I should know better than to debate a professor in light of the likelihood that he has more time and inclination by virtue of his occupation (read: no billable hours) to spend on rebuttal, but here it is. Professor J. Robert Brown recent provided here a "top 5 list" of cases from the Delaware Chancery Court that -- in his view -- showed why Delaware was "anti-shareholder and anti-plaintiff." Now, I realize that there are many more qualified experts who can rebut the professor's arguments far more persuasively than I, and I am well aware that the Delaware bench certainly does not need my help to defend it. Nor have I been anointed by anyone to take on this role. Nonetheless, having just completed a review of key 2007 Delaware corporate decisions, I offer my own humble rebuttal and a "counter-list" of 5 cases in 2007 that demonstrate that the Delaware courts take shareholder rights and the duties of directors very seriously. If any readers can think of a better "top 5" list, than the one I compiled below, I welcome comments. Here is my top 5 "rebuttal list":
Sample v. Morgan, 2007 WL 177856 (Del. Ch., Jan. 23, 2007), where the court chided directors for being mere “unwitting and uninformed accomplices” in a plan to enrich other directors. The court rejected the argument that shareholder ratification had “cleansed” the transactions, and much of the reasoning relied on by the court was based on the following principle: “Every corporate action must be twice-tested: first, by the technical rules having to do with the existence and the proper exercise of power; second, by equitable rules applicable to fiduciaries.” See link for longer summary and copy of opinion.
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In Melzer v. CNET Networks Inc., 2007 WL 4146237 (Del. Ch., Nov. 21, 2007), the Chancery Court determined that a shareholder was entitled to books and records for a period of time prior to the date of stock ownership in order to allow for the detail necessary to plead a sustained and systemic failure of oversight by the Board as described in the Caremark case. See this link for longer summary and a copy of the case.
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In Re: infoUSA, Inc. Shareholders Litigation, 2007 WL 2332543 (Del. Ch., Aug. 13, 2007) (revised on Aug. 20, 2007). In this Chancery Court decision, which serves as a litigator’s guide on how to successfully plead a derivative case to challenge allegedly excessive executive compensation, the court allowed a claim for excessive compensation to proceed. In explaining how such a claim should be presented, as well as explaining the best way to plead a breach of fiduciary duty claim, the court explained that “a skilled litigant and particularly a derivative plaintiff, recognizing the institutional advantages and competency of the judiciary reflected in our law, places before the court allegations that question not the merits of a director’s decision, a matter about which a judge may have little to say, but allegations that call into doubt the motivations or the good faith of those charged with making the decision.”
The court’s decision included a classic quote that emphasizes why the business judgment rule is not a “blank check.” The court stated that “the rule does not require the court to bless the conclusion of a director that is self-evidently nonsense on stilts, nor does it protect a board that looks into the sun and names it the moon.” Moreover, the court continued: “Where, as here, the directors sought shareholder approval of an amendment to a stock option plan that could potentially enrich themselves and their patron, their concern for complete and honest disclosure should make Caesar appear positively casual about his wife’s infidelity. See link for longer summary and copy of decision.
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In Re Netsmart Technologies, Inc. Shareholders’ Litigation, (Del. Ch., March 14, 2007). In this Chancery Court decision, involving a private equity deal that certain shareholders sought to enjoin, the Chancery Court ruled: (i) the board did not have a reasonable basis for failing to undertake any exploration of interest by strategic buyers; (ii) the plaintiffs established a probability that the proxy is materially incomplete because it failed to disclose projections used to perform a discounted cash flow valuation that supported the fairness opinion. However, the court merely enjoined the merger vote until more information was disclosed. See link for longer summary and copy of opinion.
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In Valeant Pharmaceuticals International v. Jerney, 2007 WL 704935 (Del. Ch., March 1, 2007), the Chancery Court ordered the return of an excessive bonus based on a failure of the former director and president to prove the entire fairness of the decision resulting in a payment being paid to him in the amount of $3 million. See link for longer summary and copy of decision:
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UPDATE: Professor Brown comments here on his own blog post about my above comment on his TheRacetotheBottom.org blog (which is a good source for the latest developments in corporate law). His "reply" to my comment was gracious and professional and scholarly. Honestly, it is a big thrill for me when two people with different opinions (sometimes strong opinions) can engage in a polite and civil discourse about their different perspectives. Perhaps because that is not always the case in hotly contested litigation, I enjoy it and notice more when it happens. Thank you, Professor.
UPDATE II: Here is the blurb on the discussion of this "top 5 list" posted on The Harvard Corporate Governance Law Blog today, courtesy of Robert Jackson, Managing Editor of that blog.
UPDATE III: Here is a link that Professor Bainbridge was kind enough to post on his blog to the "thrust and parry".
