At the International Corporate Governance Network seminar at the Hotel duPont in Wilmington, Delaware, an extraordinary event took place this morning.
A majority of the members of the Delaware Supreme Court and the Delaware Chancery Court constituted one panel that took questions from the audience of about 300 corporate governance experts from corporate lawyers and related players in the corporate governance arena. Of course, one cannot treat their replies in that forum the same as a formal opinion issued in a real case, but there is no reason that one could not gain insights into the viewpoints of those jurists in connection with the questions asked. So, I give my readers the benefit of my notes on the following Q and A that took place today.
CAVEAT: This is NOT a transcript, so if my notes do not accurately reflect the replies of the members of the bench to which they refer, you have been forewarned–but I did the best I could do, to fairly summarize selected parts of what was said in reply to some of the questions. I did not include all the answers to all the questions.
Question: Will the Business Judgment Rule (BJR) change in light of the recent economic crisis?
VC Strine: It will continue to be the foundation of our law but that does not mean that there is a lack of accountability, and as circumstances change, boards must adapt to those changes and, for example, their monitoring function may come into play more prominently. In sum, "there is no free ride" with the BJR.
Question: How can Delaware balance the interests of companies and shareholders with its own interests as a state, when so much of the state’s revenue is dependent on those companies?
VC Lamb: Shareholders ultimately decide to come to Delaware or stay here. We try very hard not to favor any party or group, whether it’s designated as shareholder or management.
Justice Berger: Any lopsided system that favored management or shareholders would not help either group in the long-run, nor would it help Delaware.
VC Strine: Our corporate law is primarily contractual in nature, as opposed, for example, to environmental law which is mostly regulatory, and has the EPA as the regulatory agency that controls that arena in large part. Unlike the statutes in many statutes, and the EU, the law of Delaware provides many protections and rights for shareholders that balance the rights and duties of management as well.
Chief Justice Steele: It is a mystery why some people think Delaware favors management. The Delaware judiciary takes their own fiduciary duties as judges very seriously and it is unfathomable that a member of the Delaware bench would favor one side or the other–or one group or another.
Question: What role, if any, do the Delaware courts play in recent corporate failures?
VC Strine: Delaware courts very tightly police wrongdoing brought to their attention and, for example, have many times condemned "conflicted transactions". The Delaware courts also jealously protect the shareholder franchise and in many cases have "hammered" companies that interfere with shareholder voting rights.
Justice Ridgely: The Delaware statutes provide specifically for shareholder rights, and include procedures to advance those rights.
Justice Berger: Delaware courts are not averse to considering decisions and viewpoints from other states and countries where appropriate, as we do not think that we have all the answers.
Justice Ridgely: In one recent case involving derivative rights, the Delaware Supreme Court went all the way back to the 1400s to examine the source of the derivative claim in English common law, and much of our law is based on the common law of the U.K.
Question: Can directors be sued due to a failure to monitor too much risk?
VC Parsons: Delaware decisions like Caremark and Stone v. Ritter make it clear that the board has duties to monitor and that has two primary parts: First, there must be a monitoring system in place that is likely to detect problems. Second, that system must provide for a way to deal promptly with problems once detected. Whether they are liable for failure of the foregoing will depend on the specific factual details of the case. One issue that may arise is whether the board understood some of the more esoteric financial instruments that were at the root of some of the recent financial problems.