Delaware’s Prudent Approach to the Cleansing Effect of Stockholder Approval

William Savitt is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Mr. Savitt, Ryan A. McLeod, and Anitha Reddy, and is part of the Delaware law series; links to other posts in the series are available here.

In Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), the Delaware Supreme Court held that a non-controlling stockholder transaction approved by informed, unaffiliated stockholders is protected by the business judgement rule and that any lawsuit challenging such a transaction should be dismissed absent well-pleaded allegations of corporate waste. Recognizing that today’s sophisticated stockholder body can and does protect its own interests, Corwin held that in the great run of cases, stockholders—rather than plaintiffs’ lawyers or courts—should have the last word.

In the two years since, the Delaware courts have clarified that the rule of Corwin applies to transactions completed by tender offer and generally requires dismissal of claims even where a plaintiff alleges that a majority of the board of directors is conflicted with respect to the challenged transaction. These decisions build on Corwin’s essential insight that judges should generally defer to the views of informed stockholders who control a corporation’s destiny at the ballot box.

Class action lawyers have complained that the Corwin doctrine sweeps too broadly and risks eliminating breach-of-fiduciary-duty litigation. This criticism has never been true. Corwin does not apply to self-dealing transactions involving controlling stockholders or to transactions where stockholder approval was either coerced or inadequately informed. To the contrary, the commonsense governance proposition underlying the rule is that where public stockholders control a company and have freely spoken, the substantial cost, burden, and uncertainty of lawyer-driven breach-of-fiduciary-duty litigation is unwarranted.

Confirming the tailored scope of Corwin, the Court of Chancery recently rejected a defendant’s attempt to deny stockholder inspection rights on the basis of a fully-informed vote. Lavin v. West Corp., C.A. No. 2017-0547-JRS (Del. Ch. Dec. 29, 2017). The court prudently held that while stockholder approval of a merger may eliminate plenary review of the merger itself, such approval does not affect statutory books-and-records inspection rights, which, like all other stockholder rights, remain unimpaired. The simple but crucial point of Corwin remains that the informed judgment of stockholders who control the corporate vote is entitled to deference from lawyers and courts.

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