Professor Lyman Johnson, whose scholarship on corporate law has been cited in Delaware court opinions, and frequently referred to on these pages, has published a paper on the implications and consequences of the paucity of Delaware case law on the duties of corporate officers–especially when compared to the plethora of case law defining the contours of the fiduciary duties of corporate directors.
This topic was the subject of a post on these pages not long ago, referring to work by Prof. Megan Shaner. This topic was also the subject of prior comprehensive articles by Prof. Johnson, as well as by Prof. Larry Hamermesh and Gil Sparks. See, e.g., Lawrence A. Hamermesh & A. Gilchrist Sparks III, Corporate Officers and the Business Judgment Rule: A Reply to Professor Johnson, 60 Bus. Law. 865-876 (2005). Many of these articles are cited in the new paper linked below from Prof. Johnson.
Prof. Johnson’s paper entitled: Dominance by inaction: Delaware’s long silence on corporate directors, was based on his presentation at a two-day symposium held at UCLA Law School a few months ago, which which was highlighted on these pages. Yours truly was the moderator on the panel at UCLA Law School which also featured, in addition to Prof. Johnson, Dean Gordon Smith of Brigham Young University Law School and Prof. Christine Hurt, also of BYU Law School.
Papers from the two-day symposium will be published as chapters in a book that will be edited by Professor Stephen Bainbridge, who organized the symposium. That book will be titled: Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law, S. Bainbridge, ed., Cambridge University Press. An abstract of the paper follows:
With the adoption of Delaware’s general incorporation statute in 1899, and New Jersey’s ill-fated (and short-lived) turn toward a more regulatory approach to corporate law, Delaware triumphed in the corporate chartering business. Delaware’s ascendance in the corporate law market has endured for over a century, notwithstanding state competitors and the looming presence of — and occasional intervention by — the federal government on certain corporate law subjects. Various explanations are provided as to why Delaware continues to dominate, and various assessments have been offered as to whether, overall, Delaware’s corporate law jurisprudence is beneficial or detrimental for investors. These explanations and assessments typically focus on what Delaware has done well over the years to retain its prominence, not on what, deliberately or fortuitously, it has failed to do.
This chapter addresses Delaware’s remarkable silence on a central aspect of corporate governance: the various legal issues associated with executive corporate officers. Unlike the case with corporate directors, where Delaware has resolved a host of issues over many decades, Delaware has yet to provide an answer to certain basic questions pertaining to officers. These include: whether the business judgment rule applies to officers; what the applicable standard of care is for officers; why, if officers are employees and agents of the company and not of shareholders, investors can bring direct actions; the nature and contours of officer disclosure and oversight duties; whether officers may consider noninvestor stakeholders; and whether the Unocal and Revlon standards apply to officers.
This statutory and case law silence, however puzzling and long-running, and whatever its reasons — which are described–has served Delaware well. By not articulating legal rules that some might regard as too lax and others as too severe, but instead saying very little at all, Delaware has allowed the subject of officers to largely be addressed in other ways. These include board of director interactions with officers via ex ante employment agreements and ex post severance arrangements, increased federal regulation and sanctioning of certain officer-related conduct, litigation conducted outside Delaware, but relatively little Delaware litigation that promulgates clear rules. This chapter addresses these various dimensions of Delaware’s sparse law on officers, the reasons for the scarcity, and how silence on such an important subject has contributed, ironically, to Delaware’s historical preeminence. At the same time, Delaware’s eventual resolution of officer-related issues is unlikely to weaken its now long-established hegemony.
Johnson, Lyman, Dominance by Inaction: Delaware’s Long Silence on Corporate Officers (2017). Can Delaware Be Dethroned? Evaluating Delaware’s Dominance of Corporate Law, S. Bainbridge, ed., Cambridge University Press; U of St. Thomas (Minnesota) Legal Studies Research Paper No. 17-09; Washington & Lee Legal Studies Paper Forthcoming. Available at SSRN: https://ssrn.com/abstract=2964033