Did Delaware Really Kill Corporate Law? Shareholder Protection in a Post-Corwin World

Matteo Gatti is Professor of Law at Rutgers Law School. This post is based on his recent article published in the NYU Journal of Law and Business, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here) and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

Corwin v. KKR is considered one of the most important corporate law decisions of this century. Corwin shields directors from the enhanced scrutiny of Revlon in favor of the business judgment rule whenever a transaction “is approved by a fully informed, uncoerced vote of the disinterested stockholders.” Commentators see Corwin as the poster child of an increasingly more restrained approach by Delaware courts—something labeled with expressions such as “Delaware’s retreat,” “the fall of Delaware standards,” and even “the death of corporate law.”

Supporters of the decision applaud the shift from courts to markets in determining whether directors satisfactorily performed in the sale of the company. In an age of enhanced investor sophistication due to the growing size of institutional ownership, the argument goes, the judiciary has ceded the role of optimal decision maker to shareholders. However, the mainstream view among scholars is that Corwin is a setback in shareholder protection. To some, directors’ legal obligations are now limited to full disclosure. Others think that enhanced scrutiny is no longer available and the sole constraint directors face is the shareholder vote. In the views of critics of Corwin, the structure, nature, and quality of the substitute (vote vs. judicial review) are not compelling.

In a recent article, Did Delaware Really Kill Corporate Law? Shareholder Protection in a Post-Corwin World, I rebut the idea that shareholders are ultimately left unprotected after Corwin; I look into two main areas: litigation and dealmaking.

Whatever Happened to M&A Litigation?

As to whether shareholders can still rely on fiduciary duty litigation, the bulk of the analysis surrounds the preconditions to Corwin: full information, lack of coercion, and disinterest.

After Corwin, attacking the merger disclosures has been the field the plaintiff industry has relied on the most. Case law attests that judges have definitively been responsive. This is not surprising: cases revolving around informational flaws are easier to adjudicate because judges do not need to second-guess director conduct or the substance of the transaction. While it is hard to predict where the lack of coercion requirement is going to take plaintiffs (thus far, judges have found coercion in somewhat easy cases with extreme facts), coercion can be used to curb some of the procedural flaws that judges were policing under the general Revlon standard. Finally, the cleansing effect under Corwin requires that shareholder approval come from “disinterested stockholders.” Currently, there is no agreement among commentators on whether disinterest is really a precondition to Corwin—case law has considered the absence of a controlling shareholder sufficient to satisfy it. But the article argues disinterest should be considered a crucial element for the Corwin cleansing effect to have a rational justification. If the outcome of the merger vote is swung by the pivotal vote of some potentially interested stockholder (the buyer itself or the directors and officers are the obvious cases, but the list is much longer and includes cross-holders, merger arbitrageurs, and institutions), the merger vote cannot be deemed a proxy for aggregating the genuine preferences of, to use Chief Justice Strine’s words, the “real parties in interest.”

Of course, the preconditions to Corwin do not technically exhaust all litigation avenues: even after C & J Energy, plaintiffs can still rely on injunctions—whether that is a feasible strategy will depend on whether a rival bid arises, in the absence of which judges have shown significant restraint in providing such protection.

Are Deal Planners Behaving?

The article then wonders whether dealmaking has significantly changed after the seeming endorsement of a laissez-faire approach by Delaware judges. For instance, a board could embrace a relaxed attitude toward target termination fees and keep expanding the “lock-up creep.” Boards could decide to do away with market checks, without resorting to go-shops. They could make matching rights even more ubiquitous and first-bidder friendly. Should we expect any of these deviations from pre-Corwin best practices to become more common?

To begin, we need to be mindful that Revlon is by no means a precise standard. In fact, the doctrine has never required directors to fulfill anything specific; certainly not after Barkan and its “no single blueprint” refrain. Revlon does not require directors to auction off the company, it does not require selecting the highest bid irrespective of other factors, and it does not require eliminating or significantly curbing certain deal protection devices like termination fees, asset lock-ups, or matching rights. Revlon’s lack of precision is hardly surprising: it certainly is consistent with all other major lines of cases in Delaware corporate law. So, it would be quite a stretch to think that Corwin has brought a more precise, yet narrower set of commands that sharply depart from the vague, yet potentially demanding, commands permeating Revlon prior to Corwin. In a way, Corwin can be seen as an evolution of the vagueness of Revlon.

In fact, for the time being Corwin has not resulted in a worsening of sale processes. The article reports of a companion paper written together with Martin Gelter, in which we look at all domestic public deals in the 2010–2018 period for a contestable target with an equity value of at least $100 million. According to our study, the normal indicators of bad process have not worsened in the aftermath of C & J Energy and Corwin. For instance, target termination fees have not increased, deals without a pre-signing market check have not proliferated, nor have deals without both a pre-signing market check and a go shop. Our results are consistent with other recent studies that, with different methodology, have concluded that the two decisions have not had a significant impact on Revlon transactions.

Analysis

There are some possible explanations for the lack of discernable changes in dealmaking patterns. One is that Revlon was already no longer stringent in the early 2010s. Another reason may well be that the preconditions to Corwin still give judges latitude to intervene whenever a poorly run process emerges from the underlying facts, and deal attorneys are particularly sensitive to that. Consider that, even though C & J Energy seems to have shut down preliminary injunctions, such remedies could still play a role, for the very reason that no deal planner can anticipate with absolute certainty if the underlying transaction will be a one-bidder deal or become a two-bidder deal. If the latter turns out to be the case, all bets are off. (Indeed, C & J Energy was notably deferential to director conduct because no rival bid arose.) Therefore, the behavior of corporate actors is still likely to be informed by the risk of judicial intervention, which according to the analysis in the article, might occur in the following circumstances: (i) two-bidder deals in which the playing field turns out to be unleveled; (ii) extreme one-bidder deal cases in which the violation of Revlon is apparent prima facie and an injunction is in order; or (iii) less extreme (or less apparent) one-bidder deal cases that do not lead to an injunction, yet are permeated by “bad facts,” which are sufficient to convince a judge that the preconditions to Corwin are not satisfied.

All in all, the new law made by Corwin is not much less protective than the old one in detecting one-bidder deals that are the product of abusive conduct by the selling board. The new law polices two macro scenarios: board dishonesty, by imposing a full disclosure requirement; and insincere decisions by shareholders, via the coercion and disinterest requirements. However, because there are significant deterrents at work, such as rival bids, risk averse deal attorneys, and the looming threat of being censored by the Delaware judiciary, transaction planners are constrained in ways similar to pre-Corwin law.

The full article is available here.

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