INTRODUCTION A. History B. Summary of C. Scope of This Article I. CORPORATE GOVERNANCE A. Models of Corporate Governance B. Standards of Conduct C. Standards of Review 1. The Business Judgment Rule 2. Other Standard of Review Issues a. Levels of scrutiny b. Vicinity of insolvency c. Exculpation and section 102(b)(7) D. Evolving Expectations II. GOOD FAITH III. MERGERS: DEAL PROTECTION MEASURES A. Background B. Omnicare C. Contract Rights IV. DERIVATIVE SUITS A. General Clarification of Demand B. The Use of Section 220 Demands C. The Direct/Derivative Dichotomy D. Director Independence V. INDEPENDENCE IN OTHER CONTEXTS VII. DISCLOSURE ISSUES VIII. CORPORATE OPPORTUNITY IX. CONTROLLING STOCKHOLDERS A. The Intersection of Fiduciary Duty and Stockholder Rights B. "Going Private" Transactions X. APPRAISAL AND VALUATION XI. A LOOK INTO THE FUTURE A. Is Delaware Law Changing? B. Federalism v. Federalization C. Best Practices CONCLUSION APPENDIX INTRODUCTION
This Article is a glimpse via the rear-view mirror at some of the corporate law and governance developments, including the corporate jurisprudence of the Delaware Supreme Court, during my twelve-year term as Chief Justice of Delaware, which began in April of 1992 and ended in May of 2004. I call this Article a "glimpse" because this project has turned out to be broader than I originally envisaged.
In fact, my original concept was to write about the Delaware Supreme Court corporate cases during that period. But that idea turned out to be both too large and too small. It was too large in the sense that there were too many subjects covered, even by the relatively small number of Supreme Court cases. It was too small in the sense that many interesting corporate law and corporate governance topics that formed the environment of that period were not part of the Supreme Court's jurisprudence.
In the final analysis, the breadth and depth necessary to do justice to a complete jurisprudential retrospective is not practicable in a single law review article. First, the breadth: the reader will see that some of the important cases are not discussed exhaustively; some not at all. Next, the depth: the depth of analysis required to scrutinize the holding and language of the Supreme Court in each case--and their implications--is simply not practicable in an article.
During this period there were important developments in "Corporate America." The 2001-2002 scandals, typified by Enron and WorldCom, which were not Delaware corporations, came to define what was wrong with corporate governance generally. These events are aberrations and did not define Delaware corporate jurisprudence.
Rather, Delaware corporate jurisprudence is authoritatively framed, in part, by a discrete number of decisions of the Delaware Supreme Court. It is also framed, in part, by a plethora of Delaware Court of Chancery decisions, many of them excellent examples of jurisprudence. If one looks at the entire landscape of the decisions of both courts over the 1992-2004 period, one can tease out themes and trends that have little or nothing to do with the 2001-2002 scandals and the resulting activity at a national level, including the Sarbanes-Oxley Act, (1) SEC rulemaking, and listing requirements of the Self-Regulatory Organizations (SROs), like the New York Stock Exchange (NYSE). To be sure, the federal regulatory landscape is changing, and these changes will play out extensively in the years ahead. Some ripple effects of the federal dimension may influence Delaware jurisprudence going forward. Now, however, we can look at where the law has been and where it is presently. Then we can make some educated guesses about what may happen in the years ahead.
Eight years ago, Delaware celebrated the 100th anniversary of its current Constitution of 1897. That constitution provides two major regimes that are relevant here: it authorized legislation creating a general corporation law, and it revamped the judicial selection process. (2) The judicial selection process, which has been in effect and has remained essentially unchanged since then, provides for twelve-year terms for each Supreme Court justice and trial judge, (3) appointment by the governor (4) (today from a merit-selected list recommended by a bipartisan commission), (5) and confirmation by the state senate. (6) It also provides for a bipartisan judiciary. (7)
The constitutional requirement of a bipartisan judiciary is unique to Delaware. It mandates that in each court individually and in all Delaware constitutional courts collectively there may not be more than a bare majority of one major political party. (8) This system has served well to provide Delaware with an independent and depoliticized-judiciary and has led, in my opinion, to Delaware's international attractiveness as the incorporation domicile of choice.
Shortly after the adoption of the 1897 constitution, the Delaware legislature adopted a general corporation law that generally mirrored New Jersey's. (9) Many large national firms had incorporated in New Jersey, but in the early part of the twentieth century, New Jersey engaged in a strong regulatory and taxation regime affecting corporations. In part as a reaction to that regime, a major migration of corporate charters from New Jersey to Delaware occurred. (10)
There followed eight or nine decades of extensive litigation in Delaware of disputes involving internal corporate affairs. (11) That litigation resulted in the body of Delaware judge-made law that shaped Delaware history and the landscape of corporation law in the United States. The Delaware Court of Chancery and Delaware Supreme Court have established a reputation for their extensive business expertise and swift decision making, have amassed a vast amount of rich case law, and have earned international respect. In 2005, for the fourth year in a row, Delaware was rated first in the nation among judicial systems for efficiency and fairness in civil litigation by a Harris Poll conducted for the United States Chamber of Commerce. (12)
As of February 19, 2004, Delaware had over 615,000 business entities, including about 275,000 domestic corporations. (13) Nearly sixty percent of the Fortune 500 companies and nearly the same proportion of those listed on the New York Stock Exchange are Delaware corporations. (14) In addition, seventy percent of initial public offerings in 2004 on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ were Delaware corporations. (15)
Summary of Themes
Delaware corporate jurisprudence is shaped both by Supreme Court and Chancery Court decisions. In the years from 1992 to 2004, there were only slightly more than eighty Supreme Court decisions in the corporate area, including full opinions and orders. Concepts of corporate governance are shaped not only by these courts' jurisprudence, but also through academic discourse and counseling on best practices.
The Delaware Supreme Court decisions during these twelve years clarified some areas of the corporate law and left others shrouded in ambiguity. Most of the decisions were sound and advanced the law in a meaningful direction. Others are the subject of valid criticism.
Beyond the Supreme Court jurisprudence during this period is the overlay of Chancery decisions and other corporate governance developments. My central focus, after looking back over this twelve-year landscape, is to observe that it was a period of significant development. This period was somewhat like the mid-1980s in that regard. But it was different, because the earlier era was characterized by the hostile takeover phenomenon, culminating in the watershed year of 1985 when four major cases shaped the takeover jurisprudence for years to come. (16)
During my twelve-year term as Chief Justice, the developments were not as sharply focused as the takeover period of the mid-1980s. But if I had to characterize in one sentence my observation of the 1992-2004 period, it would bring to mind Dickens's phrase about "the best of times ... [and] the worst of times." (17) It was a rational period of some clarification and some residual ambiguity in Delaware jurisprudence, in a national atmosphere of tumultuous upheaval and a voluntary quest for best practices by many corporations. As a consequence, some of the subthemes I have observed in reexamining the corporate jurisprudence of this period are as follows:
* Corporate governance, with its emphasis on board structure and process, has emerged as the predominant focus of directors, their counselors, and courts.
* Delaware judges have had a substantial role in shaping best practices in corporate governance.
* Standards of conduct for directors are defined by Delaware statutory law and judge-made articulations of fiduciary duties. The expectations for director conduct evolve over time as business mores evolve, with courts applying the evolving expectations in a common law process in deciding the proper standard of review to apply in specific circumstances.
* The evolution of expectations means the directors themselves, as well as the courts, must focus on genuine processes, not mere rote, "check the box" drills.
* Courts should not second-guess the business decisions of directors, and the Delaware courts have not done so. There has been no change in Delaware law of the time-honored business judgment rule, which remains alive and well.
* The fact that judicial review by Delaware courts of director conduct has resulted in some findings of wrongdoing and liability is primarily a function of intensified judicial focus on process and improved pleading by plaintiffs' lawyers.
* Improved pleading by plaintiffs' lawyers has, in turn, been influenced by court decisions in this period. For example, one significant development has been the Delaware courts' strong suggestions that plaintiffs' lawyers employ a books and records demand before bringing a derivative suit.
* Two examples of...