duties of Corporate Officers

Professor Lyman Johnson, whose scholarship on corporate law has been cited in Delaware court opinions, and frequently referred to on these pages, has published a paper on the implications and consequences of the paucity of Delaware case law on the duties of corporate officers–especially when compared to the plethora of case law defining the contours of the fiduciary duties of corporate directors.

This topic was the subject of a post on these pages not long ago, referring to work by Prof. Megan Shaner. This topic was also the subject of prior comprehensive articles by Prof. Johnson, as well as by Prof. Larry Hamermesh and Gil Sparks. See, e.g., Lawrence A. Hamermesh & A. Gilchrist Sparks III, Corporate Officers and the Business Judgment Rule: A Reply to Professor Johnson, 60 Bus. Law. 865-876 (2005). Many of these articles are cited in the new paper linked below from Prof. Johnson.

Prof. Johnson’s paper entitled: Dominance by inaction: Delaware’s long silence on corporate directorswas based on his presentation at a two-day symposium held at UCLA Law School a few months ago, which which was highlighted on these pages. Yours truly was the moderator on the panel at UCLA Law School which also featured, in addition to Prof. Johnson, Dean Gordon Smith of Brigham Young University Law School and Prof. Christine Hurt, also of BYU Law School.
Papers from the two-day symposium will be published as chapters in a book that will be edited by Professor Stephen Bainbridge, who organized the symposium. That book will be titled:  Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law, S. Bainbridge, ed., Cambridge University Press.  An abstract of the paper follows:

With the adoption of Delaware’s general incorporation statute in 1899, and New Jersey’s ill-fated (and short-lived) turn toward a more regulatory approach to corporate law, Delaware triumphed in the corporate chartering business. Delaware’s ascendance in the corporate law market has endured for over a century, notwithstanding state competitors and the looming presence of — and occasional intervention by — the federal government on certain corporate law subjects. Various explanations are provided as to why Delaware continues to dominate, and various assessments have been offered as to whether, overall, Delaware’s corporate law jurisprudence is beneficial or detrimental for investors. These explanations and assessments typically focus on what Delaware has done well over the years to retain its prominence, not on what, deliberately or fortuitously, it has failed to do.

This chapter addresses Delaware’s remarkable silence on a central aspect of corporate governance: the various legal issues associated with executive corporate officers. Unlike the case with corporate directors, where Delaware has resolved a host of issues over many decades, Delaware has yet to provide an answer to certain basic questions pertaining to officers. These include: whether the business judgment rule applies to officers; what the applicable standard of care is for officers; why, if officers are employees and agents of the company and not of shareholders, investors can bring direct actions; the nature and contours of officer disclosure and oversight duties; whether officers may consider noninvestor stakeholders; and whether the Unocal and Revlon standards apply to officers.

This statutory and case law silence, however puzzling and long-running, and whatever its reasons — which are described–has served Delaware well. By not articulating legal rules that some might regard as too lax and others as too severe, but instead saying very little at all, Delaware has allowed the subject of officers to largely be addressed in other ways. These include board of director interactions with officers via ex ante employment agreements and ex post severance arrangements, increased federal regulation and sanctioning of certain officer-related conduct, litigation conducted outside Delaware, but relatively little Delaware litigation that promulgates clear rules. This chapter addresses these various dimensions of Delaware’s sparse law on officers, the reasons for the scarcity, and how silence on such an important subject has contributed, ironically, to Delaware’s historical preeminence. At the same time, Delaware’s eventual resolution of officer-related issues is unlikely to weaken its now long-established hegemony.

Johnson, Lyman, Dominance by Inaction: Delaware’s Long Silence on Corporate Officers (2017). Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law, S. Bainbridge, ed., Cambridge University Press; U of St. Thomas (Minnesota) Legal Studies Research Paper No. 17-09; Washington & Lee Legal Studies Paper Forthcoming. Available at SSRN: https://ssrn.com/abstract=2964033