A Babe in the Woods: An Essay on \u3ci\u3eKirby Lumber\u3c/i\u3e and the Evolution of Corporate Law

This essay examines the development of corporate law during the time span of the author\u27s career, focusing on the interrelated subjects of valuation, corporate purpose, and shareholder litigation

Calling Off the Lynch Mob: The Corporate Director\u27s Fiduciary Disclosure Duty

Two parallel bodies of American law establish the obligations of corporate directors to disclose information about the corporation to its existing stockholders: (1) the Securities Exchange Act of 1934, and (2) state common law, including doctrines such as fraud and negligent misrepresentation. Although these state common law doctrines have been applied to transactions in corporate securities, their significance has been largely eclipsed by comprehensive federal regulation. Of growing importance, however, is a state law duty that courts have created and imposed upon directors based upon their fiduciary relation to the corporation and its stockholders. In the last twenty years, this branch of fiduciary doctrine has blossomed prolifically, particularly in the Delaware state courts. According to the Delaware Supreme Court in Stroud v. Grace, it is now well-recognized that fiduciary duty requires directors to disclose all material information within their control when they seek stockholder action. Just thirteen days after the Stroud opinion was issued, moreover, a Delaware trial court went further, holding that a fiduciary duty to disclose all material information arises when directors approve any public statement, such as a press release, regardless of whether any specific stockholder action is sought. As described in the Delaware cases, this fiduciary disclosure duty is deep, as well as broad. The duty is said to be strict, imposing liability without regard to director negligence or other culpability;s to afford stockholders a remedy without regard to whether they relied upon a statement made in violation of the duty; and to afford a virtual per se rule of damages, under which stockholders may obtain a monetary award on account of a breach of the disclosure duty with- out having to establish actual loss

The Fair Value of Cornfields in Delaware Appraisal Law

The Delaware Supreme Court’s opinions in Weinberger and Technicolor have left a troublesome uncertainty in defining the proper approach to the valuation of corporate shares. That uncertainty – increasingly important as going private mergers become more frequent – can be resolved by a blend of financial and doctrinal analysis. The primary problem—the potential opportunism by controlling shareholders in timing going private mergers—can be addressed by a more complete understanding of corporate finance. The definition of fair value must include not only the present value of the firm’s existing assets, but also the future opportunities to reinvest free cash flow, including reinvestment opportunities identified, even if not yet developed, before the merger. This issue has been incompletely articulated by the courts. On the other hand, value created by the merger that can only be achieved by means of the merger itself – such as reduced costs of public company compliance – should not be included in determining fair value. We also show that except in the case of acquisitions by third parties (where actual sale value, minus synergies, is a useful measure of fair value), hypothetical third party sale value does not and should not ordinarily be taken as a measure of fair value

The Importance of Being Dismissive: The Efficiency Role of Pleading Stage Evaluation of Shareholder Litigation

It has been claimed that the risk/reward dynamics of shareholder litigation have encouraged quick settlements with substantial attorneys’ fee awards but no payment to shareholders, regardless of the merits of the case. Fee-shifting charter and bylaw provisions may be too blunt a tool to control agency costs associated with excessive shareholder litigation, and are in any event now prohibited by Delaware statute. We claim, however, that active judicial supervision of public company shareholder litigation at an early stage reduces the costs of frivolous litigation to shareholders by separating meritorious from unmeritorious litigation before the full costs of discovery are incurred. Using procedures and doctrines that have not previously been catalogued and appreciated as a coherent set of interrelated dynamics, the Delaware Court of Chancery has relied on the motion to dismiss as the primary procedural vehicle for accomplishing that early stage triage. Such early stage analysis depends upon consideration of essentially undisputed facts, and upon the availability of such facts to the plaintiff shareholder through sources that compensate for the problem of asymmetric access to relevant information. The motion to dismiss in representative shareholder litigation has thus come to resemble, and substitute for, the motion for summary judgment. The Delaware courts’ atypical demand for, and unusual willingness to consider, extensive facts in resolving motions to dismiss encourage defendants to supply relevant information voluntarily, on a cost efficient basis that avoids largely unlimited discovery. Where time constraints preclude disposition via a motion to dismiss, the motion for expedited discovery must necessarily come to serve the same efficiency promoting functions as the motion to dismiss, and the Court of Chancery has come to apply essentially the same level of substantive factual review of the merits encountered in resolving motions to dismiss. The result is a system in which cases are dismissed or settle at the motion to dismiss stage: from 2011 through 2014, for example, there were only four public company shareholder class or derivative suits in which the Court of Chancery resolved the case after trial. With the likely concentration of deal litigation in the Delaware courts resulting from increasingly prevalent exclusive forum charter and bylaw provisions, the motion to dismiss and the motion to expedite discovery are likely to become even more important in promoting the efficient conduct of shareholder class and derivative litigation involving public companies

Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies

This article examines the evolution of Delaware appraisal litigation and concludes that recent precedents have created a satisfactory framework in which the remedy is most effective in the case of transactions where there is the greatest reason to question the efficacy of the market for corporate control, and vice versa. We suggest that, in effect, the developing framework invites the courts to accept the deal price as the proper measure of fair value, not because of any presumption that would operate in the absence of proof, but where the proponent of the transaction affirmatively demonstrates that the transaction would survive judicial review under the enhanced scrutiny standard applicable to fiduciary duty-based challenges to sales of corporate control. We also suggest, however, that the courts and expert witnesses should and are likely to refine the manner in which elements of value (synergies) should, as a matter of well established law, be deducted from the deal price to arrive at an appropriate estimate of fair value

Optimizing The World’s Leading Corporate Law: A 20-Year Retrospective and Look Ahead

In a 2001 article (Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law) two of us, with important input from the other, argued that in addressing issues like hostile takeovers, assertive institutional investors, leveraged buyouts, and contested ballot questions, the Delaware courts had done exemplary work but on occasion crafted standards of review that unduly encouraged litigation and did not appropriately credit intra-corporate procedures designed to ensure fairness. Function Over Form suggested ways to make those standards more predictable, encourage procedures that better protected stockholders, and discourage meritless litigation, by restoring business judgment rule protection for transactions approved by independent directors, the disinterested stockholders, or both. This article examines how Delaware law responded to the prior article’s recommendations, concluding that the Delaware judiciary has addressed most of them constructively, thereby creating incentives to use procedures that promote the fair treatment of stockholders and discourage meritless litigation. The continued excellence and diligence of the Delaware judiciary is one of Delaware corporate law’s core strengths. But some recent cases have articulated standards of review that involve greater than optimal litigation intensity and less than ideal respect for decision-making in which independent directors and disinterested stockholders have potent say. Those standards also impair the integrity of Delaware’s approach to demand excusal in derivative cases and the identification of controlling stockholders. We also propose eliminating concepts like substantive coercion that do not provide a legitimate basis for resolving cases. Finally, we urge action to correct new problems such as the unfair targeting of corporate officers for negligence claims in representative actions and the frustrating state of practice under Delaware’s books and records statute