Smelling my way to Dover

With apologies to the Bard, I made my way to Dover (DE) yesterday using a GPS, not my nose.  I was in the capital of the First State to attend the Senate Judiciary Committee's hearing on SB 313, the proposed amendments to the DGCL that seek to overturn three Chancery Court opinions (Moelis, Activision, and Crispo).  In the time I was allotted to speak, I made three points: 

First, the proposed Moelis provisions (§ 122(18)) is very broadly drafted and threatens to seriously undermine § 141(a) in ways that may not be repairable. For example, the proposed provision permits the board to outsource internal governance of the corporation to a single common stockholder with disputes over that contract decided by an arbitrator outside of Delaware. It's truly baffling to me why people who consider the delicate balance of the corporation law think this might be a good thing. It’s a threat to the basic underpinnings of the Delaware corporation law and could quickly become the source of erosion in Delaware’s market position.

Second, although the Activision amendments are intended to make sure boards are not penalized for foot-faults when doing a merger, these amendments do a bit more than that. They are not just technical amendments. Specifically, proposed § 147 permits a board to approve a merger agreement that is in "substantially final form." There may be still be i's to dot and t's to cross, but the material terms are there or are known to the board when they approve the merger agreement, the fact that there is some clean up after approval shouldn't cause a merger agreement to fail.

However, proposed § 268 provides that disclosure schedules, which can materially alter the meaning of a merger agreement “shall not be deemed part of the agreement for purposes of any provision of this title.” So, when a merger agreement is in "substantially final form" that merger agreement excludes the disclosure schedule. A disclosure schedule call alter the understanding of material terms of the merger agreement. As written, the proposed § 268, as written, contemplates a scenario where the board can validly approve a merger agreement in "substantially final form" without any knowledge of how a disclosure schedule material affects the terms of the merger agreement. It’s hard for me to imagine that the legislature intends for directors to do this, but by adopting this language, the legislature is giving board license, in effect, to violate their duty of care.

Finally, the Crispo amendments are also fraught with unintended consequences. This provision specifically permits parties to merger agreements to include so-called “Con Ed” provisions. While merger agreements now uniformly include specific performance provisions and deal makers have come to rely on the Delaware courts for deal certainty in the face of a reluctant buyer, I worry about the impact on deal certainty that a proliferation of statutorily authorized Con Ed provisions will have on judges who must decide whether to order performance (generally disfavored) or damages.  I mean it's widely believed that Elon Musk only closed on the Twitter deal because his lawyers told him he would be ordered to perform. What might have happened if he had been given the option of paying $5 billion to walk away? 

Anyway, the amendments advanced out of committee on a vote of 4 in favor with 3 abstentions.

-bjmq