Prof. Hamermesh recaps 40-plus years of Delaware corporate law trends at 35th Annual F.G. Pileggi Distinguished Lecture

By Francis Pileggi on Posted in Annual F.G. Pileggi Distinguished Lecture in Law

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The law school professor widely regarded as the “dean” of Delaware corporate law told a gathering of the state’s bench and bar in Wilmington Nov. 8 that he was just fortunate to be in the right place at the dawn of the age of hostile takeover litigation.

At the 35th Annual Francis G. Pileggi Distinguished Lecture in Law at the Hotel duPont, Widener University Delaware Law School Professor Emeritus Lawrence A. Hamermesh presented his unique perspective on more than 40 years of legal trends in an interview with fellow Widener professor Paul L. Regan. The law school provided an excellent overview of the event on their website.

Hamermesh said in 1976, he was fresh out of Yale Law School and working for the law firm Morris Nichols Arsht & Tunnel in Wilmington when he was assigned to a minority shareholder’s appraisal suit over the value of the stock of Kirby Lumber Corp.

He said that low-profile case involved issues that were common to later high-stakes hostile acquisition litigation that dominated the docket of the Delaware Chancery Court for decades. Bell v. Kirby Lumber Corp. 413 A 2d 137 (Del. 1980).

Morris Nichols frequently defended companies and their officers and directors, who usually took the position that the company’s worth should be based on its revenue — in Kirby’s case, about $120 a-share — but the plaintiff said its assets were worth $770 a-share.

Kirby’s legacy

Hamermesh said as merger and acquisition battles heated up through the 1980’s, hostile bidders seeking control of a bare majority of a target company’s stock so they could profitably sell off its pieces were focused on asset value.

“The court struck a compromise and averaged Kirby’s stock value between those two value extremes but that was just the beginning” of a long, see-saw battle between corporate officers and directors on one side and hostile bidders and activist investors on the other, he said.

Often, he faced his interviewer, Prof. Regan, in those battles during Regan’s stint at firm Skadden Arps, before Hamermesh traded the courtroom for the Widener classroom in 1994, where the two have steered the corporate law department.

They said they have witnessed the evolving struggle between corporate operating value and break-up asset value proponents put takeover litigation and the Delaware business courts in the national spotlight.

Often, the threat of a takeover that would bust up a company and its business made strange bedfellows out of traditional adversaries, such as management and labor who would be forced to put aside their differences to present a united front against a hostile bidder, Hamermesh noted.

Spotlight shifts to Delaware

After the U.S. Supreme Court decided in Green v. Santa Fe that merger challenges were the province of  state law and not classic federal securities laws because they focused on fiduciary duty, not securities deceit and fraud, the Delaware state courts rose to prominence, the professors agreed. Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977)

They discussed the key Delaware decisions in the 1980’s that tried to balance the right of the directors to manage their companies, against the right of investors, as the owners, to decide the company’s ultimate fate.

Unocal and Revlon’s effect

The Delaware Supreme Court’s Unocal decision for the first time imposed an “enhanced duty” on directors to show that their takeover defense was a reasonable response to a threat to the corporation by a hostile bidder, they said. Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)

One year later, the high court’s Revlon ruling said in a sale-of-control battle the directors effectively become the auctioneers of the company and must take a hostile bidder’s higher offer, because the board’s defenses could be the product of conflicted interests. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)

“The Supreme Court said the board has to take the highest offer in a sale situation if its the end of the line for the business, but what if it will live on in some other form?” Hamermesh asked.  In those cases, the board could consider other constituencies, including the interests of constituencies such as employees, creditors and suppliers. Compare generally, Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL, Slip op. at 30-31 and n.8 (Del. Ch. Oct. 7, 2019)(recent Chancery decision noting considerations that can be taken into account consistent with fiduciary’s obligation to act in best interests of stockholders.)

The takeover battles evolved into a struggle between long-term revenue proponents and the hedge funds, private equity companies and other activist investors who pushed for changes that would generate quick, short-term profits, he said.

Investing with grandchildren in mind

Today, the issue is still “shareholder primacy”, versus other interests – such as the environment — because “companies can benefit by dumping on the world, but what about my grandchildren — what kind of world will they inherit?” because of investor decisions, he asked.

The professor said like many investors, his stock holdings are through “investment intermediaries” whose short-or-long-term influence on the companies in their portfolio can be hard to gauge.

The iconic Delaware court rulings mainly address the fiduciary duties of corporate officers and directors, “but what duty do investment companies owe to shareholders?” he asked.  The focus has been on the agency costs directors and officers incur in running the company, “but what are the investment intermediaries’ agency costs?”

Responding to Regan’s “where is shareholder litigation going?” question, Hamermesh applauded the Chancery Court’s 2016 Trulia decision that effectively stopped what he called “merger tax” lawsuits in which plaintiff law firms reaped attorney fees for quick settlements that provided no benefit beyond unimportant added deal information.   In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 894 (Del. Ch. 2016).

In hindsight, he said, whatever his contribution has been to his field, his choice of corporate over criminal law meant that, “I was basically representing people fighting about money, and no one was going to die.”

35th Annual F.G. Pileggi Distinguished Lecture in Law

By Francis Pileggi on Posted in Annual F.G. Pileggi Distinguished Lecture in Law

The 35th Annual Francis G. Pileggi Distinguished Lecture in Law (named after the father of this blog’s primary author) will be held on:

Friday, November 8, 2019.

Registration and breakfast is at 8:00 a.m. at the Hotel du Pont in Wilmington, Delaware. The Annual Lecture begins at 8:45 a.m.

Download the brochure which also provides details for registration online.

Prior Annual Pileggi Lectures have been highlighted on these pages.

The Delaware Journal of Corporate Law at Delaware Law School, which handles the administrative aspects of this annual event, provides more information about prior speakers in the series on their website.

Chancery: investor’s stealth demand on biopharma can’t avoid Spiegel pre-suit demand choice

By Francis Pileggi on Posted in Chancery Court Updates

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

A shareholder who made a veiled threat to take action against a biopharmaceutical company over its directors’ allegedly excessive compensation effectively made a pre-suit demand and cannot later sue and claim that a demand would have been futile, the Delaware Chancery Court has ruled in Solak v. Welch, et al., No. 2018-0810 KSJM, memorandum opinion (Del. Ch. Oct. 30, 2019).

 Vice Chancellor Kathaleen St. Jude McCormick’s October 30 opinion dismissed John Solak’s derivative suit against Ultragenyx Pharmaceutical Inc.’s directors, finding that his pre-suit letter requesting them to address non-employee board member compensation was not a harmless investor request.  Rather, it was a “proverbial wolf in sheep’s clothing” demand “with far more legal bite” that required the plaintiff to either prove the directors wrongfully refused to take action or suffer the court’s dismissal of his breach of duty and waste of assets charges, the vice chancellor said.

Only two choices

She said the Delaware Supreme Court’s Spiegel v. Buntrock decision gives investors seeking to sue in the name of the company two choices: either first demand that the directors, as managers of the company, take action to right a wrong or skip the demand and show that it would have been futile because the directors are too conflicted to give the charges a fair review. Spiegel v. Buntrock 571 A.2d 767, 772-73 (Del 1990).

The vice chancellor’s opinion says Spiegel does not allow a shareholder to demand an action under the guise of  seeking better corporate governance practices and then use the second Buntrock option and argue that his letter was not a pre-suit demand but rather “an informal, good faith attempt to educate the board and encourage it to make changes.”

According to Vice Chancellor McCormick’s opinion, Solak’s counsel sent a June 2018 letter to the Novato, Calif. company’s directors suggesting that they correct the excessive $400,000 a year average compensation the independent directors have been receiving since 2014.

The letter claimed that pay plan lacks meaningful limitations and renders the company “more susceptible than ever to shareholder challenges and that Solak would consider “all available shareholder remedies” unless Ultragenyx responded in thirty days.

When the board rejected the request the following October after an internal investigation of compensation policies, Solak sued in Chancery Court one month later and the directors moved to dismiss it in December for failure to show that plaintiff’s pre-suit demand was improperly refused.

The ‘steeper’ route

After hearing oral argument on the motion in August, the vice chancellor said the pivotal issue was whether Solak’s letter constituted a pre-suit demand.  That’s because of the two Spiegel options for a derivative plaintiff, successfully pleading that pre-suit demand would have been futile because of director conflict was a “steep” route, he said; but proving that his demand was wrongly refused was “steeper yet.”

In light of the Spiegel court’s holding that a plaintiff who makes a pre-suit demand “tacitly concedes” that the board is qualified to consider that demand under the protective business judgment rule, Solak argued that the letter was not a pre-suit demand.

The judge said under Delaware caselaw, a pre-suit letter is a demand if it provides, “(1) the identity of the alleged wrongdoing, (2) the wrongdoing allegedly perpetrated and the resultant injury to the corporation and (3) the legal action the shareholder wants the board to take.”

Demand disclaimer

She said the disclaimer in Solak’s letter that it could not be construed as a pre-suit demand does not shield it from the Delaware law prohibition against both making a pre-suit demand and pleading demand futility “to cover all the bases.”

The vice chancellor also rejected Solak’s argument that his letter was not a demand because it did not expressly demand that the directors commence litigation. She said previous Chancery Court decisions have found that clearly demanding corporate action is sufficient.

Moreover, Solak’s letter “reads like a complaint” and is “nearly a carbon copy” of his later-filed lawsuit in drawing comparisons with compensation levels at other companies and in the remedial measures it requests, the opinion says.

In addressing Solak’s argument that shareholders will be deterred from even ambiguous communications that might be considered a demand, making a subsequent derivative suit procedurally more difficult, the vice chancellor said normally, the investor’s ambiguity would get the benefit of the doubt.

Similar suit, same result

However, she noted a 2018 New York state court decision dismissing a suit by Solak after he made what constituted a pre-suit demand for action by another corporation’s board to correct alleged excessive director compensation. Solak v. Fundaro, Index No. 655205/2017, slip opinion (N.Y. Sup. Ct. Mar. 19, 2018).

She said in that New York case, Solak unsuccessfully attempted to “dress down” the pre-suit communication. “The product of this tactical wordsmithing is not the sort of “ambiguity” warranting a plaintiff-friendly presumption.”

Applying the business judgment rule, the vice chancellor found no reason to doubt the good faith of the directors’ decision to refuse the pre-suit demand and dismissed Solak’s suit.

Chancery Explains Step-Transaction Doctrine and Defines “Affiliate

By Francis Pileggi on Posted in Chancery Court Updates

A recent Delaware Court of Chancery opinion is noteworthy for its discussion of many aspects of the law, but I intend to highlight only a few of them, including its description of the important concept known as the Step –Transaction Doctrine. In PWP XERION Holdings III LLC v. Redleaf Resources, Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019), the court engaged in a thorough analysis of the issues related to the failure of a company to obtain prior written consent from a major stockholder before approving certain transactions.

Key Takeaways from this Decision

Step-Transaction Doctrine:

The doctrine “treats the steps in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan.” See pages 31-32.

The court explained that the step-transaction doctrine applies if the component transactions meet one of three tests. First, the “end result test” will allow the doctrine to be invoked if it appears that a series of separate transactions were pre-arranged parts of what was a single transaction, cast from the outset to achieve the ultimate result. Id.

Second, under the interdependence test, separate transactions will be treated as one if the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. The third and most restrictive test is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there is a binding commitment to undertake later steps. Id.

Analysis of the Terms “Affiliate” and “Business Plan.”

The court analyzed the term affiliate as it applied to a company director because consent was required for certain transactions with an affiliate of a director. See pages 17 to 21.

The court also analyzed the meaning of “business plan” because prior consent of a major stockholder was required before any changes could be made to the business plan. See pages 22 to 25.

Other Useful Statements of Delaware Principles of Law Regarding Tension between Board’s Fiduciary and Contractual Duties:

The court also discussed the concept that a board can fulfill its fiduciary duties while making a decision that (complying with those fiduciary duties) might call for engaging in “an efficient breach” of contract. See page 34.  Contrariwise, a board could comply with a contract which would result in a breach of fiduciary duty. Id.

The court also explained, in connection with a stockholder and its board-designee who took different positions on the same issue: that the rights of a stockholder, and what a stockholder might lawfully be permitted to do, are much different than the duties of a director-designee of that stockholder.  The court explained that a stockholder and its director designee occupied:

(i) different roles;

(ii) are subject to different decisional frameworks; and

(iii) can legitimately have different views.

Other cases on these pages have addressed the duties of a “blockholder director”  who must act in the best interests of all stockholders–and not only the stockholder who appointed the director.

Chancery Provides Guidance on Electronic Discovery Practices

By Francis Pileggi on Posted in Chancery Court Updates

A recent Delaware Court of Chancery decision is noteworthy for the clarification it provides regarding several nuances of electronic discovery practice. See Ferguson v. Capital Development Insurance Company, LLC, C.A. No. 2018-0831-KSJM (Del. Ch. Oct. 8, 2019).

Key Points: Among the helpful takeaways from this short letter ruling are the following:

  • Although the Guidelines for Practitioners in the Delaware Court of Chancery suggest that the proponent of discovery should propose protocols for the recipient to use in the collection and production of ESI, the court explained that the protocol does not constitute a formal rule of court, and therefore, cannot be “weaponized” as a basis to refuse to reply to discovery requests.
  • The court observed that sometimes the person receiving discovery requests is best suited to propose ESI protocols for search, collection and production–given their superior knowledge of their data repositories, but this is not a requirement that has the force of a rule.
  • The court instructed, however, that it “encourages the proponent of discovery to propose protocols that the recipient may use when collecting electronically stored information.”

Pro Se Representation of Corporations Prohibited: In a statement of law not related to electronic discovery, the court reiterated the truism that in Delaware, entities may not appear pro se, but rather they must be represented by counsel before the court (even when it is a wholly-owned company). See Harris v. RHH P’rs, LP, 2009 WL 891810, at *2 (Del. Ch. Apr. 3, 2009).

Chancery Grants Advancement, Rejects Common Defense

By Francis Pileggi on Posted in Chancery Court Updates, Selected Articles by Francis

For those readers who follow the many Chancery decisions highlighted on these pages regarding advancement for corporate officers and directors, the recent Court of Chancery decision in Nielsen v. EBTH Inc., C.A. No. 2019-0164-MTZ (Del. Ch. Sept. 30, 2019), can be added to the long line of cases that reject an argument that the requirement for advancement–that the underlying litigation was brought “by reason of the fact” of the claimant’s role as a director or officer–was not satisfied. As the court described it: “Few cases present facts that fall short of Delaware’s standard favoring advancement. This case follows the common pattern.”

An article co-authored by the undersigned, and Chauna Abner, provides a more complete overview of this case and appeared in The Delaware Business Court Insider.

Directors may face oversight liability for not properly monitoring key drug’s clinical trial

By Francis Pileggi on Posted in Chancery Court Updates

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications,  for over 30 years.

The business judgment rule cannot shield Clovis Oncology Inc.’s directors from shareholder charges that they breached their oversight duty by ignoring reports that their flagship cancer-fighting drug was unlikely to pass regulatory tests, the Delaware Chancery Court has ruled in the matter styled: In re Clovis Oncology Inc. Derivative Litigation, No. 2017-0222-JRS, memorandum opinion (Del. Ch. October 1, 2019).

Vice Chancellor Joseph R. Slights’ Oct. 1 opinion allows the biopharmaceutical startup’s investors to proceed with derivative claims that Clovis lost $1 billion in value after the market learned that its directors failed to comply with regulatory protocol for Rociletinib.

He said duty-of-oversight charges have been among the hardest to prove, but the Clovis plaintiffs well-pled that their directors did not respond to red flags at a time when the company’s fate. depended largely on the outcome of a single lung cancer therapy trial.

A duty-of-care duo

The Clovis opinion, and the Delaware Supreme Court’s June decision in Marchland v. Barnhill, 212 A.3d 805 (Del. 2019), are being closely examined by corporate law specialists because together they provide a new avenue to sue for violating the duty of oversight.

In June, the Delaware Justices reversed a Chancery Court dismissal of a consolidated shareholder suit that charged the Blue Bell Creameries directors’ failure to oversee ice cream safety resulted in a deadly and costly listeria outbreak in 2015. The opinion, written by Chief Justice Leo E. Strine Jr., found the Blue Bell board “made no effort to put in place a board-level compliance system.”

That, he said, was a violation of the first part of the oversight duty spelled out in the seminal 1996 Caremark decision which said directors must set up and monitor systems to ensure that they get adequate information on whether the company is being operated properly. In re Caremark Int’l. Inc. Deriv. Litig. 698 A. 2d 959 (Del Ch. 1996).

Caremark duty, part two

Vice Chancellor Slights’ Clovis opinion was based on Marchand decision and focused on the second part of the Caremark duty: to properly monitor the systems the directors set up,

The plaintiffs claimed the Clovis directors in fact paid very little attention to the plan and protocol they set up for the clinical trial of Roci, an initially promising lung cancer treatment. In later stages though, there were ample indications that Roci would not get the U.S. Food & Drug Administration’s approval for market, Vice Chancellor Slights said.

The consolidated suit charged Clovis executives entered ineligible information in the clinical trial’s records that “allowed the company to mislead the market regarding the drug’s efficacy.”

The plaintiffs said when Clovis was later forced to enter the correct information, it was clear that Roci would not be approved, but some directors and a senior executive sold stock before the market learned the bad news.

In response to the defendants’ motion to dismiss, the vice chancellor said the duty to implement a proper oversight system and then monitor it is important, “especially so when a monoline company operates in a highly regulated industry.”

He noted that at the beginning of the clinical trial Clovis had no other drugs on the market, received no sales revenue and was entirely dependent on investor capital.

Business risk vs. oversight risk

Directors must have great latitude in making decisions on business risk, but “it is appropriate to distinguish the board’s oversight of the company’s management of business risk” from the board’s oversight of compliance with regulatory mandates, the judge said.

In refusing to dismiss the breach-of-duty charge he said he was satisfied that plaintiffs have properly pled that the directors “consciously ignored red flags that revealed a mission critical failure to comply” with the protocol and FDA regulations.

However, Vice Chancellor Slights dismissed an insider selling charge for lack of proof of scienter, finding that it is not enough that the sale took place near the time that the insider acquired non-public information.

This is especially true where the size of the trade is not abnormally large and does not represent a dramatic change in trading pattern, he said.

Based on the same findings, the Court also dismissed a charge that some defendants improperly enriched themselves from the insider selling.

Takeaways

Vice Chancellor Slights’ detailed recitation of what he found to be the Clovis directors’ failures to monitor and disclose Roci’s true test history could serve as a cautionary tale for a new, stricter Caremark era.

Or, turned around, it could provide proactive directors and their counsel with a to-do list for revising board-level control and disclosure.

Termination Fee May Not be Sole Remedy for Termination of Merger Agreement

By Francis Pileggi on Posted in Chancery Court Updates

A recent Delaware Court of Chancery opinion allowed a claim to proceed based on the theory that a termination fee for a merger agreement was not the sole remedy for breach of contract.  In Genuine Parts Co. v. Essendant, Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019), the court discussed a very fact-specific, contract-based reason why the termination fee was not the sole remedy for a potentially willful breach of the merger agreement.

Key Facts:

The non-solicitation provision in the merger agreement had a “fiduciary-out” which was subject to various parameters and notice requirements.  There was also a “willful breach” exception to the termination fee as a sole remedy. 

In addition, the target-company met with another suitor before signing the merger agreement despite: (i) a representation that there were no other suitors; and (ii) no notice or disclosure of that pre-agreement meeting being made.

The claims included breach of contract because the competing bid that was accepted was allegedly not a superior bid.

Highlights of Court’s Analysis:

The court explained that non-solicitation provisions are routine, and that there is no per se prohibition about a non-solicitation provision as long as there is a “safety valve” that allows for a board to consider a superior offer. See Slip op. at 23-24, and footnotes 76-78.

The court distinguished a prior Chancery decision, which had materially different terms in the applicable agreement, where the court determined that a losing bidder was unlikely to get specific performance beyond the termination fee.  See Cirrus Holding Co. v. Cirrus Industries, Inc., 794 A.2d 1191 (Del. Ch. 2001).

By contrast, the court did follow the reasoning of another Chancery decision that found, based on the terms of the contract in that case, that a termination fee was not an exclusive remedy.  See NACCO Industries, Inc. v. Applica, Inc., 997 A.2d 1 (Del. Ch. 2009).

Delaware State Bar Association Responds to Attack Ads Against Delaware Courts

By Francis Pileggi on Posted in Commentary

Recent attack ads appearing on TV that apparently were financed by a disgruntled litigant unhappy with the results of a decision by a Delaware court, generated an unusual response from the Delaware State Bar Association. A website called Town Square Delaware provides a copy of the letter. The Delaware Business Court Insider also published an article about the attack ad, in which they quoted yours truly (condemning the misguided ad.)

Forum Selection Clauses; Delaware Law; Federal Law; Internal Affairs Doctrine; and Chancery’s Sciabacucchi Decision

By Francis Pileggi on Posted in Chancery Court Updates, Commentary

For readers who follow the law regarding forum selection clauses, a recent article by Professor Joseph Grundfest should be of interest. The good professor addresses the December 2018 Court of Chancery decision in Sciabacucchi v. Salzberg (highlighted on these pages), and the intersection of Delaware law and Federal law in the context of forum selection clauses and the internal affairs doctrine. The abstract follows to his article titled: The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi

Abstract

The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.

In Sciabacucchi, Chancery applies “first principles” to invalidate FFPs primarily on grounds that charter provisions may only regulate internal affairs, and that Securities Act claims are always external. In so concluding, Sciabacucchi adopts a novel definition of internal affairs that is narrower than precedent, and asserts that plaintiffs have a federal right to bring state court Securities Act claims. It describes all Securities Act plaintiffs as purchasers who are not owed fiduciary duties at the time of purchase. The opinion constrains all actions of the Delaware legislature relating to the DGCL to comply with its novel definition of “internal affairs.”

Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies critically on assumptions of fact that are demonstrably incorrect. It asserts that FFPs are “contrary to the federal regime” because they preclude state court litigation of Securities Act claims. But the U.S. Supreme Court in Rodriguez holds that there is no immutable right to litigate Securities Act claims in state court, and enforces an agreement that precludes state court Securities Act litigation. Sciabacucchi assumes that Securities Act plaintiffs are never existing stockholders to whom fiduciary duties are owed. But SEC filings and the pervasiveness of order splitting conclusively establish that purchasers are commonly existing holders protected by fiduciary duties. The opinion fears hypothetical extraterritorial application of the DGCL. To prevent this result, it invents a novel definition of “internal affairs” that it applies to constrain all of the Legislature’s past and future activity. But the opinion nowhere addresses the large corpus of U.S. and Delaware Supreme Court precedent that already precludes extraterritorial applications of the DGCL. It thus invents novel doctrine that conflicts with established precedent in an effort to solve a problem that is already solved. The opinion’s novel, divergent definition of “internal affairs” also conflicts with U.S. and Delaware Supreme Court precedent that the opinion nowhere considers.

Sciabacucchi is additionally problematic from a policy perspective. By using Delaware law to preclude a federal practice in federal court under a federal statute that is permissible under federal law, Sciabacucchi veers Delaware law sharply into the federal lane and creates unprecedented tension with the federal regime. Its narrow “internal affairs” definition invites sister states to regulate matters traditionally viewed as internal by Delaware, and advances a position inimical to Delaware’s interests. By propounding its divergent internal affairs constraint as a categorical restriction on the General Assembly’s actions, past and future, the opinion causes the judiciary to intrude into the legislature’s lane. And, data indicate that the opinion in Sciabacucchi caused a statistically and economically significant decline in the stock price of recent IPO issuers with FFPs in their organic documents.

In contrast, a straightforward textualist approach would apply the doctrine of consistent usage and use simple dictionary definitions to preclude any extension of the DGCL beyond its traditional bounds. Textualism avoids all of the concerns that inspire the invention of a divergent “internal affairs” definition. Textualism does not require counter-factual assumptions, conflict with U.S. or Delaware Supreme Court precedent, cause Delaware to constrain federal practice in a manner inconsistent with federal law, or advocate policy positions inimical to Delaware’s interest. Textualism also interprets the DGCL in a manner that profoundly constrains the ability of all Delaware corporations to adopt mandatory arbitration of Securities Act claims. Textualism validates FFPs in a manner that precludes the adverse, hypothetical, collateral consequences that animate Sciabacucchi’s fragile analysis, without generating Sciabacucchi’s challenging sequelae.

Keywords: Securities Act, forum selection, Delaware, jurisdiction, litigation, Section 11, charters, by-laws, internal affairs, federal forum provisions

JEL Classification: K22, K41

Suggested Citation
Grundfest, Joseph A., The Limits of Delaware Corporate Law: Internal Affairs, Federal Forum Provisions, and Sciabacucchi (September 12, 2019). Rock Center for Corporate Governance at Stanford University Working Paper No. 241. Available at SSRN: https://ssrn.com/abstract=3448651 or http://dx.doi.org/10.2139/ssrn.3448651
 

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