ABSTRACTCommon law adjudication has always involved the formulation of - PDF document

ABSTRACTCommon law adjudication has always involved the formulation oflegal standards by judges based on assumptions In this essay, which was delivered as the keynote address for evolution of the common law of corporations. Using doctrinalexamples case-specific, but which instead involve more general understandingsabout how human beings behave in various market and to acquire knowledge aboutreal-world behavior, to expose their reasoning openly, and to be willing tochange course if experience and judges to assess the reliability and validity of newempirical research, and to apply that research to the task of common lawdecision making. *Vice Chancellor, Court of Chancery, State of Delaware.'This keynote address for the Second Annual Law andBusiness Program bad thing, because it is socially useful that the common law the basis of a view of the shaping a common law that fits the recognition of this reality brings withit concomitant responsibilities. Chief willing toabandon previous decisions if they no longer best advance that case, the Courtengaged in a free-wheeling judge's ability to procure real-world knowledge during the actual specific information-i.e., the record-is challenging all by itself. Therefore, the knowledge thatthe judge possesses before the hearing must, American states, has a structure that entrusts a great deal ofpolicymaking authority the requirement that the acts be accomplished in themanner specified by determining cases, and the statutorily required methods of implemen-tation act to safeguard stockholder rights in important transactions, such asmergers,' by requiring stockholder assent.Nonetheless, it corporate directors an enormous amount of leeway to act. To the extentthat the statute alone was the law of corporations in America simply would notexist. Put differently, Delaware's enabling statute is premised on uses the common law of fiduciaryduties as an additional restraint on director action. This fiduciary restraintenables stockholders to benefit safely abuse that flexibility for their own self-interest at the stockholders'expense.One of the dangers of fiduciary duty review when judges seekout knowledge, "[r]isk-for-risk... a thinking, informed judge is far less dangerous embraced the businessjudgment rule, to protect the decisions of disinterested directors acting ingood faith from judicial intrusion.6At the the late twentieth century developedmeans to assess what level of deference to give to conflict transactions. Forexample, where prove entire fairnessor the transaction would be invalidated.'As the law developed, the outcome of corporate law cases more andmore turned to undisputed case-specific facts--such as whether a board was comprisedof a majority of thereforeto justify the application of the business judgment rule. This judgment isbased largely on non-case-specific factual assumptions about the Business Judgment Rule under US. Corporate Law in COMPARATIVE CORPORATEGOVERNANCE: STATE OF THE ART AND EMERGING RESEARCH 307 (Klaus J. Hopt et al. eds.,1998).7Gottlieb v. Heyden Chem. Corp., 91 A.2d 57, 58-59 (Del. 1952) (ratification bydisinterested stockholders obviates all attacks on a transaction except for claims of waste); Pumav. Marriott, 283 A.2d 693, 696 (Del. Ch. 1971) (approval of conflict transaction by a boardcomprised of a majority the talk some consistency,all the issues will involve legal reasoning and the fashioning of legal rules." 364,402-03 (1942); FED.R. EVID. 20 1(a) advisory committee's note).As the work of John Monahan and Laurns Walker has pointed out, the term "legislativefacts" creates some confusion. As a practical matter, they finding. Because suchassumptions do not usually turn on evidence specific law. See John Monahan &Laurens in judicial proceedings). In anotherwork, they dilate on the reality that courts often make assumptions about the world, not to shape (2000). See Jack B. Jacobs, Comments on Contestability, 54 U. MIAMIL. REv. 847 (2000). In his commentary, Vice Chancellor Jacobs notes that reliable real worldevidence about the effect of takeover defenses might of corporations, and the need for judges twice, collectively, to consider the asset sale, having previouslydelegated to Submissive's chief financial officer (who does not work forDominator) the job of negotiating the sale price. At the second meeting,the independent board majority approves the that the price is fair to Submissive and a confirming fairnessopinion present at bothmeetings. The independent board majority never meets separately toapprove the sale.A derivative suit is filed. The statute is not particularly helpful to thejudge in resolving the case, because under the DGCL, the approval of thedisinterested directors satisfies section 144." Thus, apply the common law of corporations to the really hard questions.Namely, is demand excused? Does answer those questions, but instead will identify some of thenormative and empirical factors bearing on the answers.I will start with an obvious concern. Dominator is a majoritystockholder. Nagging at concern that the Submissiveboard is going to be unduly responsive to Dominator, and subtly influenced by the fact that Dominatorhas the voting power to unseat otherhand, the judge will consider that the independent directors were beneficial to Submissive?Still, the judge is troubled by the fact that the independent directorsdid Dominator-affiliated directors may have chilled discussionsthat would have occurred outside their presence. The fact that the CFO'scareer ultimately turns on Dominator's will strength in numbers; they could block the deal. Thisshould have bucked them good faith judgment of independent directors to protectthem in these situations. As important, the judge also knows that if shegives no deference to the independent board majority, she may beundercutting the incentive that majority stockholders, like Dominator, haveto elect independent directors.Confronted with forge a path based on the best information she even more, that the ruleshe articulates will a truly"independent" director who can act only in the best interests of to what extent are we willing to trust their judgment? Is with the active advice of financial and legaladvisors, and without participation and involvement by insiders?These issues raise interesting psychological and sociologicalquestions. What are in the majority? Or specifically charged as aseparate committee to application of the businessjudgment rule in cases like these therefore invariably rely on empiricalintuitions to answer these type case law dealing with thesequestions lacks citations to empirical research. Sociological andpsychology journals are typically not presented to my court our original real world questions. Is demandexcused? Does the business judgment Inview of the difficult nature of some of these questions, it good defense lawyer would contend thatthe plaintiffs could not proceed with a derivative suit. Why? BecauseAronson presumes capable of objectively considering a demand to sue a controllingstockholder like track the structural operation of the business judgment rule."Aronson thus sociological research to the behavior of corporate boards.For recent examples, Board:Behavioral Science and Corporate Law, 80 U. MICH. by Dominator to Submissive will always be subject to entire fairnessreview, regardless of conception, the majority stockholder simply holds too much structural andpractical sway over Submissive to fully trust any internal corporate proxiesfor arm's-length bargaining. As a result, the produce a potentially confusing result. The Aronson test hastwo prongs.22 The first prong supposedly tracks the structural operation ofthe business judgment rule.3 Under that first prong, (Del. 1997)."8787 A.2d 85 (Del. 2001)."Tremont discussed infra pages 509-10. The scope of the Lynch doctrine recent opinion, Chancellor Chandler read Emerald Partners as extendingLynch only to situations involving either a squeeze out merger or a merger between twocorporations under the control of a single controlling stockholder. Orman v. Cullman, 794 A.2d5, 20 n.36, & 23 n.40 (Del. Ch. 2002). This narrower reading not all, transactions involving controllingstockholders)."Emerald Partners, 787 A.2d at 94-95; Tremont, derivativeplaintiff to not make a demand if he can show not entitled tobusiness judgment rule protection."5 This is usually done by aparticularized showing that the transaction resulted from a breach offiduciary duty. The second prong is useful to permit a plaintiff to showthat some factor of the disinterested directors that they cannot impartiallyconsider a demand."' But note how the TremontlEmeraldPartners formulaplays cases can be read to apply the entire fairness standard to the independent board majority at Submissive, their import may be toexcuse demand under the second prong of Aronson. legislative facts in the development of the common law of corporations.The TremontlEmerald Partners line of reasoning emerges out of a priorseries of cases addressing squeeze-out mergers in which a controlledsubsidiary for cash or stock.2" There a majority stockholder and a controlled subsidiary could qualifyfor business judgment rule treatment if: (1) the subsidiary board wascomprised of a majority of independent directors; (2) a special committeeof the subsidiary's independent directors was empowered to negotiate andveto the merger; or (3) the merger 493 A.2d 929 (Del. 1985);Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983); and Sterling v. Mayflower Hotel thoughtwas premised on the notion that when an 800-pound gorilla wants the of the directors' andstockholders' minds is the fear that the gorilla will not get his way. As a result, we cannot fully trust most, wewill give the majority stockholder some credit this approach also implicitly involves a judgment about the utility of thestatutory appraisal remedy--the fact as significant enough to give themthe backbone to the issue came to the Delaware Supreme Court in Kahn 800-pound gorilla theory. The1994 ruling in Lynch created what many viewed the nature of the transaction, and the controlling stockholder'scontractual and voting authority. What, of course, determined the outcomewere non-case-specific factual judgments. How does the typicalindependent director react to a going private offer by controlling stockholder who, forexample, owns thirty-nine percent, has the effective power to block otherin other corporations owned by Marriott family members holding 46% of the corporation's stock,the business judgment rule applied because a majority of the board which approved the transactionwas independent).3See Rosenblatt v. Getty Oil Co., 493 A.2d 929. (Del. 1985).3See Citron varietyof other factors, which have been author); Randall S. Thomas, Revising The Delaware Appraisal Statute, 3 DEL.L. REV. 1 (2000)."638 A.2d I 110 (Del. the controlling stockholderowns a majority of shares, does its practical ability to compel if the independent directors say no now, preventthe independent directors from approximating arms-length bargaining?How will minority stockholders react to being given veto power over agoing private merger? Will will the availability ofjudicial relief if such bad acts transpire comfort them other. This arguableextension occurred without discussion of whether a transaction potentiallyless important to a majority stockholder (such as the sale of a modest-sizedasset) should be subject squeeze-out merger. It is thispotential extension that causes the most direct doctrinal tension withAronson.35The Lynch doctrine has also produced tension with another body ofprecedent. In a prior line an independent tender offer for theminority's shares had no duty to 6 By independent, I mean that thetender offer negotiated agreementwith the subsidiary board.Of course, Lynch turns on the arguably contrary premise that a goingprivate offer by a majority stockholder is inherently coercive. UnderLynch, even when the majority stockholder subjects itself to a special majority of the minority vote, it remains subject tothe entire fairness standard.At present, there is an active and lively debate about these two chancery has held (in thecontext of a preliminary injunction proceeding) that going private offers outside the reach of Aronson, which addresses derivative claims.36Solomon v. Pathe Communications Corp., 672 A.2d 35, 39.40 (Del. 1996); op. at 6-7 (Del. Ch. Apr. both cases, thecourt held that the majority stockholder had authorityby the name of the first of these decisions, Siliconix.3 in the wake of the ruling to of corporations will have tograpple with most importantly on larger empirical claims about the commercialworld, rather than on any case-specific fact findings. Will the rule of Lynchbe tested against the real world experience since Lynch was decided? Forexample, if there is empirical evidence that going private transactionsnegotiated by special committees have been advantageous to minoritystockholders, will such transactions receive closejudicial scrutiny, thus potentially reducing the number of such transactionsthat occur? finance colleagues for a moment. Even under theSiliconix line of cases, there independent offer is somehow coercive.Determining what is coercive, however, as a practical matter cannot turn Dominator does not promise what it will do to the minority if it wishes and on unspecifiedterms. In a later section 253 merger, appraisal, assuming full disclosure by Dominator of the material facts.4"The question becomes whether the offer structure is coercive-aquestion whose answer could be thought large extent, onlegislative facts. Start with the notion that some respected scholars believethat tender offers are inherently more coercive than votes, a view associatedwith, one Dominator is using, mightcause even target stockholders with a higher reservation price to tender,irrespective of minority the opportunity to exercise free will.Under this perspective, however, the outcome might tilt towardsDominator if he restructured his offer. make twoindependent decisions. One would be to tender. The second would be tosimply vote on whether the offer would proceed. Assume Dominatoragreed not to proceed with the offer unless a majority of the minority bothtendered way the world works, thismodified structure would give the minority a free choice (putting aside thepsychological fears it deal withthe actual outcome in Siliconix? That e.g., Lucian A. Bebchuk, The Case Against Business, Harvard Law School (Oct. 12, 2001); Lucian Arye Bebchuk, TowardUndistorted Choice and Equal Treatment in Corporate Takeovers, 98 HARV. L. REV. 1695(1985).[Vol. binding promise from the offeror about what he would dowith the remaining stockholders who ajudgment arguably borne out by the actualbehavior of the Siliconix stockholders.Assume yet another modification. In this variation, Dominatorconditions the procession of its offer on by and large,the structure in the Aquila case. In Siliconixstockholders in a more coercive environment, does this promise-whichensures that hold-outs will be treated equally with those whotender-render the modified Dominator offer incontestably non-coercive?I venture no answer, but suggest again that the answer turns on legislativefacts. That is, the case turns on a judicial decision about how the worldworks, ajudicial decision that necessarily involves empirical assumptions.These thecontrary, they illustrate the dynamism inherent in the common law processof adjudication.4 difficultempirical and normative judgments under time pressure. The appeal ofvarious arguments will tug and pull on thejudges involved, the variant arguments and evidentiary records in the cases,the mood set by the current market environment, normative analysis far more than it is a path process in whichdetermining what the rule should some reason, Aronson might notimmediately be seen as relevant to whether an asset sale this reality; moments like these are integral-and usefully vital-to theevolution of the common law. always wise. What judges can aspire to is that these moments will resultin decisions that are fully reasoned, that are candid in acknowledging thetensions that exist in the current status of a willingness to update the common law on the basis of thoughts tentatively,"My colleague, Chancellor Chandler, has articulated well some of the unique cultural critical factors is the continuing feedback that the Delaware courts receive PennsylvaniaLaw and Economics Institute, Distinguished Jurist Lecture (Feb. 24, 2000). Chancellor Chandleraptly apply the common lawof fiduciary duties actions, which are continuously metby reactions from an acknowledgment of the managerial prerogativesof Delaware directors under Section various choices beforethem, and-perhaps most importantly-be willing to revisit and abandonprior decisions, if necessary, to forge involve judicial judgments about howhumans are likely to behave in particular contexts and the likely results ofthat behavior, candor about balance, well worth it forjudges to seek out knowledge and Berle and Means model of the public of thedemand futility test] of complaints alleging specific facts pointing similar observation. In commenting on the need forcorporate law judges to avoid placing too much case-determinative weight benefit of all that judges not become too long rested on empirical assumptions lackingreal world proof, and that corporate law theories that can be tested against observable facts an unbiased, and sufficiently thorough, sample of theliterature, much less to understand it fully.49 The joyous human experience confounds the ability ofsocial science to describe the way things are some aspects of the natural sciences. Judges reviewing askewed and incomplete body cold page to an active dialogue with the social scientists on that49That judges are not likely litigation process that this literature points out is thereality generally Michael Rustad & ThomasKoenig, The Supreme Court and Junk REv. 91 (1993) (discussing the increasing partisan forcefully argued that judicial decisionmakingat all levels (i.e., both the trial record).As a personal matter, I believe it to be extremely useful for the court to have anopportunity to engage in a direct back-and-forth with testimonial experts. This permits that. .." or "Can judgesconducting jury trials. Nonetheless, the Daubert hearings, now so common as a predicate to theadmission of expert testimony, can permit jury trial real world. Nor do they support acts ofjudicialobscurantism, in which judges rest their decisions on their "discovery" ofrules of decision within prior precedents, thereby suppressing the empiricaland normative foundations of theirjudgments. Neither option changes the absorb all the information relevant to ourjudgments is compromised.This inevitability does not, to my way common law is the goodfaith effort by impartial judges to articulate principled rules of proxy solicitors, with no corroborating production ofempirical data, even from theirown companies' files. Id. at 337. In view of the expedited nature of the case, I was forced tomake the best judgment I could, while acknowledging the in supra note 50."Even Dworkin counseled modesty onthe 1109."Sophisticated commentators on corporate law are keenly aware of the extent to whichjudges must forge common law rules based on"intuitions about underlying empirical conditions."Robert M. Daines & Jon D. Hanson, The Corporate Law Paradox: The Care for RestructuringCorporate Law, 102 YALE U. 577, that are just in a deeper sense."5That these efforts are never completed, but always involve a strivingfor facts finding, enhances, not detracts, from the vitality and legitimacy of thecommon law. Judges should not fear that a candid struggle with difficultquestions of legislative fact will reveal to the public, for the first time, thereality an uncertain and ever-changingworld.6'Schauer, supra ... important, in my opinion, that the citizens who law understand what that process really is; understandwhen and why choice is unavoidable; understand that choices should be exposed and all choices choice is compelled by circumstance. A judicial system thatexposes its grounds -its real grounds, which may extend beyond a set ofdoctrinal expressions -is in the end, the better system of government.Allen, supra note 10,