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Program on Corporate Governance Advisory Board
- William Ackman
- Peter Atkins
- David Bell
- Kerry E. Berchem
- Richard Brand
- Daniel Burch
- Paul Choi
- Jesse Cohn
- Creighton Condon
- Arthur B. Crozier
- Renata J. Ferrari
- John Finley
- Carolyn Frantz
- Bruce H. Goldfarb
- Joseph Hall
- Jason M. Halper
- Paul Hilal
- Carl Icahn
- David Millstone
- Theodore Mirvis
- Maria Moats
- Erika Moore
- Carey Oven
- Morton Pierce
- Philip Richter
- Paul K. Rowe
- Marc Trevino
- Steven J. Williams
- Daniel Wolf
HLS Faculty & Senior Fellows
The Delaware Law Series
Rodman Ward, Jr.
Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School. Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware.
On March 18, 2023, the corporate law and corporate governance communities lost a special person special. Rodman Ward, Jr. graduated from Harvard Law School in 1959. He was a distinguished partner in the Wilmington law firm of Prickett, Ward, Burt & Sanders for many years, during which he was one of Delaware’s leading corporate litigators and commercial lawyers.
During the 1970’s, Rod became the go-to Delaware litigator for a rising firm named Skadden, Arps, Slate, Meagher & Flom, and Joe Flom asked Rod to leave his successful practice and head the first office of Skadden outside of New York, which Rod did for many years.
During this formative period of Delaware takeover law, Rod and the Skadden Wilmington office were at the center of many of the era’s key takeover cases. Among other matters, Rod argued and won the iconic case of Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261 (1988). To Rod’s delight, his convincing advocacy in that case led his adversary to mutter Henry II’s lament, “will no one rid me of this meddlesome priest.”
To Exculpate, or Not to Exculpate: Is It Even a Question?
Ethan Klingsberg and Pamela Marcogliese are Partners, and Elizabeth Bieber is Counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Ms. Marcogliese, Ms. Bieber and George Ter-Gevondian 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 Monetary Liability for Breach of Duty of Care? (discussed on the Forum here) by Holger Spamann.
Toward the end of last summer, the Delaware General Corporation Law (DGCL) was amended to permit companies to exculpate officers for breaches of their duty of care. This amendment permits officers to benefit from Section 102(b)(7) of the DGCL, in most instances, in the same way that this valuable section has long insulated directors from liability for actions taken in good faith. However, the catch is that this new right of officers to exculpation will take effect if, and only if, the charter of the company in question provides explicitly for this right. This means a charter amendment and, therefore, a shareholder vote will be required.
Approximately six months following the amendment of Section 102(b)(7), we have not changed our view: we believe the benefits of exculpation are significant and, at most companies, worth the costs of pursuing shareholder approval of a charter amendment. The market data from companies with off-cycle meetings within the last six months supports this view.
As a practical matter, extending exculpation to officers has the potential to reduce both the volume and scope of lawsuits alleging breaches of fiduciary duties by officers. This, in turn, reduces the indemnification burden on companies since such lawsuits are now more likely to be resolved earlier in the progression of the lawsuit (on a motion to dismiss, for example) or at lower cost of settlement. As a result, companies may see reduced D&O insurance premiums. Companies may also experience less quantifiable benefits, such as avoiding or truncating negative press cycles attendant to such lawsuits. However, companies should be aware that extending exculpation to officers will not insulate these officers from derivative lawsuits (i.e., a lawsuit by the board, on behalf of the corporation) against officers.
The Venture Corporation
Gad Weiss is a J.S.D. Candidate at Columbia Law School. This post is based on his recent paper.
Technological innovation is a powerful driving force for human advancement and welfare. Modern societies celebrate the numerous ways that innovative feats have contributed to the quality of life, from curing diseases to tackling global environmental challenges. Startups play an indispensable role in promoting innovation. The collaboration between entrepreneurs and venture capitalists (“VCs”) has been observed to incentivize disruptive research and development in a way that cannot be replicated within established firms, in academia, or elsewhere. In some nations, startups are also significant contributors to the economy. The United States is a striking example. Firms that launched as venture-backed startups dominate US capital markets in terms of market capitalization and proportional weight of leading market indexes, and significantly contribute to US job creation. Many economies strive to create a US-like startup ecosystem and reproduce its success locally.
Who Are Quality Shareholders and Why You Should Care
Lawrence A. Cunningham is Special Counsel at Mayer Brown LLP, Principal of the Quality Shareholders Group and Henry St. George Tucker III Professor Emeritus at George Washington University. The following post is based on Professor Cunningham’s address delivered as the 37th Annual Francis G. Pileggi Distinguished Lecture in Law at Delaware Law School on February 10, 2023. This post is part of the Delaware law series; links to other posts in the series are available here.
The stated purpose of the Pileggi Lecture is to create an opportunity for those “distinguished” in corporate law and governance to address those “most responsible for shaping it:” the Delaware bench and bar. The message I’d like to share is: you are doing an excellent job, and please keep it up. A few takeaways upfront:
- I concur with the widely held view that Delaware’s corporate law is a national treasure
- evidence shows that Delaware’s “made-to-measure” approach to corporate governance is supported by America’s most patient and focused investors—called “quality shareholders”
- there’s reason for great skepticism about the trend toward “one-size-fits-all” governance favored by America’s indexing investor community and to resist efforts by certain shareholders to rule corporate boardrooms.
In this lecture, after summarizing the “Delaware way,” I present my research on shareholder typologies, then canvas core topics in corporate governance today along with current debates about corporate purpose. The review shows not only the soundness of the Delaware approach but Delaware’s critical role in maintaining the boundaries to protect it.
Boardwalk Pipeline v. Bandera
Gail Weinstein is Senior Counsel, Steven J. Steinman and Brian T. Mangino are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Steven Epstein, Randi Lally and Mark H. Lucas, 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 Independent Directors and Controlling Shareholders (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani.
In Boardwalk Pipeline Partners, LP v. Bandera Master Fund LP (Dec. 19, 2022), the Delaware Supreme Court reversed a Court of Chancery decision (Nov. 12, 2021) that had ordered the general partner of Boardwalk (a master limited partnership) to pay the former public unitholders almost $700 million in damages in connection with the general partner’s $1.56 billion take-private of Boardwalk.
Notably, the Supreme Court did not overturn the Court of Chancery’s factual findings that the General Partner and its affiliates had (i) opportunistically timed the take-private to occur during a temporary period of regulatory uncertainty and declining prices for Boardwalk’s units, and (ii) manipulatively pressured their law firm to deliver a “contrived,” “sham” opinion to satisfy the sole condition to the general partner’s exercise of its call right to acquire the public units. Nonetheless, the Supreme Court overturned the Court of Chancery’s legal holding that the general partner was liable for willful misconduct.
Instead, the Supreme Court viewed the general partner as simply having made “full use” of the broad “flexibility” a controller is permitted under Delaware law when its fiduciary duties have been contractually eliminated and the absence of those duties has been fully disclosed to investors. “The Partnership Agreement allowed Boardwalk to exercise the call right to its advantage—and to the disadvantage of the minority unitholders—free from fiduciary duties,” the Supreme Court wrote. The Supreme Court also held that the opinion of counsel the general partner obtained satisfied the contractual condition to exercise of the call right. The Supreme Court stated that the “proper focus” for the court was not on the validity of the legal opinion but on whether the general partner had acted reasonably in relying on it. The general partner had acted reasonably in relying on it, the Supreme Court concluded, based on its having obtained and relied on a second opinion from another law firm—which was not challenged—that opined that it would be within the general partner’s reasonable judgment to decide to rely on the first opinion. As the partnership agreement provided a conclusive presumption of good faith for the general partner when relying on advice of counsel, the general partner was presumed not to have engaged in willful misconduct and was entitled to exculpation from damages.
Abandoned and Split But Never Reversed: Borak and Federal Court Derivative Litigation
Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School and Mohsen Manesh is Professor at University of Oregon School of Law. This post is based on their recent paper.
J.I. Case Company v. Borak is perhaps unique in contemporary Supreme Court jurisprudence. Although the Court has “abandoned” the 1964 precedent, Borak has never been formally reversed, and it continues to generate circuit splits, most recently concerning the enforceability of a forum selection provision.
Borak held that shareholders enjoy a private right of action under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 14(a), as implemented by Rule 14a-9, broadly prohibits any material misrepresentation or omission in connection with the solicitation of proxy votes from public company shareholders. However, neither the statutory provision nor its implementing rule expressly empowers shareholders to enforce the ban on false or misleading proxy solicitations. Nonetheless, Borak held a private right of action is implied.
Suffice it to say that Borak has not gracefully aged. In the six decades since, the Court has repeatedly distanced itself from Borak, even making it clear that the case would be decided differently today. Still, while chipping away at its doctrinal foundations, the Court has never had the occasion to expressly overrule the beleaguered precedent.
Surprisingly then, despite its “derelict” status, the Seventh Circuit Court of Appeals recently relied on Borak in ruling that a corporation may not cutback against wasteful, frequently meritless shareholder litigation through a forum selection provision in its governing documents, specifically one that requires all derivative lawsuits to be brought in the state courts where the corporation is chartered. In Seafarers Pension Plan v. Bradway, a divided Seventh Circuit panel reasoned that because federal courts enjoy exclusive jurisdiction over all Exchange Act claims, limiting derivative lawsuits to state court would effectively bar shareholders from bringing a Borak claim in a derivative action. Consequently, the divided panel held, over the dissent of Judge Easterbrook, that the enforcement of a corporate forum provision to preclude derivative Borak claims would violate shareholders’ rights under the Exchange Act and the underlying state corporate law authorizing forum provisions.
Lessons from the Chancery Court Decision in P3 Health Group
Gail Weinstein is Senior Counsel, Steven J. Steinman and Brian T. Mangino are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Andrew J. Colosimo, Randi Lally, and Erica Jaffe 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? (discussed on the Forum here) by John C. Coates, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernán Restrepo and Guhan Subramanian.
In P3 Health Group, private equity firm Hudson Vegas Investments SVP LLC, which was the second-largest unitholder of P3 Health Group Holdings, LLC (the “Company”), challenged the Company’s de-SPAC merger. The Company’s sponsor, private equity firm Chicago Pacific Founders Fund, L.P., controlled the Company (a Delaware LLC) by virtue of its majority equity ownership, board designees, and contractual rights. Hudson claimed that the merger, which stripped it of $100 million of stock options and its contractual rights with respect to the Company and was effected over its objection, violated its contractual veto right over affiliated transactions.
The Delaware Court of Chancery recently issued five important decisions in the case (dated November 3, October 31, October 28, October 26, and September 12, 2022), rejecting dismissal of most of Hudson’s claims.
Background. Chicago Pacific provided the start-up capital for the Company and soon thereafter, Hudson invested $50 million in the Company. Soon thereafter, a de-SPAC merger was structured with Foresight Acquisition Corp. (a SPAC formed by an unaffiliated businessperson), which contemplated a three-way merger that included another Chicago Pacific portfolio company (known as “MyCare”). Hudson objected to the transaction. Chicago Pacific and the Company then restructured it to exclude MyCare (but allegedly contemplated including MyCare later in a follow-on transaction). Hudson unsuccessfully sued to enjoin the merger. Following the closing, Hudson asserted claims against Chicago Pacific and certain of its and the Company’s key managers and officers for their roles in arranging the merger. Hudson also added a claim that its initial investment in the Company was fraudulently induced. In a series of recent pleading-stage decisions, Vice Chancellor Laster rejected dismissal of most of the plaintiff’s claims.
Chancery Court Addresses Board Responsibility Under Caremark for Cybersecurity Risk
Gail Weinstein is Senior Counsel, and Philip Richter and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Brian T. Mangino, Erica Jaffe, and Shant P. Manoukian. This post 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 Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.
In Construction Industry Laborers Pension Fund v. Bingle (Sept. 6, 2022) (SolarWinds), the Delaware Court of Chancery dismissed a derivative suit asserting Caremark claims against the directors of SolarWinds Corporation for their alleged failure to oversee the company’s cybersecurity risk. SolarWinds, which developed software for businesses to help them manage their information technology infrastructure, was attacked by cyber hackers, resulting in the massive leaking of its customers’ personal information. When the attack (known as “Sunburst”) was disclosed, SolarWinds’ stock price dropped by 40%. Stockholders brought suit and argued that demand on the board to bring the suit was futile as a majority of the directors faced a likelihood of personal liability under Caremark for breach of the duty of loyalty in having failed to oversee the company’s cybersecurity risk. The case was dismissed at the pleading stage.
Fair Value as Process: A Retrospective Reconsideration of Delaware Appraisal
William W. Bratton is Nicholas F. Gallicchio Professor of Law Emeritus at the University of Pennsylvania Carey Law School. This post is based on his recent paper. This post 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.
Section 262(h) of Delaware’s General Corporation Law (DCL) bids the Chancery Court in an appraisal proceeding to “determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger.” It provides no further instructions regarding the means to the end, other than an admonition to “take into account all relevant factors.” For additional guidance on the meaning of fair value, we must consult a caselaw that stretches back in time almost a century.
There have been two intervals of disruption in this history—disruptions incident to unexpected revisions of the methodology of fair value ascertainment by the Delaware Supreme Court. The first was the 1983 decision of Weinberger v. UOP, 457 A.2d 701 (Del. 1983), which withdrew a longstanding and constraining valuation mandate and much expanded appraisal’s menu of acceptable methodologies, inviting reference to state-of-the-art valuation technologies. The intent and result were to facilitate liberality in the treatment of appraisal petitioners. The second disruptive intervention occurred more recently, with the decision of three cases–DFC Global Corporation v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017), Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), and Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (2019). This trio of cases brings back mandatory methodology, imposing the merger price as the basis for fair value ascertainment in appraisals arising from a high-profile subset of arm’s length mergers. The rulings substantially modify Weinberger without overruling it, lurching away from liberality of treatment. Controversy and confusion have resulted.
The Corporate Contract and Shareholder Arbitration
Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School and Mohsen Manesh is Professor at University of Oregon School of Law. This post is based on their recent paper. This post is part of the Delaware law series; links to other posts in the series are available here.
Longstanding decisions of the U.S. Supreme Court coupled with more recent developments in the corporate law of Delaware have sparked renewed concerns that publicly traded corporations may adopt arbitration provisions precluding shareholder lawsuits, particularly securities fraud class actions. In particular, in a line of decisions spanning decades, the U.S. Supreme Court has steadily expanded the reach of the Federal Arbitration Act (“FAA”). Section 2 of that statute mandates
“[a] written provision in any … contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable…..”
Applying the FAA, the Court has upheld contractual agreements compelling arbitration of claims made under both the Securities Act of 1933 and the Securities Exchange Act of 1934. Indeed, the Court has gone further, ruling that an agreement to arbitrate is enforceable even when made as part of an unnegotiated contract of adhesion, even if pursuing claims through individualized, bilateral arbitration (rather than in a class proceeding) would make it uneconomical to vindicate those claims, and even if applicable state law would otherwise hold the agreement to arbitrate to be unconscionable.