This is my fifth update from this corporate law seminar in New Orleans. On this second day, the third panel presentation this morning is titled: "Delaware Developments". The panel members include a member of the Delaware Chancery Court and a few leading Delaware corporate practitioners.
Vice Chancellor Lamb discussed the very recent Delaware Supreme Court decision in Lyondell Chemical Co. v. Ryan, which was recently summarized on this blog.
Among the comments His Honor made about the case, he referred to page 18 of of Supreme Court opinion in Lyondell which describes what must be show in order to establish a violation the duty of care as compared with the duty of loyalty.
He also referred to the part of the Supreme Court’s opinion that explained that simply putting a company "in play", does not trigger Revlon duties. Rather, Revlon duties are only triggered when the board decides to sell the company. Revlon applies heightened scrutiny and uses a "range of reasonableness". The Supreme Court also cited approvingly the Chancery Court decision in the Lear case (which was handed down shortly prior to the Chancery Court’s decision in Lyondell v. Ryan. The Lear case includes the distinction between a review of the board’s activities in connection with a sale, both before as opposed to after the transaction closes.
Contractual Limitations on a Board’s Fiduciary Duties
The panel cited to the Chancery Court decision in Grimes v. Donald (1995) that stands for the view that a board should not restrict its duties to manage the corporation. (Compare with the option that the board might want to change its mind on whether to recommend a merger). See also Carmody v. Toll Bros. (1998) prohibiting the "dead hand pill"; and Abercrombie v. Davies (1956) preventing a voting agreement that required board designees to vote as a block.
By contrast, DGCL Section 141 allows certain restrictions to be in the certificate of incorporation–as opposed to having such restrictions in the bylaws which do not allow for as much leeway. See CA, Inc. (recent Delaware Supreme Court case) See also Grimes (upheld an agreement that allowed the CEO to unilaterally decide that his employment was terminated if his powers were restricted); and Cullman (agreement upheld that was in director’s role as shareholder and also had fiduciary out). Another case discussed was:
Hokanson v. Petty, 2008 WL 5169633 (Del Ch. 2008). Claim that board breached duty of care and loyalty rejected because court said the agreement involved allowed the board to seek a higher price. Though the claims were time-barred, even so, the board had fulfilled its fiduciary duties by getting the best deal possible in a very distressed situtation.
The Delaware cases discussed included: IBP v. Tyson (2001) (applying NY law to grant specific performance and finding no trigger of MAE clause); Frontier v. Holly (2005)(staterment of CEO was not a repudiation, so the party that claimed a repudiation of the other was found to be in breach and no MAE established); United Rentals v. Ram Holdings (2007)(summarized on this blog, finding that contract limited remedy to termination fee); Hexion v. Huntsman (2008)(no MAE found, when one party orchestrated an insolvency opinion for merged entity, and specific performance ordered.)
PROPOSED REVISIONS TO THE DELAWARE GENERAL CORPORATION (DGCL)
Dave McBride discussed the changes expected to be made in the next few months to the DGCL by the Delaware Legislature and presumably to be signed by the Governor by this summer.
- Section 112. In light of the recent decision by the Delaware Supreme Court in the CA, Inc. case, this change would allow the bylaws to include provisions that would allow individuals to the board to be nominated by stockholders.
- Section 113. Also in light of the recent CA, Inc. case, this allows bylaws to provide for reimbursement for expenses incurred by stockholders in soliciting proxies. But there is a mandatory provision that relates to the setting of the record date and effectiveness of bylaw change.
- It is still an open question (in some circles) in Delaware as to what power a board has to amend a "shareholder-adopted" bylaw.
- Section 145. Changes the default rule on advancement due to recent decision in Schoon v. Troy so that an existing right to advancement cannot be withdrawn or eliminated once an act occurs that may provide for advancement, unless a bylaw or contract provision expressly provides otherwise.
- Section 225(c). Allows a corporation to seek, in the discretion of the Chancery Court, to remove a director if he is convicted of a felony in connection with his duties, and under certain other circumstances.
- Section 213(a). This addresses "dual record dates".
Gantler v. Stephens, (Del. Supr., Jan. 27, 2009)(previously summarized on this blog). A member of the panel also discussed this recent Delaware Supreme Court case that addressed issues of shareholder ratification and refused to apply the Unocal test, and instead applied the "entire fairness standard" to a board decision to retain control over their bank.