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E-MailDavid A. Skeel, Jr. is S. Samuel Arsht Professor of Corporate Law at University of Pennsylvania Law School. This post is based on his recent article, and is part of the Delaware law series; links to other posts in the series are available here.
In less than a decade, Delaware’s legislature has overruled its courts and reshaped Delaware corporate law twice, with proxy access bylaws in 2009 and with shareholder litigation bylaws in 2015. Not since 1986, when Delaware lawmakers overruled Smith v. Van Gorkom by authorizing charter provisions protecting directors from duty of care liability, had Delaware’s legislature overruled its courts in such dramatic fashion. Yet the Delaware legislature has now stepped in twice, and it has done so in a particularly puzzling way: with proxy access, Delaware’s legislature authorized the use of bylaws or charter provisions that Delaware’s courts had banned; while with shareholder litigation, it banned bylaws or charter provisions that the courts had authorized.
What in the world is going on?
To answer this question, we need to consider two issues that have received very little attention from corporate law practitioners or scholars, the limits of the credibility of Delaware judges, and the factors that might induce Delaware lawmakers to wrest control of Delaware corporate law away from the judges. The absence of attention is quite understandable. After all, the sophistication and expertise of the Delaware judiciary is one of the few things Delaware enthusiasts and critics agree about. There has been little reason to speculate about the possibility the judges’ credibility might be in doubt. And the Delaware legislature and judiciary are very closely intertwined, with the judiciary typically taking the lead. But the legislature’s 2009 and 2015 interventions put both issues squarely on the table.
The common theme in the proxy access and shareholder litigation controversies is that each involved the permissible scope of a corporate bylaw. The first bylaw controversy came as the Securities and Exchange Commission wrestled with the question whether corporations should be required to include shareholder nominees for director in the firm’s own proxy materials. In the midst of that debate, shareholders of a Delaware corporation proposed a bylaw that would have required the corporation to reimburse the proxy expenses of shareholders whose directorial candidates were elected. The second controversy emerged from the recent pattern of multi-forum litigation, in which shareholder actions are filed in multiple locations. Prompted by dicta in a Delaware chancery court decision, [1] Delaware corporations started adopting exclusive forum provisions requiring that the litigation be brought in a particular forum (usually Delaware), and in some cases “loser pays” bylaws that purported to require unsuccessful plaintiffs to reimburse the defendants’ attorneys’ fees. As I have already noted, the Delaware courts struck down the first set of bylaws—proxy access [2]—but upheld the second—shareholder litigation. [3] The Delaware legislature then overruled its courts each time. The legislature first permitted bylaws that its courts had banned, and then banned bylaws its courts had permitted.
In this article, I attempt to unravel the mystery of these puzzling developments. A variety of factors seem to have played a role, including Delaware’s concern about federal intrusion in corporate law and the fact that shareholders proposed proxy access bylaws whereas shareholder litigation provisions came from directors. To fully unravel the bylaw puzzle, however, it is essential to recognize the potential threat posed by these developments to Delaware judges’ credibility, and to consider the relationship between Delaware’s judges and its legislature. Because the success of Delaware corporate law depends on the state’s ability to attract litigation to Delaware, Delaware’s judges would have faced a perceived conflict of interest if they continued to decide cases involving the permissible scope of forum selection clauses. Although being overruled by the legislature might seem to raise questions about the credibility of the judiciary, in this context it appears to have had the opposite effect, protecting the courts’ reputation.
Part I of the article describes in more detail the two sets of bylaws and the response to each by the Delaware courts and lawmakers. Part II considers a doctrinal account of the courts’ and legislature’s actions. Although the doctrinal analysis is more helpful than one might initially expect, it only partially explains the divergent responses of Delaware’s courts and legislature. This suggests that additional imperatives may have played a role. Parts III and IV incorporate judicial credibility into a public choice explanation of the imperatives, such as Delaware’s interest in minimizing federal intrusion in state corporate law, which may have influenced the Delaware legislature. Part V introduces and offers initial thoughts on the question of when Delaware’s legislature is likely to redirect the course of Delaware corporate law, as it did with both sets of bylaws.
The full article is available for download here.
Endnotes
1In re Revlon, Inc. S’holders Litigation, 990 A.2d 940, 960 (Del. Ch. 2010).(go back)
2See CA, Inc. v. AFSCME Emps. Pension Plan, 953 A.2d 227, 229 (Del. 2008) (finding that a proxy access bylaw was invalid).(go back)
3See ATP Tours, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014) (finding that a loser pays bylaw was permissible).(go back)
