Wednesday, May 28, 2014
The ubiquity of transaction-related litigation is, I think, a real problem. By now, 94%+ of announced mergers end up with some litigation. I think that most reasonable people can agree that not all 94% of transactions where there are lawsuits do the facts suggest that something has gone wrong. Much of the litigation is really just flotsam intended to generate a settlement -- a settlment that directors are all too willing to grant in exchange for a global release.
In any event, there have been a series of efforts, including exclusive forum provisions, which have been deployed in a self-help manner to try manage this issue and its multi-jurisidictional cousin. In the 2013 Boilermakers opinion, Chief Justice Strine gave his blessing to board-adopted exclusive forum bylaw. Following Galaviz v Berg there was some question as to whether an exlcusive forum bylaw adopted by the board had sufficient inidicia of consent such that it would be enforceable against shareholders. In Boilermakers, Strine noted that forum selection bylaws were consistent with both Delaware and federal law, and also that the mere fact that such a bylaw was adopted by the board does not render such a bylaw invalid:
The certificates of incorporation of Chevron and FedEx authorize their boards to amend the bylaws. Thus, when investors bought stock in Chevron and FedEx, they knew (i) that consistent with 8 Del. C. § 109(a), the certificates of incorporation gave the boards the power to adopt and amend bylaws unilaterally; (ii) that 8 Del. C. § 109(b) allows bylaws to regulate the business of the corporation, the conduct of its affairs, and the rights or powers of its stockholders; and (iii) that board-adopted bylaws are binding on the stockholders. In other words, an essential part of the contract stockholders assent to when they buy stock in Chevron and FedEx is one that presupposes the board’s authority to adopt binding bylaws consistent with 8 Del. C. § 109. For that reason, our Supreme Court has long noted that bylaws, together with the certificate of incorporation and the broader DGCL, form part of a flexible contract between corporations and stockholders, in the sense that the certificate of incorporation may authorize the board to amend the bylaws' terms and that stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.
Boilermakers set the stage for the Delaware Supreme Court very recent opinon in ATP Tour. ATP Tour, you know, the tennis guys. The issue in the ATP is related both to the question of transaction-related litigation and unilaterally adopted bylaws. In ATP, the tour adopted a fee shifting bylaw that would eschew the "American Rule" and require that in the event of unseuccessful shareholder litigation - or litigation that "does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought" then the shareholder will be responsible for paying the corporation's litigation fees. Here's the bylaw as adopted:
(a) In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.
Clearly, such a bylaw, if adopted and upheld, would bring the transaction-related litigation train to a screeching halt or at the very least dramatically alter the settlement dynamics.
This bylaw ended up in front of the Delaware Supreme Court as a certified question from the federal district court in Delaware. You'll remember that Delaware is one of the few state supreme courts that will accept certified questions of law. The question before the court was whether the unilaterally adopted fee-shifting bylaw above was valid under Delaware law.
That such a provision is legal under Delaware law isn't all that surprising, really. What is surprising is that court would agree to wander into this hornet's nest of an issue entirely of voluntarily. Whether or not to accept a certified question is entirely within the discretion of the court and the court could have avoided deciding the question altogether had it wanted to. But, apparently it wanted to decide the issue.
The reaction to the opinion has been pretty incredible. For example, Delaware litigator Stuart Grant remarked,"The Delaware Supreme Court seems to have caused Delaware to secede from the union." A little over the top, sure. But, the just because plaintiffs hate the result, don't think that the defense bar is jumping up and down claiming victory and recommending widespread adoption of these provisions. They're not. In fact, many worry that adopting such provisions might just put their clients in the cross hairs. No one wants a fight if they can avoid it. And anyway, the global releases their clients get from settling otherwise trivial transaction challenges are valuable security blankets for directors.
The reaction by both plaintiffs and defendants to the ATP ruling has been a unique constellation of interests. Ronald Baruch calls the reaction evidence of the "cozy" litigation community in Delaware. Plaintiffs want to get paid and defendants want their releases. In response the Corporation Law Section of the Delaware Bar has moved quickly to propose an amendment to elminate fee shifting under the DGCL. The proposed amendment (with underlined insertion) is below:
Amend § 102(b)(6), Title 8 of the Delaware Code by making insertions as shown by underlining as follows:
A provision imposing personal liability for the debts of the corporation on its stockholders based solely on their stock ownership, to a specified extent and upon specified conditions; otherwise, the stockholders of a corporation shall not be personally liable for the payment of the corporation's debts except as they may be liable by reason of their own conduct or acts.
The effect of the proposed amendment would make fee shifting impermissable under the DGCL and therefore rule it out as a bylaw. If approved by the legislature in Delaware, the amended 102(b)(6) would go into effect on August 1. Now that's swift justice.
The battle against transaction-related litigation will have to be fought on other ground.
Thursday, April 10, 2014
Yesterday, the Delaware Senate confirmed Andre Bouchard as the next Chancellor to replace Leo Strine who is now Chief Justice of the Delaware Supreme Court. Next up on the Delaware judicial merry go round, nominating a replacement for Justice Jacobs who will retire in July.
Tuesday, April 1, 2014
Delaware Justice Jack Jacobs has today announced his retirement effective July. There are two obvious potential candidates, James Vaughn and Jan Jurden. Both had applied to replace Chief Justice Steele. The Judicial Nominating Committee sent their names along with Chief Justice Strine's name to the governor, who ultimately selected Strine. Jurden, however, has come under some scrutiny in the past few days for her sentencing of an heir to the duPont family fortune. It's the kind of thing that, while not disabling, will require a lot of explaining. If you're explaining, you're losing. My uninformed guess is that she gets passed over for now.
Monday, March 24, 2014
Today we will get a decision on Delaware's petition to the US Supreme Court that the court hear an appeal in the Delaware Chancery arbitration case. For those of you looking for a quick 'get up to speed' on what's going on, there's a nice interview with Brian Farkas in the NY Commercial Litigator Insider (reg. req'd, but it's worth it).
Thursday, March 20, 2014
Governor Markel has nominated Andre Bouchard (a Boston College alum, '83) to be the next Chancellor the Delaware Chancery Court. According the governor's statement:
In nearly 30 years practicing law in Delaware, Andy Bouchard has demonstrated a remarkable ability to dissect complex legal issues and vigorously represent his clients. He is well recognized for his professionalism and ability to think quickly on his feet in the courtroom,” said Markell. “His experience establishing and growing his own small business as founder of his law firm, as well as his long career before the Court of Chancery, will give him a special appreciation for the work of the court and the many and varied litigants who would appear before him in his new role.”
WDDE has all the details here.
Wednesday, February 26, 2014
OK, so one more thing. All of the amici refer in an off-hand way to the fact that these proceedings aren't really secret. Sure, the proceedings are confidential -- and they don't even appear in the docketing system. But! In the event, the resulting order is appealed, the proceeding is public. The Business Roundtable sums it up nicely:
Arbitration proceedings shall be considered confidential and not of the public record until such time, if any, as the proceedings are the subject of an appeal.
Here's the thing. At first glance we might think that that means that the entire record is made public and that the Delaware Supreme Court will be able to provide perhaps a de novo review of the arbitral order. That would be okay, I guess, because novel questions would reach the Delaware Supremes and they could continue to build the common law.
But, as A-Rod recently found out after he came to his senses, that is not what the court will be permitted to do. Appeals of arbitral orders - to be consistent with the FAA - are much narrower and do not involve a de novo appeal. As noted in NASDAQ's brief:
[Appeals are limited] under Federal Arbitration Act to cases of fraud on or corruption, misconduct, or abuse of power by the arbitrator.
So, no de novo review of arbitral awards from Chancery.
So let's say, Delaware notwithstanding the FAA, Delaware decides that no, it's arbitral program is 'special'. And, unlike any other arbitral program in the United States, the Delaware program will have the benefit of de novo - or substantive - review by a public court. That would be unique -- in fact -- by not having FAA-consistent review as the current procedure suggests (but only suggests), the whole Chancery Court arbitration procedure would look exactly like a trial. (Inconvenient, no?)
Well, I'd love to be a litigator on the first substantive appeal to the Delaware Supreme Court of an arbitral award, cause after they are done with it, we're going straight to the US Supreme Court where the nine have consistently ruled that there is no de novo review of FAA-consistent arbitrations, only reviews for fraud, corruption, or misconduct by the arbitrator.
So, if you want the Delaware Supreme Court to provide a substantive review of an arbitral award our of Chancery litigants would have to come to the court prepared to argue that the Chancellor who handled to the arbitration was incompetent, drunk, or otherwise. Yeah. Good luck with that.
Ok, I'm done.
Of the three, the law firm memo is the most strident and, I think, given the source, the most puzzling. The basic gist of the law firm's amicus brief is that there is just way too much public access of the courts in this country and that it's about time that the Supreme Court did something about it! ("The Court should grant certiorari in this case to restore the Fist Amendment right of access to its properly narrow scope.") Lawyers, in particular, litigators who make their living in the courts you would think would be among the most sensitive to the importance of information and precedent to facilitate the work of advising clients and structuring transactions. But here, they appear to be going 'all in' to ask the Supreme Court to limit the qualified right of access under the First Amendment solely to criminal trials.
What would the world be like if, as the Business Roundtable brief suggests, "Chancery Court arbitration is likely to become an increasingly preferred method of dispute resoultion"? Well, they start, but don't finish, to answer to their own question: "[A]s [deal lawyers] counsel their clients to specify Chancery Court arbitration in their agreements, we can expect that it will be an increasinly utilized tool for dispute resolution."
And...then this is my fear...someone will wake up in ten years time and ask a question, "What's a MAC?" You'll have to dust off an old case book to see what it was once. But, you won't really know. And when your clients ask you,"Will a court uphold this deal structure, what's my risk?" You won't really know. How could you? All or most of the disputes that are the fodder of the Delaware corporate common law will have gone dark. Although dispute resolution will not have stopped, law generation through the courts will have.
That's what's at stake here. It's frustrating to me that so many involved haven't looked down the road to recognize that.
Or, let's think about it this way. The chancellors will continue to hear cases and the 'law' as applied by the Chancellors in arbitration will continue to evolve. However, it won't be precedential and diffusion of knowledge will be limited. Rather than being able to look up recent decisions - or better read The Chancery Daily in your inbox every morning - practitioners will be forced to rely on meetings with 'lawyers in the know' and relationships to understand the current state of the law. While that's not an impossible condition, it raises the relative costs of knowing the "Delaware corporate law". Over time, lawyers who might have previously advised clients to incorporate in Delaware might find the costs of learning the Delaware law to be too expensive. Why not just rely on California law instead? The cases are all online and if something happens, we will learn about it cheaply. That's the long-term threat to Delaware that may well stem from 'success' with Chancery arbitration.
Anyway, like I said, it's frustrating.
There are a couple of points in the amici briefs that are worth commenting on. First, the 'experience and logic test' is all about framing. The Third Circuit (and the District Court) looked at the proceeding and reached the conclusion that the publicly-funded finding of fact by judges who normally hear this kind of dispute had enough attributes of a civil trial that it was in fact a civil trial. Just because you call something and arbitration doesn't make it an arbitration.
The Third Circuit felt the procedure looked like a trial and then applied the experience and logic test to civil trials. The amici say, "No, no, this is an arbitration, so no openness with the experience and logic test." Where you starts dictates where you end to a certain degree when applying the test.
Second, the amici extoll the virtues of arbitration because it is so much more efficient that the normal judicial system. Think about that for a second. The Delaware Secretary of State describes the state's judicial system in the following way:
The Delaware Court of Chancery is a specialized court of equity with specific jurisdiction over corporate disputes. Without juries, and with only five expert jurists selected through a bipartisan, merit-based selection process, the Court of Chancery is flexible, responsive, focused and efficient.
Apparently, according to the amici, it's not really all that efficient nevermind what the Secretary of State says.
Honestly, I find that hard to stomach. Hello! Men's Wearhouse filed a suit in the Delaware Chancery Court on Monday. Yesterday - Tuesday - it got a hearing on a motion to expedite. Please. Enough with the 'Delaware courts aren't efficient' nonsense.
Okay, let's say for arguments sake the amici are right and Delaware is not an efficient place to resolve disputes. Why would arbitration organized by the same inefficient courts be any better? This is a bad argument.
Finally -- not really finally, but I am getting tired you really don't want to read all this -- the amici argue that arbitration is valuable because the entire process is confidential. 'Sure, the Delaware Chancery Court has procedures for confidential treatment of sensitive materials, but just between us, the Delaware rules for confidential treatment suck. Right, amIright?'
Seriously. Does the Chancery Court seriously believe that its own rules with respect to confidential treatment of trade secrets are inadequate? I find that hard to believe.
Anyway. I'm going to finish off this post with a uncategorical statement with which you are free to disagree:
The US capital markets benefit and are strengthed when stockholders of publicly-traded corporations have access to information about the way in which their investments are managed and the law that governs them. Period. Full stop.
Tuesday, February 4, 2014
So, you'll remember the Boilermakers case in which the validity of Chevron and FedEx's forum provision bylaws were challenged in the Delaware Chancery Court. In that case, Chancellor Strine was asked to rule on the facial validity of the forum selection provisions in the bylaws of both Chevron and FedEx. The case was important because in Galaviz v Berg, a federal court in California had ruled invalid a forum provision bylaw that was adopted unilaterally by the board after the challenged act occurred. Although Boilermakers drew a lot of attention - from me as well - I think there was very little doubt by most observers that when asked a Delaware court would say that such a provision was facially valid. Strine did not disappoint (Boilermakers opinion).
However, Chancellor Strine was restrained and made it clear that although such a provision was facially valid, he would leave it to other courts - in other jurisdictions - to consider as applied challenges to these provisions. He also encouraged the parties to bring an appeal so that the Delaware Supreme Court could weigh in on the issue. Although the plaintiffs initially sought an appeal of the Chancellor's ruling, they later voluntarily dismissed it, perhaps believing that a little ambiguity might help them later in other cases.
The issue has now shifted to the West Coast. There is parallel litigation in front of Judge Tigar in the Norther District of California. In that litigation, plaintiffs are - among other things - challenging whether the forum selection provision is proper. Chevron is now moving for the appellate review that Boilermakers avoided in Delaware -- apparently seeing blood, counsel wants to stamp on this victory and get the conclusive word on the question of the facial validity of forum selection bylaws.
Chevron has now asked the Calfornia to certify a question to the Delaware Supreme Court on the validity of the forum selection bylaws (Chevron Certified Question Motion).
Delaware is one of the very few states that will entertain certified questions. They do this because they believe it is important for their franchise for the Supreme Court to always be available to provide definitive guidance on novel corporate law questions as they arise. In this case, Chevron is asking for Judge Tigar to certify the question of validity of the provision to Delaware. If Delaware affirms the facial validity of the provision, which I suspect they would, then that would effectively end that challenge.
So, if Judge Tigar certifies this question, the whole show will move back to Dover. We'll see.
Thursday, January 30, 2014
Yesterday afternoon following a 30 minute confirmation hearing, the Delaware Senate unanimously confirmed Chancellor Leo Strine as the next Chief Justice of the Delaware Supreme Court. That's a marked difference from Strine's initial appointment to the Chancery Court, which was quite controversial at the time. Yesterday's event was a much smoother affair, according to Reuters:
The outspoken head of the state's nationally important business court was confirmed unanimously as the chief justice of Delaware's Supreme Court on Wednesday after breezing through legislative approval.
Leo Strine was confirmed by a 20-0 vote in the state Senate's Executive Committee. He said he expected to be sworn in as chief justice in the coming weeks.
DelawareOnline noted that the confirmation - quick as it was - touched on non-corporate subjects, too:
Strine spoke about a number of issues in his confirmation hearing in committee, saying at one point that Delaware policymakers must discuss ways to reduce the state’s levels of incarceration.
“We cannot continue to have the increases in percentage of our population that’s incarcerated as an answer. That cannot be the long-term answer for our society,” Strine said. “It’s a very complex thing. No one has an easy solution. But the idea that we can continue to incarcerate more and more of our population without having an adverse effect on economic growth and even our feelings about ourselves as a community isn’t realistic.”
OK, so that's that. Next up ... nominating a replacement for Strine on the Chancery Court.
Wednesday, January 29, 2014
The Litigation Insider (reg req'd) offers a rare interview of Vice Chancellor Laster. It's worth a read. He comments on the Chancery Court's ability to act swiftly (ahem...Chancery Arbitration supporters should pay attention to the answer there), the amount of attention the work of the Chancery now gets, as well as things he has learned over the past five years or so:
Q: Five years later, what have you learned the most as a judge? What do you wish you had known then that you know today?
A: Five years later, I am more sympathetic to small firm attorneys and solo practitioners than I was when I arrived on the court. I had the good fortune to learn the practice of law at Richards, Layton & Finger, one of Delaware’s largest and best-known firms. We litigated primarily against other large firms who had the resources to do things well. Even when I started my own small firm, we worked on cases with and against big firm lawyers, and we maintained high standards. Having been on the bench, I have now seen the wide range of resources that parties can bring to cases. It is not always possible for a small firm lawyer or solo practitioner to devote the resources to a case that a large firm could with a well-heeled client. I would like to be able to send myself an inter-temporal memo with that information. I would also give myself a heads up about the decisions where I’ve been reversed so I could try to get them right.
Ditto that thought about the inter-temporal memo. How do I get one of those?
Thursday, January 23, 2014
OK, so I don't think the odds of SCOTUS taking the Delaware arbitration appeal are high -- there isn't an obvious circuit split of the type that generally attracts the court's attention. That said, it's possible that the court might take the case because they want to make more statements about the value of arbitration.
With that in mind, this little colloquy from EBIA v Arkison which was before the court earlier this month is interesting - if for no other reason that it allows us to do the most ridiculously vain thing ever: count potential votes on the court.
The issue for the court in EBIA was whether - with the consent of the parties - a Federal bankruptcy judge could enter a final judgment on a fraudulent conveyance claim rather than hear the claim and then make a recommendation for review by a Federal district court.
So, not directly on point, but close enough for this to play out (via Oyez):
Justice Elena Kagan: --Mr. Gannon, could you say a word about the relevance of arbitration here?
Because I've been trying to figure out, if there's an Article 3 problem irrespective of consent when Congress adopts some kind of scheme for alternative adjudication, why schemes of mediation and arbitration wouldn't similarly be constitutionally problematic.
Curtis E Gannon: I -- obviously, we don't think that -- that these schemes here in the bankruptcy judge context and the magistrate judge context, which are -- which are hedged around with lots of procedural protections and statutory protections, rise to that level.
But I do think that a principal difference, if the Court were looking to distinguish arbitration from these types of concerns, is that the arbitration is more purely private.
Although there's statutory authorization, the arbitrators are generally not Federal employees.
Bankruptcy judges, by contrast, are actually units of the district courts.
They are within Article 3.
Justice Elena Kagan: Yes, but that would suggest that arbitration is more constitutionally problematic because it -- it extends -- you know, it goes -- it's further away from the supervisory authority of the district court.
Curtis E Gannon: --I'm -- I'm loathe to say that it's further away because I think that there may be a separation of powers distinction between--
Chief Justice John G. Roberts: Arbitration is a matter of contract between two parties.
Nothing happens in an arbitration until you get a district court to enter a judgment enforcing the contract.
It seems to me totally different from the situation we're talking about here.
Curtis E Gannon: --Well, I do--
Justice Elena Kagan: A matter of contract versus a matter of consent?
Like I said, you understand the difference.
Chief Justice John G. Roberts: But you -- I'm posing a question to you, I guess.
Courts enforce contracts all the time.
They don't enter judgments beyond their Article 3 authority simply because the two parties before them agree that they should.
Curtis E Gannon: --That's true, Mr. Chief Justice.
OK, so one for. And maybe one against?
Wednesday, January 22, 2014
So, last night Delaware filed a cert petition with the US Supreme Court asking the court to overturn the Third Circuit's ruling with respect to Delaware Chancery arbitration program. I've written about this before (here and even a law review article here). In any event, I'm on record that I believe Chancery arbitration is a bad idea that over the long-term will undermine Delaware's corporate law franchise. In any event, when challenged at the District Court, that court found that confidential Chancery arbitration violated the First Amendment's qualified right of access (District Court Opinion). In a 2-1 opinion on appeal, a panel of the Third Circuit agreed with the District Court (Third Circuit Opinion). In that opinion, the majority appears to have read my law review piece - no need to cite me, I'm not proud. In any event, the majority mimics many of the same arguments that I previously argued about the relative merits of the Chancery arbitration program.
Petitioners make a couple of policy arguments for why it's important why the Chancery arbitration procedure must survive. It's a matter of national competitiveness, otherwise parties will incorporate overseas and take their disputes overseas, too. That's a pretty dubious argument. There is no evidence that any Delaware firm. I looked at a pile of merger agreements to check to see if there was anything to this argument. Prior to adoption of the Chancery arbitration procedure, only a handful of mergers relied on anything other than the public courts to resolve disputes between the parties. There is no evidence that anyone contracted to resolve merger related disputes through international arbitration. It's just not an issue. There is no real competitive challenge to the position of the courts with respect to merger litigation at this point. In rushing to adopt the Chancery arbitration procedure, Delaware is fighting with ghosts.
The second argument for why preservation of the Chancery arbitration procedure is so important is a familiar argument about how the US courts are so inefficient that delayed justice will push parties to seek international arbitration rather than dispute resolution in the US. Gee, I guess, maybe, but are the Delaware courts arguing that the Delaware courts are so inefficient that the inefficiency of the Delaware courts is pushing Delaware corporations overseas? Really. Please. No.
A third argument -- and this one is tied to the question of confidentiality of arbitration procedure - is that if the court were to uphold the qualified First Amendment right of access the procedure would fall into disuse and that confidentiality is central to the success of the procedure. Confidentiality is the only real benefit to arbitration?
Well, honestly, I don't understand how that ties into the argument that the reason why parties are supposedly leaving Delaware is because of the inefficiency of the public courts. Frankly, it doesn't. It shifts the goal posts and makes confidentiality the central contribution of the arbitration procedure. To that I say hogwash.
OK, if the public courts had proven themselves incapable of protecting trade secrets and other commercially sensitive information, I might listen. But, under the Chancery Court' s rule 5.1, parties can seek confidential treatment for sensitive materials. Does Delaware think that its own rules for confidential treatment are inadequate? I don't think so. Anyway, to the extent arbitral confidentiality extend beyond areas that 5.1 typically will protect, then why does anyone in a policy position believe that keeping those kinds of facts (possibly management breeches of fiduciary duties or other bad acts by managers) from the public? I strain to see a policy rationale.
In any event, Delaware might get a day in court on this. I'd be surprised if they do - though as someone recently reminded me if the court wants to make a statement about arbitration (again), this might be a case they will take.
I'll rehash the actual legal arguments in another post later if the case gets picked up.
Wednesday, January 15, 2014
The Delaware Law Weekly has surveyed the field of potential replacements for Chancellor Strine once he moves up to the Supreme Court and comes up with four names:
Andre G. Bouchard, a partner with Bouchard Margules & Friedlander and current chairman of the Judicial Nominating Commission, is viewed as a front-runner to replace Strine. Others who have been mentioned as possible candidates include Superior Court Judge Jan R. Jurden, Chancery Court Vice Chancellor J. Travis Laster and Joseph R. Slights III, a former Superior Court judge and current Morris James partner.
Two things worth noting: First, Andre Bouchard is an Eagle (BC, '83) - so, that's good. Second, if Vice Chancellor Laster were to slide over to the Chancellor's seat, his position of Vice Chancellor would also have to be filled by someone so the nomination merry-go-round would continue for a few more months. The same rules with respect to non-partisan appointment of judges applies to the Chancery Court as applies to the Supreme Court.
Monday, January 13, 2014
A columnist at the News Journal/DelawareOnline weighs in on the Strine nomination:
Gov. Markell has certainly chosen someone whose national reputation gives new cachet to the court. Leo Strine, at age 49, should be able to tackle any challenge his Supreme Court is bound to face.
Friday, January 10, 2014
The Delaware Grapevine pumps the brakes a bit:
As conventional a choice as Strine seems, his elevation would still be something of an act of faith, because he does not come with the standard judicious temperament. Instead, he is a grandiose and contradictory figure, as brilliant and comic as he can be defensive and browbeating.
When Strine went on the bench as a vice chancellor in 1998, he described himself as a "mad wizard," and it is never certain which Strine will show up, either the judicial wizard or the madman.
Wednesday, January 8, 2014
Reuters: Do you think that once you join the Supreme Court you’ll change the views you held on the Court of Chancery?
Strine: An absurd scenario, at best fit for a discussion by a Red Bull-fueled group of nerdy second-year law school corporate law junkies, who find themselves dateless (big surprise) on yet another Saturday night.
My guess is that we will have less of this on the Supreme Court than we had at the Chancery Court - the opportunities for judges to riff from the bench are more limited - so enjoy it while you can.
Thursday, December 19, 2013
I took advantage of the brief time between exams and the holidays to hop down to Delaware to sit in on the appellate arguments in MFW Shareholder Litigation. You'll remember that in MFW Chancellor Strine was presented with a question - in a controlling shareholder transaction which is conditioned on both negotiation and approval by an independent, special committee and a fully-informed, uncoerced vote of the majority of the minority what is the proper standard of review. Chancellor Strine held that the proper strandard of review for a transaction in which the controller essentially disables itself is business judgment.
[If you don't need any of this background and just want a quick summary of the argument, feel free to skip down.]
Since Weinberger, entire fairness has been the standard for transactions involving controlling shareholders. In Kahn v Lynch, the Supreme Court provided a gloss on Weinberger's entire fairness standard for controlling shareholder transaction. Where the controller does the transaction in reliance on either a special committee or a vote of the majority of the minority, the burden shifts from the controller to plaintiff to prove that the transaction was not entirely fair. But, as Chancellor Strine noted in Cox Communications, the decision by the Supreme Court to keep the entire fairness standard in play made it impossible to get even weak complaints dismissed at an early stage. In no small part, Kahn v Lynch was a contributor to the 'litigation industrial complex' - generating almost guaranteed valuable settlement opportunities at the mere announcement of a controlling shareholder transaction no matter how valuable the underlying transaction for minority shareholders.
In MFW, Chancellor Strine had an opportunity to directly address the question of the proper standard of review in a controlling shareholder transaction where the controller conditioned the deal on robust procedural protections that essentially disabled the controller. The question for the corut was whether additional protections should give the board any credit - perhaps even sufficient credit to get weak claims dismissed early. Chancellor Strine put the 'credit' problem this way:
Uncertainty about the answer to a question that had not been put to our Supreme Court thus left controllers with an incentive system all of us who were adolescents (or are now parents or grandparents of adolescents) can understand. Assume you have a teenager with math and English assignments due Monday morning. If you tell the teenager that she can go to the movies Saturday night if she completes her math or English homework Saturday morning, she is unlikely to do both assignments Saturday morning. She is likely to do only that which is necessary to get to go to the movies—i.e., complete one of the assignments—leaving her parents and siblings to endure her stressful last-minute scramble to finish the other Sunday night.
Plaintiffs in MFW improvidently decided not to settle, rather seeking the option of going for post-closing damages. Their mistake. That gave Chancellor Strine the opportunity to address the question that eluded him in Cox. In MFW, Chancellor Strine announced that where a transaction with a controller is conditioned on both negotiation and approval by an independent, special committee and a fully-informed, uncoerced vote of the majority of the minority that business judgment is the proper standard of review.
[Appeal before Delaware Supreme Court]
OK. So that brings us to today in Dover where the Supreme Court met en banc to hear the plaintiff's appeal. I went down to watch the arguments and seem the wheels of corporate justice turn. Justice Holland sat as acting chief. Judge Jan Jurden sat by designation (Someone trying her out? Just sayin'...).
Justice Holland noted for the plaintiffs benefit that the court decided to hear the case en banc because, well, maybe the court wanted to write a new rule... Was that big enough of a hint that the court is looking to make some new law here? Justice Jacobs made the issue more explicit for the plaintiffs - forget about the particular facts of this case, what is the policy reason why the Supreme Court should accept or reject the Chancellor's reasoning.
Unfortunately, the plaintiffs weren't really up to the task of articulating a good reason why the procedural protections in MFW aren't robust enough to generate the business judgment presumption for a special committee. Plaintiffs asserted that special committees are structurally biased in favor of controllers in almost all circumstances. OK, so I am generally pretty cynical, but I still believe in the court's presumptions. Near as I can tell, special committees still get the presumption of independence until plaintiffs present facts that they aren't. Plaintiffs, it seemed, wanted the court to toss the presumption of independence of special committees altoghether in controlling shareholder transactions. Why? Not sure exactly why. But, if you are proposing to the court that directors shouldn't have the presumption of independence, then one really should have a strong articulated reason why. In any event, it didn't seem like the court was entertaining that notion.
Rather, the court quickly turned to the power of the fully-informed, uncoerced vote of a majority of the minority. Why isn't that powerful enough - together with the special committee - to get the business judgment presumption Justice Jacobs wondered? Well, well, because arbs! Oh, wait. Aren't arbs stockholders? Yes, but they just want to make money. So, shareholder votes shouldn't get credit? Again...the plaintiffs failed to clearly articulate a policy reason why a fully-informed, uncoerced vote of the majority of the minority isn't going to work. In general the plaintiffs struggled to provide the court with any reasons to overturn Chancellor Strine's reasoning.
When counsel for the special committee got their chance, they did a much better job of articulating reasons to uphold Chancellor Strine ruling. Justice Berger asked whether with the procedural safeguards the result of the special committee/majority of minority process was equivalent to an arm's length deal? No, was the response, but for the purposes of judicial review the precedural protections that disable the controller put the special committee in the same place as an independent board that would otherwise get the protection of business judgment. There was some push-back from Justice Berger on that point - particularly that even though the controller disabled itself, it's the controller who is the impetus for the transaction, not the special committee.
If the plaintiffs manage to get the Supreme Court to overturn the Chancery Court's opinion in MFW Justice Berger's point will likely be the reason. While, the special committee and the unaffiliated shareholders can still say no, it's the controller (and only the controller) who always gets the ball rolling. Because only the controller is permitted to 'set the scene' for the sale, the special committee process and the following shareholder votes are irretrievably infected by a structural bias that requires entire fairness to be the standard rather than business judgment. There, I made the plaintiff's argument for them.
As in previous cases, I won't hazard a guess on the actual outcome of this argument. However, I will note the old saying that 'you can't win an appeal at oral argument, but you can lose one.'
Friday, December 13, 2013
Following along the same theme as yesterday - multi-forum litigation, we have a ruling from Chancellor Strine in the Cheap Trick litigation.
In short, Chancellor Strine dismissed the case without prejudice in favor of the parties resolving their issues in front of a Federal judge in Illinois. This litigation is really a pretty garden variety issue at heart -- board members of a corporation with a voting rule that requires unanimous consent of all the members of the board fight with each other about the removal of one member of the board. Deadlocked, they turn to the courts to help them resolve their mess. Or, in other words, "What do mean I'm not in the band anymore?"
From the Delawareonline piece:
In August 2013, band members Richard Nielsen, Thomas Peterson and Robin Zander sued drummer Brad Carlson in Delaware Chancery Court seeking to remove him as a member of the group’s board of directors, claiming he left the band in 2010 by no longer performing with them on tour.
A month earlier Carlson had sued Nielsen, Peterson and Zander in U.S. District Court in Illinois over his removal...
In a bench ruling, Strine dismissed the Delaware action in favor of the earlier filed Illinois action.
Strine said Illinois, where the band formed in the 1970s and where two members still live, was a logical jurisdiction for resolving "garden-variety" questions of contract interpretation, including whether Carlson is still a member of the band.
So, while Delaware may have an institutional interest to keep as much corporate litigation at home as possible, this interest does not prevent Delaware courts from letting go of high-profile litigation when it was clearly filed earlier in another jurisdiction and it doesn't implicate novel issues of Delaware law.