1. Federalism And Corporate Law: Reflections Upon Delaware, 1974 83 Yale L. J. 663 William L. Cary

2. The Proper Role Of A Target's Management In Responding To A Tender Offer, 1981 94 Harv. L. Rev. 1161 Frank H. Easterbrook , Daniel R. Fischel

3. Do The Merits Matter? A Study Of Settlements In Securities Class Actions, 1991 43 Stan. L. Rev. 497 Janet Cooper Alexander

4. Understanding The Plaintiff's Attorney: The Implications Of Economic Theory For Private Enforcement Of Law Through Class And Derivative Actions, 1986 86 Colum. L. Rev. 669 John C. Coffee, Jr.

5. The Plaintiffs' Attorney's Role In Class Action And Derivative Litigation: Economic Analysis And Recommendations For Reform, 1991 58 U. Chi. L. Rev. 1 Jonathan R. Macey , Geoffrey P. Miller

6. Corporate Control Transactions, 1982 91 Yale L.J. 698 Frank H. Easterbrook , Daniel R. Fischel

7. A Structural Approach To Corporations: The Case Against Defensive Tactics In Tender Offers, 1981 33 Stan. L. Rev. 819 Ronald J. Gilson

8. A Team Production Theory Of Corporate Law, 1999 85 Va. L. Rev. 247 Margaret M. Blair , Lynn A. Stout

9. Shareholder Passivity Reexamined, 1990 89 Mich. L. Rev. 520 Bernard S. Black

10. The “Race To The Bottom” Revisited: Reflections On Recent Developments In Delaware's Corporation Law, 1982 76 Nw. U. L. Rev. 913 Daniel R. Fischel

11. Piercing The Corporate Veil: An Empirical Study, 1991 76 Cornell L. Rev. 1036 Robert B. Thompson

12. Toward An Interest-Group Theory Of Delaware Corporate Law, 1987 65 Tex. L. Rev. 469 Jonathan R. Macey , Geoffrey P. Miller

13. Beyond Metaphor: An Analysis Of Fiduciary Obligation, 1988 Duke L.J. 879 Deborah A. Demott

14. Shareholders Versus Managers: The Strain In The Corporate Web, 1986 85 Mich. L. Rev. 1 John C. Coffee, Jr.

15. Empowering Investors: A Market Approach To Securities Regulation, 1998 107 Yale L.J. 2359 Roberta Romano

16. Fair Shares In Corporate Mergers And Takeovers, 1974 88 Harv. L. Rev. 297 Victor Brudney , Marvin A. Chirelstein

17. Federalism And The Corporation: The Desirable Limits On State Competition In Corporate Law, 1992 105 Harv. L. Rev. 1435 Lucian Arye Bebchuk

18. Corporate Governance, Agency Costs, And The Rhetoric Of Contract, 1985 85 Colum. L. Rev. 1403 Victor Brudney

19. The Political Economy Of Takeover Statutes, 1987 73 Va. L. Rev. 111 Roberta Romano

20. Corporations, Corporate Law, And Networks Of Contracts, 1995 81 Va. L. Rev. 757 Michael Klausner

Honorable Mention: Legal Implications Of Network Economic Effects, 1998 86 Cal. L. Rev. 479 Mark A. Lemley , David McGowan (“network theory may help explain Delaware's dominance in the market for corporate charters”)

This was assembled through WestlawNext's Law Reviews and Journals database, with non-corporate articles mentioning Delaware discarded (there were only three of those).  Lemley & McGowan would have been about 10^th, and theirs is the second youngest of the articles on the list, which range in publication date from 1974 to 1999.  The oldest, and most-cited, is Cary’s; Ralph Winter’s article responding to Cary's did not make the list, suggesting it is not in Westlaw’s database.  Fischel wrote three of 20, Coffee, Romano, Brudney, and Easterbrook two (both of Easterbrook’s co-written with Fischel).

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Delaware Vice Chancellor Laster issued a new corporate opportunity opinion yesterday, Dweck v. Nasser. It's not going to replace Broz v. Cellular Info. Sys., Inc., 673A.2d 148 (Del. 1996) in my casebook, but it's an interesting case nonetheless.

Gila Dweck was CEO and 30% stockholder of Kids International Corporation. Albert Nasser was Chairman of the Board and the controlling stockholder. Kids was a successful manufacturer of private-label clothing for discount retailers, like Wal-Mart and Target. Dweck wanted to own a larger share of the company, but Nasser declined to accommodate her, so Dweck took matters into her own hands, establishing two competing companies and eventually appropriating many of Kids' accounts.

In 2005, Dweck and Nasser split, accusing each other of breaching their fiduciary duties in various ways. The claim that most interests me is a corporate opportunities claim against Dweck. Although some of the background facts relating to Kids' ownership structure are complicated, VC Laster describes Dweck's treachery with admirable simplicity: Dweck established "competing companies that usurped Kids' corporate opportunities and converted Kids' resources to the point of literally using Kids' own employees, office space, letters of credit, customer relationships, and goodwill to conduct their operations."

If this seems like a pretty easy corporate opportunity case, that's because it is (with all due respect to VC Laster, who had to deal with 930 exhibits!). The first defense offered by Dweck was a rather lame "line of business" argument: because Kids manufactured private-label clothing, the other companies could enter the market for branded clothing. As VC Laster noted, this was not much of a defense to the claim of disloyalty: "Although Kids primarily operated in the private label business, Kids easily and readily could have expanded into the branded business."

Dweck also claimed that Nasser consented to the branded-label businesses, but VC Laster rejected Dweck's testimony, stating that Nasser was never informed of the new companies.

The most interesting defense was based on an operating agreement of Essential Childrenswear, a company formed by Nasser, Dweck and Dweck's brother, Haim. That agreement had a so-called "free-for-all provision," which read as follows:

Any Member and any of their respective affiliates may engage in or possess any interest in other business ventures of any kind, independently or with others, including but not limited to any business similar in nature to or competitive with the business of [Essential]. The fact that a Member or any of their respective affiliates may encounter business opportunities and may take advantage of such opportunities himself and/or herself and/or itself or introduce such opportunities to entities in which he/she/it has or has not any interest, shall not subject such Member or affiliate to liability to [Essential] or any of the other Members on account of the lost opportunity. Neither [Essential] nor any Member shall have any right by virtue of this Agreement or otherwise in or to such ventures, or to the income or profits derived therefrom, and the pursuit of such ventures, even though competitive with the business of [Essential], shall not be deemed wrongful or improper. . . . [Essential] and each Member hereby waives all right or remedy against the Members with respect to any damage, injury, lost profits or revenue as a result of any competitive business activities on the part of any Member.

Waivers of fiduciary duties have become common in Delaware LPs and LLCs -- see Mohsen Manesh's forthcoming paper, Contractual Freedom under Delaware Alternative Entity Law: Evidence from Publicly Traded LPs and LLCs -- but I haven't seen as much discussion of waivers in the corporate context, outside of DGCL Section 102(b)(7), which permits a waiver of sorts (allowing corporations to include an exculpation clause in a corporation's certificate of incorporation, limiting or eliminating the personal liability of a corporation's director for a breach of fiduciary duty).

The provision above would probably be analyzed under DGCL 122(17) (which I blogged about a long time ago). This provision permits a corporation to "[r]enounce, in its certificate of incorporation or by action of its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or one or more of its officers, directors or stockholders." (emphasis added)

In Dweck, the provision was in an operating agreement, which may have been authorized by Essential's board of directors (the court doesn't say). But VC Laster rightly observed that even if this provision were effective for Essential's affairs, it could not "eliminate broadly the duty of loyalty for all other business entities formed by the same parties."

Unfortunately for Dweck, a Kids stockholders' agreement, which had a similar provision, was never signed by Nasser. According to VC Laster, "The free-for-all provision never became effective, and Dweck cannot rely on it to justify her conduct. I therefore need not reach the complex legal issues that the provision would raise."

Would the "free-for-all provision" survive under DGCL Section 122(17)? I found only one case citing this code section -- Wayne County Employees' Retirement System v. Corti, 2009 WL 2219260 (Del.Ch.2009) -- and Chancellor Chandler did not rule on the provision because there was no actual controversy touching on the provision. Nevertheless, the issue raised in that case is the same issue that would likely have arisen in Dweck: are the opportunities pursued by Dweck "specified business opportunities or specified classes or categories of business opportunities"? My view is that the identification of "other business ventures of any kind" is not sufficient specification.

Thanks to Kurt Heyman for the tip on the case and to Mohsen for an insightful email on the free-for-all provision.

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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.

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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?

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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."  

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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. 

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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 21^st 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.

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Thanks to Usha for plugging the Columbia Law School conference on the Delaware Court of Chancery. The conference is partly aimed at honoring Bill Chandler, the recently retired Chancellor, but it is also looking forward to the court under new Chancellor Leo Strine.

On the first panel, Bill Savitt of Wachtell argued that "dictum" in the Delaware Court of Chancery is different than dictum for other courts. In some ways, he argued, the Court of Chancery is more like a legislator or regulator than a common law court because the judges are so engaged with and knowledgeable about the issues. Thus, they are not subject to the same "availability heuristic" that troubles other courts. See Fred Schauer's article, Do Cases Make Bad Law?, 73 U Chi L Rev 883 (2006).

According to Savitt, one reason the Delaware courts are in a better position than other courts to legislate or regulate, rather than just deciding incrementally, is that Delaware decisions are subject to extensive commentary from academic bloggers! Here is the photo:

You can see our banner in the bottom right-hand corner of Bill's slide. Thanks for the plug!

UPDATE: If you want a blow-by-blow account of the conference, you might try Alison Frankel's Twitter feed.

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Rumors about this have been swirling for some time now, but it was confirmed for me by an email from the Delaware State Bar Association:

The Judicial Nominating Commission gives public notice that it has received notification from the Governor that the following office can be filled by the appointment of the Governor with the concurrence of the Senate:

Chancellor of the Court of Chancery of the State of Delaware

(Due to the retirement of The Honorable William B. Chandler III)

Chancellor Chandler has been a terrific judge, and he is a terrific person. I have appreciated his willingness to engage with academic lawyers and to write opinions that are clear and thoughtful. He will be greatly missed.

His Airgas opinion was the text for my most recent Business Associations examination, and watching the students work through that opinion made me appreciate all the more the quality of his judging.

Best of luck, Bill! I hope our paths will cross often in the future.

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So everyone knows by now that the Delaware Chancery Court upheld the Airgas poison pill, forcing AirProducts to take its money and go home.  Prof. B. is all over it. 

In other anti-buyer news, Delaware reminds us that private equity funds are the new T. Boone Pickens, stopping the acquisition of Del Monte Foods by KKR. 

Wow!  Mergers, takeovers, poison pills, IPOs -- corporate law is back!

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Ten days ago, Mason Capital Management encouraged the board of directors of Airgas to forget litigation with Air Products and come to terms, but the board of Airgas is forging ahead in the Delaware Court of Chancery. In the wake of last week's activity, Steve Davidoff is wondering about the Airgas board. I am wondering, too.

On September 6, 2010, Air Products offered to acquire shares of Airgas at $65.50 per share. The board of directors of Airgas decided unanimously that this price was "grossly inadequate," and after a November board meeting, the Airgas board issued a letter stating, "the board has unanimously concluded that it believes that the value of Airgas in a sale is at least $78 per share." Last week, a fight broke out among the Airgas directors about what they meant by this statement.

Three Airgas directors who were nominated by Air Products and elected by the Airgas stockholders at the 2010 annual meeting (Messrs. Clancey, Lumpkins and Miller) claimed that the $78 price was an invitation to Air Products to negotiate. In a letter released late last week, Clancey, Lumpkins and Miller offered this account of the November board meeting:

[W]e expressed our beliefs that proposing a price (any price, within reason) would be more likely to generate a constructive dialogue between the two companies and potentially result in an increased offer from Air Products than would a figurative "stiff arm." It was in that context, and only in that context, that we agreed to communicate a $78 price to Air Products. To be clear, at no time did any of us take the position that a $78 offer price was the price of admission to having any discussions with Air Products, nor did we agree that $78 was the minimum per share price at which Airgas might be purchased.

The Chairman of Airgas, John van Roden, denied this account, arguing that the $78 was stated as a minimum value for Airgas. 

At the Board’s November 1-2 meeting, the suggestion was made by one or more of you that a letter be sent to Air Products expressing both a willingness to meet and specifying a minimum value of Airgas in a sale. Following discussion, all of the directors agreed with that view. At the November 1 portion of the Board meeting, the price to be included in the letter was actively discussed by the entire Board, including each of you. The company’s financial and legal advisors were present for and contributed to the discussion. At no time did any of you suggest at that meeting that the company’s advisors were conflicted or biased. In fact, one of you suggested a price of at least $80 per share. Ultimately the price of at least $78 was reached as the Board’s unanimous view.

Ok, so the directors of Airgas are bickering about price. Does this dispute matter? Maybe.

In his response to the three unhappy directors, Chairman van Roden asserted that "[n]one of your claimed grievances has any bearing on the issues that are now pending before the Court." After Chairman van Roden made this assertion, however, Air Products announced a "best and final offer" to acquire all of the outstanding shares of Airgas, Inc. for $70 per share. The Airgas board has not yet expressed an opinion on this new offer, but by questioning Airgas' price resolve, Messrs. Clancey, Lumpkins and Miller not only laid the groundwork for an internal board debate about this new offer, but also provided litigation fodder for Air Products, assuming the issues in the case are not mooted by the new offer. (For an argument that the new offer makes the litigation moot, see the brief filed by Airgas last Friday.)

The main issue in the litigation is whether Airgas can maintain a shareholder rights plan in the face of the Air Products offer, and price is central to the the resolution of this issue. Indeed, in his December 2 letter asking for supplemental briefing, Chancellor Chandler observed, "this dispute appears to be about price and price alone." The reason for this focus on price is that maintenance of the poison pill is justified only if the Air Products offer can be characterized as a "threat" to Airgas stockholders under the famous Unocal standard. An all-cash offer of the type proposed by Air Products is threatening to the Airgas stockholders only if the price is inadequate. In questioning the November statement of the Airgas board of directors, Messrs. Clancey, Lumpkins and Miller raise some doubt about the adequacy of the subsequent $70 bid.

Steve Davidoff prognosticates:

The Airgas board is still likely to unanimously reject the Air Products offer, but watch to see whether there is split in terms of willingness to negotiate and whether the board again terms the offer "grossly inadequate" or something less.

Air Products will also try to make hay of this disagreement with Chancellor Chandler, to buttress its effort to pull the poison pill. It may even try to make a motion for rehearing in the Delaware Supreme Court claiming that the court’s decision was on an unsound basis – namely that the board was unanimous. Such a maneuver would likely be for public relations value as any motion for a rehearing is likely to be quickly denied as the decision was ultimately decided on other grounds.

Excellent stuff.

Last Friday, Messrs. Clancey, Lumpkins and Miller issued a statement denying reports of division on the Airgas board, but the release of the dueling letters shows that the directors are having vigorous price discussions (as they should).

Also last Friday, Airgas filed a brief with the Delaware Court of Chancery in response to Chancellor Chandler's letter. We are still waiting for disclosure of the Air Products filing on the same day, and when that is released, we may get a better sense of where this litigation is headed.

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Mason Capital Management LLC, which describes itself as "significant investors" in Airgas, Inc., submitted a letter to the company's board of directors today. The gist of the letter: "reach a deal with Air Products."

This letter was motivated by a letter from Chancellor Chandler to the parties asking for supplemental briefing. While I would be thrilled to see Chancellor Chandler answer the questions in his letter, Mason Capital does not want the company to pay its lawyers to satisfy my curiosity: "While it may be satisfying to M&A lawyers and law professors to see how the issues Chancellor Chandler raises are dealt with by the competing parties, and to see how Chancellor Chandler, and ultimately the Delaware Supreme Court, resolves those issues, a better result for all concerned would be to reach a deal with Air Products."

Thanks to one of our readers for sending me the Chandler letter and the tip on the Mason letter.

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Is it Dodd-Frank?  Probably, on the federal level, but this has been a year of plenty of action.  The SEC did its proxy reform concept release.  And in enforcement, the post-Galleon spread of wiretaps looks to make next year a big year for prosecutions - so far we just have Don Chu, which threatens uber hedge fund SAC.  The enforcement case of the year this year must be the Goldman Sachs ABACUS deal settlement.  Here's Adam Levitin on it.

I don't keep up with Delaware like my compadres on the blog, but as Gordon has noted, Airgas might be an important case, and, indeed, it has spawned a few opinions.

I don't think the US Supreme Court did a lot of corporate law this year, with business patents and PCAOB decisions that could have gone far resolving very little.  But the Morrison case, presuming that the securities laws do not apply extraterritorially (and arguably not reversed by a sort of clumsy effort in Dodd-Frank to reverse it), could be pretty big, here's Richard Painter on both issues.  And until the honest services statute is revised, Skilling was good news for corporate executives, here's Christine on the case.

On international deals, the killing of BHP's bid for Potash by the Canadian government may a harbinger of protectionism as an M&A defense, so I say it's pretty notable.  Here's Steve Davidoff on one aspect of the affair.

And in international regulation, Basel III's continuing development gets my nod.  The Basel Committee just met, plans to promulgate the text of Basel III by the end of the year, and has concluded, as US regulators like Sheila Bair have been urging, that systemically significant "banks should have loss-absorbing capacity beyond the Basel III standards ... work on this topic continues in the Committee and the Financial Stability Board (FSB)."

What have we missed?

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Last week, just before Thanksgiving, the Delaware Supreme Court issued its opinion in Airgas, Inc. v. Air Products and Chemicals, Inc. (Francis Pileggi has a brief summary of the case here and has posted the opinion here). The issue was whether a bylaw proposed by Air Products at the last annual meeting of Airgas stockholders on September 10, 2010 was valid. Chancellor Chandler upheld the bylaw, but the Delaware Supreme Court has reversed that decision.

The case involves a hostile takeover attempt by Air Products. At the 2010 annual meeting, Air Products succeeded in electing three nominees to the Airgas board of directors, which is a classified board. To gain control of Airgas, Air Products needs to elect at least three more directors to the 10-person board, and Air Products would like to make that attempt as soon as possible. Thus, the bylaw in question provides that the next annual meeting of Airgas stockholders would be scheduled for January 2011, only four months after the 2010 annual meeting.

Whether this bylaw is valid depends on the Airgas charter, which provides that any bylaw "inconsistent with" the staggered board provision of the charter must be approved by "the affirmative vote of the holders of at least 67% of the voting power of all the shares of the Corporation entitled to vote generally in the election of Directors, voting together as a single class." Air Products did not obtain that much support for the bylaw proposal, so the issue narrows to a comparison of the bylaw with the staggered board provision. Are they inconsistent? The charter states that directors "shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election." Air Products contends that a term of two years and four months from the year of their election is consistent with this charter provision.

According to Chancellor Chandler, in an October 8, 2010 opinion, the language of the charter is ambiguous. The term of office is defined by reference to annual meetings of stockholders, but the charter does not define "annual" or "third year." In the face of this uncertainty, Chancellor Chandler reasoned that the charter should be "viewed in the light most favorable to the stockholder franchise." In this case, that interpretation would allow the proposed bylaw:

[A] January 18, 2011 annual meeting would be the "2011 annual meeting." 2011 is the third "year" after 2008. Successors to the 2008 class can be elected in the "third year following the year of their election" which is 2011. Thus, the bylaw does not violate Airgas’s charter as written.

The Supreme Court agreed with Chancellor Chandler in concluding that the language of the charter is ambiguous, but held that "overwhelming and uncontroverted extrinsic evidence" supported a reading of the charter that would grant the Airgas directors a term of "approximately three years" ... and "twenty-eight months is not approximately three years."

The interesting thing about these two opinions is that both courts framed the issue as a fairly straightforward contract interpretation, but their divergent paths in the face of ambiguity suggest that what they were actually doing is deciding a profound policy question, namely, who controls the corporation? The stockholders (through a bylaw vote) or the incumbent managers (relying a generous interpretation of an anti-takeover provision in the charter)?

We see in Chancellor Chandler's interpretive standard ("rule of construction in favor of franchise rights") an express desire to empower the current stockholders to the full extent allowed by the charter. The Supreme Court's approach, on the other hand, is more subtle -- after all, we would not expect the Court to announce, "in the face of ambiguity, we favor the incumbent managers" -- but the pro-incumbent bias in the Court's interpretation is difficult to miss. The Court admits that it has no precedent directly on point, but rather than embracing a "rule of construction in favor of franchise rights," the Court looks to "extrinsic evidence."

And how is this evidence "pro-incumbent"? The best evidence it finds involving provisions like the one in the Airgas charter comes from proxy statements describing such staggered board provisions. That's right ... proxy statements! Documents drafted by incumbent managers and filed with the SEC.

The Court refers to these disclosures as embodying "widespread corporate practice and understanding," but the fact that directors on staggered boards created under Airgas-like provisions generally serve three-year terms does not mean that the provision requires three-year terms. The issue in the case is whether that term can be truncated to 28 months, and prior to this case, we had no guidance on that issue. None of the other extrinsic evidence -- including references in practitioner commentaries and an easily distinguishable 50-year-old Court of Chancery decision -- directly confronts this issue.

In the final analysis, we see that the Supreme Court was not compelled by precedent or by rules of contract interpretation to decide in favor of the incumbent managers. And, yet, the Court chose that path, rather than embracing the Court of Chancery's pro-stockholder canon of construction. This is consistent with the Supreme Court's longstanding skepticism regarding the desireability of stockholder governance. While I prefer Chancellor Chandler's brand of corporate law as a policy matter, it is worth noting that both courts are simply deciding the case based on a preferred policy in the face of an ambiguous charter provision. I would be more comforted by this thought if the Delaware Supreme Court would give stockholders more space for effective private ordering.

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Is Delaware a corporate tax haven?

Evidence from the BYU Accounting Symposium, where I am sitting right now. This is a big part of the story:

One of the most prevalent corporate state tax planning strategies involves subsidiaries organized in the state of Delaware. This method, using a subsidiary commonly referred to as a Passive Investment Company (PIC) or Delaware Trademark Holding Company, exploits the fact that Delaware does not tax income generated by intangible assets, such as a trademark, when held by the Delaware-based subsidiaries of a Delaware holding company. To reduce taxation in a state that has high tax rates, the high-tax rate parent company or high-tax subsidiary pays the low-tax Delaware subsidiary a fee for the use of the trademark or other intangible asset. The fee is deductible against income earned in the high-tax state company, and is not taxable in the state of Delaware. Thus, by engaging in a PIC strategy, the firm does not pay taxes to any state on the income shifted to the Delaware subsidiary and benefits from a deduction taken in a high-tax state for use of the intangible asset.

The idea that Delaware is a tax haven is not new, exactly, but this is a fascinating paper. Of course, the strategy described above would result in other states are losing tax revenue to Delaware. Thus, according to one of the commentators in this session, 22 states now have taken steps to counter this strategy. Could the door for PICs be closing? I don't know the answer to this, but the authors claim based on interviews of accountants that the strategy is alive and well.

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