Harvard’s Professor Subramanian Addresses Constitutionality of DGCL Section 203
Guhan Subramanian is the Joseph Flom Professor of Law and Business at the Harvard Law School. He prepared a post on the Harvard Law School Corporate Governance Forum based on his lecture delivered at the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. The beginning of his post is excerpted below:
In November 2013, I delivered the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. My lecture, entitled “Delaware’s Choice,” presented four uncontested facts from my prior research: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a “meaningful opportunity for success” in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed—so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success.
I concluded my lecture with three questions for the audience:
- (1) Is the constitutionality of Section 203 settled law?
- (2) If not, would a bidder be well-advised to challenge the constitutionality of Section 203 the next time it becomes a binding constraint in a takeover situation?
- (3) And if yes, what, if anything, should Delaware do to avoid this challenge?
I, along with numerous prominent academics and practitioners, believe the answer to the first question is no. Professor Joe Grundfest of Stanford Law School told the Wall Street Journal: “Lawyers now have the data they need to renew a constitutional battle over these sorts of state takeover laws.” Professor Steve Bainbridge of UCLA Law School wrote on his popular blog: “I agree that the article’s data calls into question the empirical grounding of the Delaware trilogy. To that extent, I agree that the validity of the Delaware statute could be challenged.”