Recent Decisions Maintain Stability in Delaware Corporate Law

Delaware’s renowned corporation law rests upon a director-centric premise, reflected in Section 141 of the Delaware General Corporation Law (“DGCL”), that the business and affairs of corporations are to be managed by boards of directors. In carrying out this mandate, directors owe fiduciary duties requiring that they act in an informed manner (i.e., the duty of care) and only in the best interests of the corporation and all of its shareholders (i.e., the duty of loyalty). Consistent with the legislative judgment placing directors at the helm of the corporate enterprise, and mindful of the necessary risk-taking inherent in that role, the Delaware courts afford unconflicted, informed, and properly motivated directors wide latitude in carrying out their duties. That deference is reflected in the venerable business judgment rule, under which courts will not second-guess the decisions of independent and disinterested directors acting in good faith and following an appropriate decision-making process.

Seven significant decisions of the Delaware courts over the last eighteen months reaffirm the tenets underlying Delaware’s director primacy model and the policy judgments upon which the business judgment rule rests. In, Retracing Delaware’s Corporate Roots Through Recent Decisions: Corporate Foundations Remain Stable While Judicial Standards Of Review Continue To Evolve, an article recently published in Volume 12 of the Delaware Law Review, Bradley R. Aronstam and David E. Ross explore the following decisions: (i) In re Citigroup Shareholder Derivative Litigation, [1] which involved director business risk oversight allegations and emphasizes the continued viability of the business judgment rule in that setting; (ii) Selectica, Inc. v. Versata, Inc., [2] which applied enhanced scrutiny to a modern shareholder rights plan with a 4.99% threshold and highlights the deference afforded directors who are well informed and advised by sophisticated experts; (iii) Lyondell Chemical Co. v. Ryan, [3] which revisited the Revlon doctrine and raises the bar for plaintiffs seeking to establish that unconflicted directors failed to maximize shareholder value in the sale of corporate control context; (iv) In re John Q. Hammons Hotels Inc. Shareholder Litigation, [4] which addressed the applicability of entire fairness review to transactions involving controlling shareholders not standing on both sides of the underlying transaction, as well as the effect that special committees and majority-of-the-minority conditions should have on the governing standards for assessing such transactions; (v) In re CNX Gas Corporation Shareholders Litigation, [5] which involved the Court of Chancery’s departure from the traditional deferential review accorded two-step “Siliconix” freeze-out transactions by a controlling shareholder in favor of a “uniform standard” similar to the one employed in Hammons; (vi) Berger v. Pubco Corporation, [6] which explores the appropriate parameters of the quasi-appraisal remedy arising from a controlling shareholder’s breach of its disclosure obligations in connection with a short-form merger; and (vii) Maric Capital Master Fund Ltd. v. PLATO Learning, Inc., [7] which examines the importance of full disclosure in conventional long-form mergers and the risk to corporate transactions absent such disclosure.

Retracing Delaware’s Corporate Roots suggests that these decisions underscore Delaware’s commitment to the director-primacy model and concludes that to the extent that the Delaware courts have scrutinized the actions undertaken (or, in the case of Citigroup, forgone) by directors, their decisions reflect the judiciary’s sensitivity to circumstances that call into question the foundations of the business judgment rule. In this sense, the decisions embody the highly contextual approach undertaken by the Delaware courts. In sum, while boards of directors and their counsel must continue to pay careful attention to all attendant facts, they may take comfort in the continuing stability of Delaware’s preeminent corporate law.

The full article can be found here.

Endnotes

[1] 964 A.2d 106 (Del. Ch. 2009).
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[2] 2010 WL 703062 (Del. Ch. Feb. 26, 2010).
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[3] 970 A.2d 235 (Del. 2009).
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[4] 2009 WL 3165613 (Del. Ch. Oct. 2, 2009).
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[5] 2010 WL 2291842 (Del. Ch. May 25, 2010).
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[6] 976 A.2d 132 (Del. 2009).
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[7] 2010 WL 1931084 (Del. Ch. May 13, 2010).
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