“Sweeping Changes” to Delaware’s Corporate Law Coming Due to “‘Urgency of the Moment'”: Senate Bill 21 Debated in JD Supra Article

OPINION 

“Sweeping Changes” to Delaware’s Corporate Law Coming Due to “‘Urgency of the Moment'”: Senate Bill 21 Debated in JD Supra Article

The article details the bill, including objections. In the end, what Delaware Senate Majority Leader Bryan Townsend says, explains why this bill is happening and necessary in America’s First State. There is “growing frustration out there in the marketplace as to what people believe to be a departure in predictability’ in Delaware’s courts.” Our corporation dominance has been shaken and potentially lost as I see it, folks. Alarm bells are ringing throughout Delaware as SB21 tries to repair the damage done by Andre Bouchard, Leo Strine and current Chancery Court Chancellor Kathaleen McCormick. Companies have left and as more consider leaving Delaware, this legislation is necessary in my view. Read the JD Supra article below, folks, and tell me whether you agree or disagree that Townsend’s Senate Bill 21 is what’s needed for Delaware. I always welcome and appreciate your feedback. 
Respectfully Yours, 
JUDSON Bennett–Coastal Network

Sponsor of SB 21, controversial Delaware bill to amend corporate law, speaks out

In an exclusive interview with Law360, the Delaware legislator who was the primary sponsor of the proposed amendments to the Delaware General Corporation Law that have fueled so much debate recently discusses the thinking behind the proposed legislation.  As discussed in this PubCo post, in response to much chatter and speculation about companies changing their states of incorporation from Delaware to other states—in other words, concerns about Delaware’s valuable corporate franchise—the Delaware legislature introduced a bill that, if adopted, would effect “sweeping changes” to Delaware’s corporate law.  The bill would offer a process for boards to invoke safe harbor protection from litigation over potentially conflicted transactions for directors and controlling stockholders. The bill would also address Delaware’s provisions related to books and records. The impact could be fundamental. But there has been substantial pushback—some of which is quoted in the referenced post—from critics of the bill.  In the Law360 interview, Delaware Senate Majority Leader Bryan Townsend defends the bill, citing the “‘urgency of the moment.’” In his analysis, “‘[w]hat seems to be happening here is growing frustration out there in the marketplace as to what people believe to be a departure in predictability’ in Delaware’s courts, ‘at a time when other states are standing up alternative frameworks that people are seriously considering.’” Check out the article!

As the article observes, the bill, SB21, emerged in the context of debate over “recent large or record stockholder attorney fees awards and breach of fiduciary duty findings,” as well as “contested rulings in cases involving the overshadowing of common stockholder interests by those of controlling investors.” The article also noted “increasing stockholder litigation challenging director independence and conflicts and rulings assigning controlling stockholder status at lower levels of stock ownership—triggering potential heightened court scrutiny.” Another issue identified in the article was “increasing stockholder suits for corporate books and records ahead of any litigation.”

SideBar

One example of recent control stockholder litigation was the Maffei v. Palkon decision regarding TripAdvisor, in which the Chancery Court had decided that, in a reincorporation involving a controlling stockholder that potentially received a financial or other benefit not shared with the corporation’s stockholders generally, the entire fairness standard applied. That decision was ultimately overturned by the Delaware Supreme Court, which held that, where the non-ratable benefit from the reincorporation was not material and the decision to reincorporate was made on a “clear day” (i.e., there was no pending or threatened litigation), the business judgment rule applied. (See this PubCo post and Cooley Alert.)

According to Townsend, “‘[f]or whatever reason, there was a critical mass of developments that caused Delaware companies to be very much willing to look elsewhere.’” As he explained in the interview, initially, the legislators hadn’t attributed much significance to the early announcements of potential charter moves—and the number of reincorporations has still not amounted to a surge—but some discussions in late January and early February led them to take a deeper dive and “‘reach out to a broad swath of stakeholders,’ some of whom ‘had frustrations, who weren’t necessarily telling us in recent months and years’ about their concerns. ‘There had not been a critical mass of input to indicate we might have a more serious problem.’”  He was pleased to hear, however, when they did canvas the market in February, “‘that people aren’t asking us to abandon fundamental principals and engage in the race to the bottom.’” Townsend pointed out that, although the legislation was crafted by a working group, the corporation law council of the state bar “‘has played and will continue to play a critical role in the evolution of our law.’”

At this point, he said, they wanted “‘to assure people that Delaware law will remain balanced and predictable.’” He characterized the bill as “‘not a departure from fundamental Delaware legal procedures….This is not the first, and it won’t be the last time sensitive issues unfold with regard to Delaware corporation laws.’”

SideBar

Maybe you recall or read about the events leading to the adoption in the mid-1980s of Delaware Section 102(b)(7), which permitted corporations to adopt an amendment to their Certificates of Incorporation to eliminate the personal liability of directors for monetary damages for breach of the duty of care?  That provision, also controversial, was adopted in response to a Delaware Supreme Court decision, Smith v. Van Gorkum, which had allowed the imposition of liability on directors of a public board for their conduct in connection with a takeover. Take a look at this fascinating interview transcript from the University of Pennsylvania with a then-member of the corporation law counsel, Stephen Lamb (eventually Vice Chancellor Stephen Lamb of the Delaware Chancery Court) regarding the evolution and adoption of 102(b)(7).  The interview describes the new law as fueled by exposure to the imposition of substantial (for that time) liability in Van Gorkum, together with the D&O insurance crisis and a push at the federal and state levels for more independent directors.  According to Lamb, at the time, some directors were resigning from corporate boards, and it was a challenge to “get an outsider to come in and expose his or her net worth to liabilities or rising amount of activity. And so when there’s this pressure to get more independents on the board, the idea that you’re going to get more of them to serve, have what you think is a better boards process and then expose them all to basically unlimited liability, there’s some tension.”  He recalled that “it was very hard to give someone unbiased advice if it’s a good idea” to serve on a corporate board.   He also recalled that the provision was structured the way it was, i.e., not a direct limitation on financial liability of directors for violation of the duty of care, but rather the reverse—elimination of monetary liability for breach of fiduciary duty other than various enumerated duties and provisions such as loyalty and good faith—“because of the sensitivity of members of the council to be appearing to reverse, even this indirectly, the Van Gorkom decision.”

For example, in the interview, Townsend pointed out that, although Nevada—one of the potential competitor states—permits “‘exculpation of loyalty claims[,] that would run counter to Delaware law….That’s not on the table’” in the Legislature. In his view, a balanced system is necessary, and they wanted to ensure that all sides of the debate see that they are committed to maintaining that balance: “‘We don’t want to abandon the absolute commitment to the duty of loyalty for ‘C’ corporations.’ Balance also is important in working out how corporations prove fulfillment of the duty of loyalty, Townsend said.”

With regard to stockholder litigation, Townsend indicated to the author of the article that they were committed to ensuring that there remained “‘proper incentives for plaintiffs firms to bring meritorious cases,’” and “‘proper incentives to find a resolution of the case.’” Commenting on the complaints about “mega fee awards” that are calculated as a percentage of “mega recoveries,” he observed that that money was “‘not going back to the stockholders.’” Although he viewed incentives to be important, he also recognized that some of the fee multipliers went “‘beyond the reasonableness that provides the proper incentive’ for class litigation pursuits. ‘It’s an understandable point of frustration if you don’t have certain guardrails in place to ensure the focus is on recovery for stockholders.’”

As to the dialogue between the judiciary and the legislature that this proposed legislation brings to the fore, Townsend told the author that “there always has been a ‘back and forth’ in caselaw and marketplace developments. However, he said, ‘I don’t think we’ve ever had it occur simultaneously with other states being viewed as legitimate alternatives.’”  In the quest for “‘that eternal balance between legislative and judicial roles,’” he said, “[j]udges ‘are there to address the individual trees in front of them, and they can bear the broader forest in mind, but they have to address the individual trees [and cases] in front of them. They render judicial decisions that add up to a forest’ upon which the Legislature is more in a position to opine.”