Thanks so much to all for a thought-provoking celebration of Chancellor Chandler's contribution to the Chancery Court. Matt Bodie's second post said, quite elegantly, much of what I wanted to say in this wrap-up post.
More than any one opinion, what stands out for me about the Chancery Court in general, and Bill Chandler's tenure in particular, is its engagement with and receptivity to academic perspectives. Delaware is a small state, and the Court is a small court--my students are perennially surprised to learn that there are but 4 vice-chancellors and 1 chancellor. Its small size, I think, is one of its main strengths: from the outside, at least, there's a sense that it's a tight-knit, almost monastic group of individuals who care passionately about corporate law. Newcomers, probably already predisposed to a like mindset, are seamlessly assimilated into the culture of the Court.
The Chancery Court's tradition of engagement with scholars and with practitioners flourished under Chancellor Chandler, and I have no doubt it will continue under Chancellor Strine. But I'll close with the observation one of the Georgia Law students in Bill's Advanced Corporations course made to me. Amazed at Bill's command over corporate law, he exclaimed: "He's the man!"
Yes, he is. Thanks, Bill!
Update: All forum posts are available here.
In a recently published article, Private Ordering with Shareholder Bylaws, Matt Wright, Marcus Hintze, and I begin our discussion of shareholder empowerment with a description of Air Products and Chemicals, Inc. v. Airgas, Inc. et al (2011), the Chancellor Chandler opinion discussed by Matt Bodie, Steven Davidoff, and Afra Afsharipour below. In the article, we are using the case to illustrate the limited power of shareholders under Delaware law:
The Airgas case is the latest in a long line of Delaware cases in which a board of directors defied its own shareholders. Under modern corporation statutes, like Delaware’s, shareholders have few options in circumstances like these. Generally speaking, shareholders in public corporations do three things: they sell, they vote, and they sue. In this Article, we propose to empower shareholders in public corporations by facilitating their ability to contract. As illustrated by the Airgas case, however, even with these three powers, shareholders have limited ability to pursue their own interests.
Also in that article, my co-authors and I use another Chancellor Chandler opinion, UniSuper Ltd. v. News Corp. (2005), to illustrate the possibility of shareholder empowerment through private ordering. We conclude:
UniSuper stands in stark contrast to Airgas and evinces the potential of private ordering to benefit shareholders in public corporations. The unconventional contract in UniSuper also highlights the difficulty of private ordering in public corporations. We propose legal reforms that will enhance the ability of shareholders in public corporations to contract with shareholder bylaws. By empowering shareholders in this way, we hope to improve shareholder monitoring of managers and to create laboratories of corporate governance that benefit the entire corporate governance system.
I was somewhat surprised to find that I had blogged about the UniSuper case when it was decided in 2005. You can see that post here. While I was not enamoured with some aspects of that opinion, my response to Chancellor Chandler's argument relating to the shareholders' power to control the board of directors through contract was a single word: "Wow!"
It was a surprising result, I thought, in the face of an argument that the contract at issue in the case would be unenforceable because it purported to limit the board's discretion without using a charter amendment. The Delaware Supreme Court had struck down contracts that limited board discretion (e.g., QVC and Omnicare), and even if you didn't like those opinions, there they were.
And this has caused me to wonder with regard to Airgas, why didn't Chancellor Chandler just distinguish the Supreme Court precedent and rule in favor of Air Products? That would have comported with his "personal view" of the best result (at least at the time ... he retreats from this position in a later interview), but for some reason, he felt "constrained by Delaware Supreme Court precedent." Really? The precedent (Time, Unitrin) is pretty flimsy on the issue presented in Airgas, and that precedent would have been easy to distinguish. Chancellor Chandler did it himself in the Marcus interview linked by Matt Bodie. It's a well-reasoned opinion -- typical for Chancellor Chandler -- but I was hoping for a full-blown revival of Interco. Airgas didn't even come close.
Earlier this year, Chief Justice Roberts again displayed his antipathy towards the legal academy when he said, "What the academy is doing, as far as I can tell, is largely of no use or interest to people who actually practice law." Gordon responded with a nice post, which included the quote: "legal scholars often are not writing for practicing lawyers." However, I think one of the very special things about the Delaware Chancery, and the once and future chancellors, is their openness to corporate law scholarship. Not only do Chancellor Chandler and Chancellor Strine have SSRN pages, but their opinions reflect a willingness to engage with the academic literature that goes beyond any other court in the nation. It's not even close.
The Airgas opinion provides a recent example. Central to Chancellor Chandler's opinion is his discussion of the "substantive coercion" standard first set forth in Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 258 (1989). Chancellor Chandler quotes at length from the article, and discusses how the standard (first used by Chancellor Allen in City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787 (Del.Ch.1988)) had developed both in the case law and the academic literature. The opinion noted:
At least one of the professors, it seems, is unhappy with how the Supreme Court has apparently misunderstood the concept of substantive coercion as he had envisioned it, noting that “only the phrase and not the substance captured the attention of the Delaware Supreme Court” such that the “mere incantation” of substantive coercion now seems sufficient to establish a threat justifying a board's defensive strategy.
Air Products & Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48, 100 (Del, Ch. 2011) (citing Ronald J. Gilson, Unocal Fifteen Years Later (And What We Can Do About It), 26 Del. J. Corp. L. 491, 497 n. 23 (2001)). This is a remarkable passage: a lower court is using a law review article to (indirectly?) criticize a higher court. One can only imagine Chief Justice Roberts' reaction to such a move. But it demonstrates the respect the Chancery has for the analysis that corporate law scholars bring to a problem.
David Marcus from the Deal Magazine has a terrific interview with Chancellor Chandler upon his stepping down from the Chancery. I found this exchange to be reflective of the chancellor's views on legal scholarship:
[Q:] It was clear in reading the [Airgas] opinion that you had thought very deeply about that question, but except for your decision in Unitrin, you hadn't had the chance to write about it until Airgas.
I got the views of all of my colleagues on the court on both the pill question, which was Airgas II, and on the bylaw question, which was Airgas I. They were very helpful to me in writing it and getting it out in a timely way. If the question is, "Would I have written this as long or in the same way?" probably not, because back when I wrote Unitrin in the mid-1990s, there hadn't been as much ink spilled by academics. You saw a lot of academic references in the opinion, and that probably resulted in a slightly different approach to how to write it, because I was writing it for the parties but also acknowledging the views of various academics on this question from professor [Lucian] Bebchuk to others.
There are a lot of examples of the dialogue, synergy, and even good-natured humor between the two groups -- Larry Ribstein's riff on Chancellor Strine's Three Times a Lady reference comes to mind. (And I'd add "Fee Tines a Mady.") I don't expect this to change with Chancellor Strine. But Chancellor Chandler carried on and fostered the relationship during his term as chancellor, and we can only hope to keep returning the favor.
I want to say a few words about Chancellor Chandler and his jurisprudence as well. Many have already covered some of the most prominent of his opinions, like Disney, about which so many of us have written. He has two other interesting opinions in which executive compensation, an issue of increasing public importance and focus (hello Occupy Wall Street), figures prominently.
The two opinions are Ryan v. Gifford, 918 A. 2d 341 (Del. Ch. 2007) and In re Citigroup, Inc. Shareholder Derivative Litigation, 964 A.2d 106 (Del. Ch. 2009). I value these opinions for several reasons. First, these are classic “Chandler” opinions, measured in tone, careful of the parties, strategic and clear. Second, the opinions might well be the beginning of some groundwork on executive compensation, an area that some believe Delaware has ceded. And, third, the opinions are about executive compensation and are not abdications. Did I mention executive compensation already? I think it is worth mentioning more than once.
In Ryan v. Gifford, Chancellor Chandler was faced with various claims, including some about stock options backdating. As is well known, by itself, backdating is not illegal – misrepresenting compensation, failing to disclose it, and allocating in contradiction to an established policy, however, can be. Chancellor Chandler makes this point in the Ryan v. Gifford opinion and declines to dismiss the case on that basis.
To those hungering for more dramatic action, I say, this is Delaware after all. That said, the action is, dramatic. It is a response to the backdating crisis. The crisis, was, of course, first and foremost, a governance crisis. We can argue about the greed or deceit behind the backdating crisis, but I hope many of us would agree that if the directors had all been in the room, discussing the act of backdating and what it really meant (rather than signing consents in lieu of meeting), the outcomes may well have been different. That sort of conversation, which Chancellor Chandler pointed out as a flaw in the Disney process, is key to directors doing their jobs.
The Citigroup opinion arose out of another crisis, the financial crisis. There are many issues in the case, most of which the plaintiffs lost. They did, however, succeed in surviving the motion to dismiss on one key issue – an allegation about waste in the CEO’s payment package. Succeeding in pleading demand futility is relatively rare. The claim was essentially that the directors had wasted assets in approving a $68 million retirement payment and benefit package for the former CEO who, the plaintiffs alleged, was responsible for the billions in losses. Given the allegations, and the losses of Citigroup, Chancellor Chandler found that the plaintiffs at least deserved discovery and a further opportunity to explore the claim.
Again, many might say that refusing to dismiss one small claim is a small move in the larger world of Occupy Wall Street. It was not, however, a small move for Delaware. Indeed, arguably, it was a smart, strategic, and legally correct move. It makes a statement: executive compensation should actually be crafted with limits. And, the opinion was crafted by a very judicious and circumspect Chancellor. Indeed, it’s classic Chancellor Chandler and represents just one example of why he will be missed.
Chancellor Chandler was involved in two of the cases which crucially shaped the emerging doctrine of good faith over the last ten or fifteen years. Steve Davidoff and Matt Bodie have already discussed Disney. Claire Hill and I have written on the case at length, but long story short, I think the Chancellor got things basically right. He struck a delicate balance. On the one hand, executive compensation is a real corporate governance problem, both in general and at the Disney board in particular. On the other hand, the court cannot usefully replace the board in crafting appropriate compensation packages. So what to do? The Chancellor used good faith to allow the case to continue for a while, and to lecture the board on the shortcomings in its process (Matt reproduces some of that lecturing in his post), but in the end the board escaped liability, as it should.
I am less satisfied with what happened in the Citigroup opinion. It did allow the case to continue for a while (on the waste claim), and it will presumably avoid imposing liability, as it should. But the rhetoric is wrong. It is all about the vital importance of the business judgment rule and the inappropriateness of the Court second-guessing the board. The Chancellor is not willing to state that the Caremark duty to monitor extends to business risk as well as legal violations, although he does not quite exclude the possibility either. Even Steve Bainbridge believes that Caremark should apply to enterprise risk management, although he stresses that it should be almost impossible to succeed on this theory. I agree with Bainbridge that plaintiffs should be fated to fail, but the thin sliver of space for making a claim should allow courts to sternly lecture boards that have been clearly remiss in their duty to monitor. And surely the Citigroup board was an instance of that. Where is the lecture to this board that was asleep at the wheel as it allowed its traders and others to gamble the future of the company, taking both Citgroup and the U.S. economy as a whole to the brink of catastrophe (and for the U.S. as a whole, maybe beyond the brink)? Where is the outrage?
I also find the weak rhetoric in Citigroup a bit puzzling in its institutional politics. I have speculated that the Chancellor's 2003 Disney opinion, along with several other Delaware opinions at about the same time that were surprisingly skeptical of management, represented in part an attempt to show some spine in the face of the Enron and Worldcom scandals and pressure to extend federal regulation of corporate governance. When times get hard, Delaware needs to show it is up to the job of regulating boards or else it will lose that role to the federal government. Yet, here we are in the midst of a much worse crisis, and I see very little evidence of vertebral columns in Wilmington. What gives?
First, the adulation. Those who have been lucky enough to have met Chancellor Chandler know that he is a wonderful, gracious person. He is a judge’s judge, able to deal effectively with litigants, lawyers and the myriad of actors in the Delaware eco-system. Chancellor Chandler’s tenure has been defined by the warmth and collegiality which he exudes.
I agree with Jeff Lipshaw that the Cerberus case shows Chancellor Chandler’s excellent grasp of what corporate lawyers do. But in remembering and honoring the Chancellor’s tenure, I’d like to focus on three cases that, while not necessarily defining him, show his skill at guiding Delaware and its precious corporate law through the hardest of issues.
The first of these was the epic Disney litigation. Through years of proceedings and numerous opinions Chancellor Chandler held a discourse with the Delaware Supreme Court about the fundamental tenets and breaking points of Delaware corporate law doctrine. What does it mean to act in good faith? What, if anything, was left of Smith v. Van Gorkom in a post-102(b)(7) world? What role was Delaware going to take in defining corporate governance after Enron? (Answers in order: see the opinions, not much, and a deferential one; on this last point you need only read the Chancellor’s 2009 Citigroup opinion to see Disney’s ultimate outcome).
The answers to these questions may have been disenheartening to those who advocated for a more active Delaware judiciary, but they appeared to be just right porridge to those who felt that court-administered corporate governance was bound to go wrong. Without wading into the debate, I think it is enough to say that by the end Chancellor Chandler and the Justices of the Delaware Supreme Court had come to a remarkable agreement on both the content and direction of their jurisprudence. This was a remarkable feat for a common law court.
But it was not all harmony and agreement during Chancellor Chandler’s tenure. Here, I turn to the two opinions which bookended Chancellor Chandler’s career: Unitrin, Inc. v. American General Corp. and Air Products and Chemicals, Inc. v. Airgas, Inc. et al. These two opinions are must reads for anyone trying to understand the tensions which grip Delaware’s current takeover jurisprudence. Together, they sketch an alternative takeover regime than the one the Delaware Supreme Court has crafted. In Unitrin Vice Chancellor Chandler’s lower court opinion found that a repurchase program designed to fend off a hostile takeover violated Unocal proportionality review. Chancellor Chandler, then a Vice Chancellor, framed the question nicely in that opinion by raising the question of whether “placing the decision to sell the company in the hands of stockholders who are also directors a disproportionate response to a low price offer to buy all the shares of the company for cash.” Chancellor Chandler was reversed by the Supreme Court which raised the bar on Unocal proportionality view, later leading Professors D. Gordon Smith and Robert B. Thompson to subsequently assert that Unocal proportionality review was “dead”.
Fifteen years later and faced with related issues in the Airgas case, Chancellor Chandler took a different tack. Chancellor Chandler refused to order Airgas’ ruled that Delaware law and the Unocal doctrine did not encompass the doctrine of “substantive coercion” but that were it up to him, he would decide differently.
In putting forth his vision in both opinions, Chandler advocated a more searching but not overreaching standard of review for takeovers. He did so out of a belief that director conflicts should be subject to substantive scrutiny. Perhaps shareholders should also decide at some point. Chancellor Chandler showed that he could not only fashion strong doctrine in tandem with the Delaware Supreme Court but register his dissent and preserve the autonomy and intelligence of the Chancery Court.
Ultimately, Chancellor Chandler guided the Delaware courts through Dodd-Frank, Sarbanes-Oxley and other perils. He has done the best job of all by leaving a strong court in the hands of his equally qualified successor Chancellor Strine.
Since Afra stole my original idea (!), I will not use my Master's Forum posting to cover the Airgas opinion. I agree with what Afra says about the decision in that case and am adding excerpts from it to the second edition of the business associations casebook that I coauthor.
Instead, I will comment briefly on Chancellor Chandler's remarks issued in connection with the dedication of the Adolf A. Berle, Jr. Center on Corporations, Law and Society two years ago. These remarks sit at the intersection of several topics important to current and future legal professionals (especially those of us engaged with Delaware corporate law), among them:
- the ex post and immortal nature of judicial decision making;
- Adolf Berle's contributiions to the theory, doctrine, and practical aspects of corporate governance as a compinent of corporate law; and
- the Delaware judicial tradition of public service to the bench, bar, students, and law academy through law review and law journal commentary.
On the first of these three topics, Chancellor Chandler initially observes that "[l]aw is, in many ways, a backwards-looking field. We litigate over facts that have already occurred, challenge deals that have already been signed, and apply rules of decision based on previously-established precedent or statutes already enacted." He says nothing groundbreaking here, but he uses this observation as a jumping-off point for commentary on the value associated with actively using the past to shape the present and future (rather than merely memorializing the past). His conclusion? "It is through . . . ongoing dialogue with the text that the subject matter still lives." A great thought that I will keep in mind as I go back into the classroom in the morning.
On Adolf Berle's contributions to corporate governance, Chacncellor Chandler notes that "Berle was one of the original scholars to recognize the core concern of corporate law: the separation of ownership from control." He goes on to say that "Berle articulated the governing premise of the fiduciary duties that now inform nearly every aspect of Delaware corporate law." He adds that "Berle put this notion of fiduciary duties in context by articulating a two-part test for review of managerial action. The first level of review is the technical power conferred on managers by articles of incorporation, bylaws, and statutory law. The second level of constraint consists of the common law fiduciary duties." Chancellor Chandler characterizes these matters as meaningful to his work. These legacies of Adolf Berle also are instrumental in my teaching of corporate law. I have especially been harping on the last point this semester--the one about the two-part test for managerial action. The Chancellor's summary is both pointed and apt.
The third important topic that I identified is illuminated (and refuted) in, among other places, J.W. Verret's 2007 article with Justice Myron Steele of the Delaware Supreme Court and a Renee Jones's posting here at The Glom from back in January 2008 (and the related comments). I will not expand on those commentaries here. I will add, however, that I always have found my conversations with Delaware jurists to be informative and helpful (even where I disagree with the substance of what they say), and I see their authorship of pieces in law reviews and journals as extensions of those conversations. Chancellor Chandler's remarks on the Center's dedication are part of that tradition.
So . . . thanks, Chancellor Chandler, for engaging us with these topics and the many others that you have taken on in your years on the Chancery Court. As we say here in East Tennessee, "I appreciate you."
Like many other corporate law academics and lawyers, I have long admired Chancellor Chandler’s work. His contributions to the development of Delaware corporate law have enriched both my thinking and my teaching. For purposes of this post, I will focus on my use of Chancellor Chandler’s opinions in teaching M&A.
M&A casebooks are filled with opinions from the Delaware courts. In particular, the opinions of the Delaware Chancery court reflect sophisticated and nuanced explanations of both Delaware corporate law and the M&A deal-making process. Moreover, Delaware jurisprudence has come to dominate judicial thinking with respect to issues that often arise in M&A litigation, particularly issues related to the fiduciary duties of boards in the contexts of takeover transactions.
The strengths of the Delaware courts in carefully explaining how deals are planned and executed, what is at stake and why the law has developed in the way that it has are reflected in Chancellor Chandler’s recent 158-page opinion which upheld the right of Airgas' board to use its poison pill as a defensive mechanism against Air Products’ hostile tender offer. Chancellor Chandler started out the case with a concise summary:
This case poses the following fundamental question: Can a board of directors, acting in good faith and with a reasonable factual basis for its decision, when faced with a structurally non-coercive, all-cash, fully financed tender offer directed to the stockholders of the corporation, keep a poison pill in place so as to prevent the stockholders from making their own decision about whether they want to tender their shares—even after the incumbent board has lost one election contest, a full year has gone by since the offer was first made public, and the stockholders are fully informed as to the target board’s views on the inadequacy of the offer? If so, does that effectively mean that a board can “just say never” to a hostile tender offer?
The answer to the latter question is “no.” A board cannot “just say no” to a tender offer. Under Delaware law, it must first pass through two prongs of exacting judicial scrutiny by a judge who will evaluate the actions taken by, and the motives of, the board. Only a board of directors found to be acting in good faith, after reasonable investigation and reliance on the advice of outside advisors, which articulates and convinces the Court that a hostile tender offer poses a legitimate threat to the corporate enterprise, may address that perceived threat by blocking the tender offer and forcing the bidder to elect a board majority that supports its bid.
Like other commentators, I admire this opinion for the meticulous work that it does in laying out the facts. Almost 65 pages of Chancellor Chandler’s opinion explains the complex twists and turns of the courtship, negotiation, battle and downright hostility that ensues in an attempted takeover transaction. A review of the opinion’s account of the factual developments of the Air Products/Airgas saga could easily take an entire class and be a useful tool for explaining the financial incentives that drive deals and the way the law frames the deal planning and execution process.
Also, like other commentators (see Professor Bainbridge here and here), I expected that Chancellor Chandler would uphold the pill. What I didn’t quite expect was Chancellor Chandler’s frank articulation of how decades of Delaware case law on the poison pill essentially gave him no choice but to reach the result that he did. As he explained:
Although I have a hard time believing that inadequate price alone (according to the target’s board) in the context of a non-discriminatory, all cash, all-shares, fully financed offer poses any “threat”—particularly given the wealth of information available to Airgas’s stockholders at this point in time—under existing Delaware law, it apparently does. Inadequate price has become a form of “substantive coercion” as that concept has been developed by the Delaware Supreme Court in its takeover jurisprudence. That is, the idea that Airgas’s stockholders will disbelieve the board’s views on value (or in the case of merger arbitrageurs who may have short-term profit goals in mind, they may simply ignore the board’s recommendations), and so they may mistakenly tender into an inadequately priced offer. Substantive coercion has been clearly recognized by our Supreme Court as a valid threat.
Trial judges are not free to ignore or rewrite appellate court decisions. Thus, for reasons explained in detail below, I am constrained by Delaware Supreme Court precedent to conclude that defendants have met their burden under Unocal to articulate a sufficient threat that justifies the continued maintenance of Airgas’s poison pill. That is, assuming defendants have met their burden to articulate a legally cognizable threat (prong 1), Airgas’s defenses have been recognized by Delaware law as reasonable responses to the threat posed by an inadequate offer—even an all-shares, all-cash offer (prong 2).
For my M&A class next semester, Chancellor Chandler’s summary of the current legal regime in Delaware will be required reading. His summary illuminates the development of Delaware jurisprudence in this area, as well as its continued shortcomings. Hopefully from his perch as a partner at Wilson Sonsini Goodrich & Rosati, Chancellor Chandler will continue the critical discussion he undertook in the Airgas opinion.
I will leave to others Chancellor Chandler's contribution to the great body of corporate law, as well as personal felicitations that I will simply second. As I recall, we met once at a symposium at Ohio State (I believe that's where I met Gordon for the first time - as he was bending Chancellor Chandler's ear about something during a break). Nevertheless, this is a little personal because I'm going to focus on two opinions that have endeared me (is that too strong?) to Chancellor Chandler's sensibilities regarding the life and work of the lawyer whose job is to get deals done. I am someone who worked at, and now writes about, those nuanced before-the-fact judgments often required of transactional lawyers and counselors – where the facts are fluid, one's directorial control is limited, and consequences are uncertain.
The first source of endearment is a small piece of the Disney opinion not often discussed, involving general counsel Sanford Litvack's advice to Michael Eisner about the termination of Ovitz contract for cause rather than the Non-Fault Termination ("NFT") package that engendered the whole litigation shebang.
Litvack, as an officer of the corporation and as its general counsel, consulted with, and gave advice to, Eisner, on two questions relevant to Ovitz's termination. They are, first, whether Ovitz could or should have been terminated for cause and, second, whether a board meeting was required to ratify or effectuate Ovitz's termination or the payment of his NFT benefits. For the reasons I have already stated, Litvack properly concluded that the Company did not have good cause under the OEA to terminate Ovitz. He also properly concluded that no board action was necessary in connection with the termination. Litvack was familiar with the relevant factual information and legal standards regarding these decisions. Litvack made a determination in good faith that a formal opinion from outside counsel would not be helpful and that involving more people in the termination process increased the potential for news of the impending termination to leak out.
In re Walt Disney Co. Derivative Litigation, 907 A.2d 693, 776-77 (2005).I taught this case in the basic Business Enterprises class at Tulane in the fall of 2006, fresh off my own similar experiences as a general counsel. After talking about the "big" fiduciary issues in the case, I asked the class to consider Litvack's willingness to conclude it was a "no-brainer" that there was simply no basis for bringing Ovitz's conduct, even if obnoxious or insubordinate, within the "for cause" clause. He didn't do legal research or consult with outside counsel. And obviously, this was no small decision on his part, because fighting the "non-fault termination" aspect of the contract could well have saved Disney a portion of that $140 million in severance cost. Was Litvack less than a zealous advocate? If Litvack concluded that Disney could pass Rule 11 muster (or the straight face test), did he have an obligation, moral or otherwise, to all the uninformed stakeholders (i.e. the shareholders) to pursue the claim, even if as nothing more than bludgeon to knock ten or twenty or thirty million dollars off the pay-out? But was zealous advocacy his job? That was always the toughest kind of call for me as a general counsel. Like Litvack, I would conclude that contesting a particular issue was a "no brainer" because in my judgment we had no case. But I always wondered in those instances: was I too nice? too unzealous? or too ethical? Somebody could cobble together enough of a position to cause some grief for the other side (because it seemed like people were always taking marginally ethical positions against us, and finding lawyers who would sign the pleadings!) If I reached a legal conclusion and expressed it to the board, it was the rare case that anybody would question it. In essence, my sense of ethics, my moral judgment, or my business sense, as the GC, became the moral, ethical, and business judgment of the corporation.
Why the general counsel? Because, as I've written, nobody else other than the GC really stands in the overlap of the Venn diagram between legal judgment and business judgment. It was no surprise to me that Litvack didn't consult (and didn't need to consult) outside counsel. Nobody but Litvack could make that judgment, and, to my mind, there was a certain amount of courage in doing so, particularly since it's likely Eisner would have been more than delighted with an opinion to effect that "we've got a case, and he'll have to fight us tooth and nail for the money."
The second source of endearment was his discussion in the Cerberus case of the sometimes convoluted result of negotiated drafting, on which I've posted elsewhere. Here was the issue. Section 9.10 of the agreement said that the merger target (i.e. the company whose shareholders were going to walk away with cash – let’s call it the seller for ease of reference) had the right to enforce the agreement by injunctive relief for specific performance for a whole bunch of things, including forcing the deal to close. But Section 9.10 said it was “subject to” Section 8.2, which said “notwithstanding” any other provsion in the agreement, the seller’s sole remedy if the buyer walks away was a $100 million termination fee. The buyer walks away, and the issue was simply whether it must close under Section 9.10 or can walk away for a price of $100 million under Section 8.2. Larry Ribstein, Steve Davidoff, and others lathered over the possibility that otherwise competent M&A lawyers could have let this "left hand - right hand" thing in the contract. I suppose I was feeling some "there but for the grace of God go I," knowing what it's like to craft a contract in the middle of the night under time pressure. Here's what I said in part:
I’ve not fully studied the opinion, but it is a fine piece of analysis, even where in very subtle ways I disagree with it. And with all due respect to Larry Ribstein and Steve Davidoff, I think Chancellor Chandler has a better feel for the limitations of law and language. Yes, this could be “sloppy drafting,” but as I alluded in an earlier post, lawyers, for all their pretensions of being at the center of a deal are often flies swarming around the galloping steed that is the deal itself, and the focus on the contract as the source of the problem is merely a fly’s-eye view.
From my viewpoint, you can never have enough judges like Chancellor Chandler.
Just to begin a theme sure to be repeated throughout the day: Chancellor Chandler is a terrific person. Like Gordon, my wife and I had the chance to visit the Court of Chancery in Georgetown, and we were treated to a tour as well as a wonderful chat with our host. He could not have been more gracious. It is often said that the strength of the Delaware corporate law lies as much (if not more) in its judges as in its statutes, and Chancellor Chandler has exemplified the combination of corporate savvy with down-to-earth sense that makes the court so successful.
The Disney case was an extraordinary event, even for the Delaware Chancery. However, when the case was first presented to Chancellor Chandler, he found that "the issues presented by this litigation, while larger in scale, are not unfamiliar to this Court." In granting the motion to dismiss, he began his opinion with the following analogy:
Just as the 85,000–ton cruise ships Disney Magic and Disney Wonder are forced by science to obey the same laws of buoyancy as Disneyland's significantly smaller Jungle Cruise ships, so is a corporate board's extraordinary decision to award a $140 million severance package governed by the same corporate law principles as its everyday decision to authorize a loan. Legal rules that govern corporate boards, as well as the managers of day-to-day operations, are resilient, irrespective of context. When the laws of buoyancy are followed, the Disney Magic can stay afloat as well as the Jungle Cruise vessels. When the Delaware General Corporation Law is followed, a large severance package is just as valid as an authorization to borrow. Nature does not sink a ship merely because of its size, and neither do courts overrule a board's decision to approve and later honor a severance package, merely because of its size.
In re Walt Disney Derivative Litigation, 731 A.2d 342, 350 (Del. Ch. 1998). This comparison has always fascinated me. Just to give you the visuals, here's the Jungle Cruise ship:
And here's the Disney Magic:
Compare that language to this language, seven years later:
In re Walt Disney Derivative Litigation, 907 A.2d 693, 762-63 (Del. Ch. 2005).
To be certain, the evidence available to Chancellor Chandler in 1998 was much more limited than it was after the trial, due in part to the plaintiffs' initial failure to request corporate records. In fact, the chancellor showed a remarkable openness to seeing the case afresh once the minutes of the board meetings came to light. The Disney case was our transition from the Internet boom to the post-Enron era. And Chancellor Chandler was our Virgil.
One ongoing question about the Delaware Chancery Court is its responsivness to the prevailing corporate and political winds. Is the Chancery successful, at least in part, because it tempers its judgment with a sense of the national mood? And if so, is that an appropriate role for the judiciary? In this regard, I think the Disney case is instructive. Chancellor Chandler had this to say about the role of corporate governance norms within the law:
. . . [T]here are many aspects of defendants' conduct that fell significantly short of the best practices of ideal corporate governance. Recognizing the protean nature of ideal corporate governance practices, particularly over an era that has included the Enron and WorldCom debacles, and the resulting legislative focus on corporate governance, it is perhaps worth pointing out that the actions (and the failures to act) of the Disney board that gave rise to this lawsuit took place ten years ago, and that applying 21st century notions of best practices in analyzing whether those decisions were actionable would be misplaced.
Unlike ideals of corporate governance, a fiduciary's duties do not change over time. How we understand those duties may evolve and become refined, but the duties themselves have not changed, except to the extent that fulfilling a fiduciary duty requires obedience to other positive law. This Court strongly encourages directors and officers to employ best practices, as those practices are understood at the time a corporate decision is taken. But Delaware law does not --indeed, the common law cannot -- hold fiduciaries liable for a failure to comply with the aspirational ideal of best practices, any more than a common-law court deciding a medical malpractice dispute can impose a standard of liability based on ideal-rather than competent or standard-medical treatment practices, lest the average medical practitioner be found inevitably derelict.
Fiduciaries are held by the common law to a high standard in fulfilling their stewardship over the assets of others, a standard that (depending on the circumstances) may not be the same as that contemplated by ideal corporate governance. Yet therein lies perhaps the greatest strength of Delaware's corporation law. Fiduciaries who act faithfully and honestly on behalf of those whose interests they represent are indeed granted wide latitude in their efforts to maximize shareholders' investment. Times may change, but fiduciary duties do not. Indeed, other institutions may develop, pronounce and urge adherence to ideals of corporate best practices. But the development of aspirational ideals, however worthy as goals for human behavior, should not work to distort the legal requirements by which human behavior is actually measured. Nor should the common law of fiduciary duties become a prisoner of narrow definitions or formulaic expressions. It is thus both the province and special duty of this Court to measure, in light of all the facts and circumstances of a particular case, whether an individual who has accepted a position of responsibility over the assets of another has been unremittingly faithful to his or her charge.
Id. at 697-98. The Enron era and the 2008 Financial Crisis have given us many opportunities to see failures of those in a position of responsibility to remain unremittingly faithful to their charges. As we grapple with how to address that faithlessness, and how to minimize it in the future, we will miss having Chancellor Chandler as our guide.
Welcome to our Masters Forum on William B. Chandler III's contributions to the Delaware Chancery Court. Bill Chandler was Chancellor of the Court for 14 years, after serving as Vice-Chancellor for 8 years. I quote from his bio:
Widely regarded as one of the country's most influential judges on issues of corporate law and governance, he issued more than a thousand opinions and presided over some of the most contentious and high-profile corporate law disputes in the country, including those involving The Walt Disney Company, Yahoo, Microsoft, Hewlett-Packard, eBay, Citigroup, Dow Chemical, and, most recently, the Air Products/Airgas dispute. Many of his rulings have become required reading for M&A and business law practitioners, and he has written and lectured widely on numerous critical corporate law issues.
We expect the Masters to weigh in on some of Bill's opinions, the role of the Chancery Court over the last 22 years, and perhaps what awaits corporate law under its new Chancellor, Leo E. Strine, Jr.