Chancellor Allen and the Fundamental Question

• Publication year: 1997
• Citation: Vol. 21 No. 02

SEATTLE UNIVERSITY LAW REVIEWVolume 21, No. 3WINTER 1998

Chancellor Allen and the Fundamental Question

D. Gordon Smith(fn*)

Introduction

There is little doubt about the extent of Chancellor Allen's judicial reputation, both among legal scholars and practicing attorneys. Toward the end of Chancellor Allen's judicial career, Professor Michael Dooley offered the following assessment: "He is widely regarded by the bar and academics as the leading judicial expert on corporate and business law cases."(fn1) Professor James Cox, who claims that he often disagrees with Chancellor Allen, was more effusive: "He's really an extraordinary judge. He brings the acuity of years of practice as well as a very outstanding academic bent-which is something characteristic of the very best judges in American jurisprudence."(fn2) Practitioners Dennis Block, Stephen Radin, and Michael Maimone gave the following tribute: "Many lawyers, academics, and jurists have 'struggle[d] to fashion answers' to the myriad of business judgment rule questions raised during the 'deal decade' of the 1980s and the new issues that have arisen in the 1990s, but none has surpassed the intellectual ability and skill consistently demonstrated by Chancellor William T. Allen. . . ."(fn3) Commentators engage in occasional sniping against particular Allen decisions,(fn4) but the general estimation of his abilities is overwhelmingly positive.(fn5)

Although judicial reputations are inevitably contingent,(fn6) there is a wide gulf between "celebrity" and greatness. Judge Ito is a celebrity; Chancellor Allen was a great judge. But Chancellor Allen's substantial reputation is anomalous. Large judicial reputations are usually made by Supreme Court justices or an occasional federal appellate court judge, like Learned Hand or Henry Friendly. After all, these judges are in a position to craft enduring change.(fn7) As Margaret Sachs notes, "Transient changes-such as those quickly trumped by Congress or the Supreme Court-are apt soon to be forgotten, along with the judges who brought them about. Enduring changes-and the judges who brought them about-are likely to be remembered."(fn8) Unlike most renowned judges, Chancellor Allen was a state trial court judge!

Of course, the Delaware Court of Chancery is not a typical state trial court. Stephen Massey noted that Chancellor Allen's reputation is partially attributable to the fact that "he has presided over the Delaware Court of Chancery, the nation's central forum for shaping American corporate law, during a period of intense corporate activity."(fn9) Especially during the late 1980s and early 1990s, when Chancellor Allen was deciding cases, the Delaware Court of Chancery was the center of the corporate law universe. Allen was Chancellor and could assign the most important cases to himself.(fn10) Lynn Stout has likened the position of Chancellor to the position of Chief Justice of the United States Supreme Court.(fn11)

Business developments during the 1980s required guidance from the nation's guardians of corporate law-the Delaware judiciary-and Chancellor Allen was there to provide it. Richard Posner has observed, "Given two . . . judges . . . of equal quality, one may be more influential than another simply because he is working at a time . . . [when] standards . . . are more fluid than at other times. . . ."(fn12) This insight actually increases the puzzle of Chancellor Allen's reputation, because he was not a great innovator.(fn13) Few of his cases appear in law school casebooks,(fn14) and some his most-cited opinions were in cases where the Delaware Supreme Court had the last word.(fn15) Chancellor Allen's conservative inclinations might have dampened his chances for judicial fame because, as Margaret Sachs argues: "In general, activist judges have greater opportunities for renown than do judges who curtail past excesses. The activist receives credit for the doctrines she creates, whereas the curtailer at most shares credit with the authors of the doctrines he pares back."(fn16)

So why is Chancellor Allen considered to have been a great judge? Any effort to explain judicial reputation inevitably treads on soggy ground. Attempts to quantify judicial reputation are often silly,(fn17) and comparisons among judges are usually biased by personal or political motivations.(fn18) Even if everyone agreed with Stephen Massey that "Allen's significance is more than a question of a judge who was in the right place at the right time,"(fn19) the task of explaining that significance would remain.

In this Article, I attempt to explain Chancellor Allen's expansive reputation by examining his ability to speak to what philosopher John Danley calls "the fundamental question": "What is the appropriate role of the modern corporation in a free society?"(fn20) From the chartering of the first corporations in the United States to the present day, debate over the fundamental question has been rancorous. On one side of the debate stand those who believe that society is best served when corporations strive to maximize profits for the benefit of shareholders; on the other side stand those who believe that corporations should have some more explicit public purpose.

Chancellor Allen's approach to the fundamental question-and his most important legacy to corporate law-was to embrace traditional corporate norms, not to create new norms, during an era of great upheaval and innovation in business practices. According to Chancellor Allen, determining the appropriate role of the modern corporation in a free society requires judicial intervention only on rare occasions. In most instances, directors and shareholders, operating within the constraints imposed by corporations statutes and other regulations (e.g., environmental law, labor and employment laws, antitrust laws, etc.), are best left alone.

But does this qualify Chancellor Allen as a great judge? Certainly his skill at explaining the application of traditional norms to new situations marks him as a judicial craftsman of high intellect. Nevertheless, I believe that his courage in facing down a Supreme Court intent of creating its own legacy(fn21)-all the while under strict public scrutiny(fn22)-is a mark of greatness. Admittedly, his approach was somewhat unoriginal (relying, as it did, on traditional standards), and it might be argued that it evaded the fundamental question because it was essentially procedural, not substantive. But Chancellor Allen understood that process often determines substance; the person who makes decisions often determines what the decisions will be. He also understood that society has a huge stake in the resolution of the fundamental question. In the words of Ron Gilson, "[a]s a matter of corporate law, the challenge was to apportion decision responsibilities among directors, shareholders, and courts. As a matter of social policy, the outcome would determine who governed the largest and most powerful private institutions in our society."(fn23)

Nowhere in corporate law is the fundamental question more conspicuous or more relevant than in takeover cases implicating the shareholder primacy norm.(fn24) When a board of directors has elected to sell control of a corporation, Delaware courts evaluate the behavior of the directors pursuant to standards announced in Revlon, Inc. v. MacAndrews and Forbes Holdings, Inc. (Revlon).(fn25) When it applies, Revlon requires the directors to obtain "the highest price for the benefit of the stockholders."(fn26)

Chancellor Allen began his judicial tenure shortly before the Delaware Supreme Court decided Revlon, and Allen's first opinion citing Revlon appeared less than one month after the Delaware Supreme Court's opinion was issued.(fn27) Allen's final Revlon opinion was written shortly before he left the bench.(fn28) In the 11 years between his first and last opinions dealing with Revlon, Chancellor Allen had both the opportunity and the inclination to speak often and forcefully on the fundamental question.(fn29)

The following sections analyze Allen's decisions involving Revlon duties and reveal his role in shaping those duties. Part one briefly describes the major cases decided by the Delaware Supreme Court defining the contours of "Revlon duties." Part two describes Chancellor Allen's Revlon jurisprudence. Finally, Part three concludes with my view of Chancellor Allen's legacy to corporate law. I argue that Chancellor Allen successfully defended the traditional allocation of power over corporate decisionmaking among directors, shareholders, and courts by artfully and insistently rebuffing attempts of the Delaware Supreme Court to expand the role of the courts into areas where they have no useful role. In so doing, Chancellor Allen helped to ensure that the appropriate role of the modern corporation in a free society would be decided by individual actors in that society rather than by judicial fiat.

Revlon and its Progeny in the Delaware Supreme court

Revlon was decided by the Delaware Supreme Court in 1985,(fn30) along with some of the most enduring cases in the history of Delaware corporate law. Perhaps the most significant case decided that year was Unocal Corp. v. Mesa Petroleum Co. (Unocal),(fn31) in which the court held that directors have an "enhanced duty" when they take defensive action to thwart a takeover.(fn32) It is a misnomer to suggest that the duties of...