del1Because the vast majority of U.S. publicly traded companies are incorporated in Delaware, legal developments in Delaware have a particularly important impact on legal standards governing corporate conduct in the U.S. Delaware law is particularly influential with respect to the responsibilities and potential liability exposures of corporate directors. In a series of recent opinions written by Chief Justice Leo E. Strine Jr., the Delaware Supreme Court has, according to an October 22, 2015 memo from the Skadden law firm (here) “reaffirmed Delaware’s deference to the business judgment of disinterested corporate decision-makers and restored important protections for directors that had been weakened by prior court decisions.”


The first of the three Delaware Supreme Court decisions involved issues surrounding the fiduciary duties applicable to boards considering proposed takeover transactions first described in the Court’s 1986 Revlon v. MacAndrews & Forbes Holdings, Inc. decision (here). In its December 19, 2015 opinion in C&J Energy Services, Inc. v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust (here), the Delaware Supreme Court reversed a  Delaware Court of Chancery ruling in which the trial court had entered an injunction blocking a proposed merger transaction.


Among other things, the appellate court said that Revlon permits a board of directors “to pursue the transaction it reasonably views as most valuable to stockholders, so long as the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so.” The board of directors is not per se required “to conduct a pre-signing active solicitation process” in order to satisfy its Revlon duties.


The appellate court’s decision in the C&J Energy Services case, the law firm memo notes, “confirms that Delaware courts will not lightly interfere with a disinterested board’s decisions about how to pursue a change of control transaction.”


The second of the three decisions involved a clarification of issues surrounding exculpatory charter provisions adopted pursuant to Section 102(b)(7) of the Delaware Corporations Code. Following the Delaware Supreme Court’s 2001 decision in Emerald Partners v. Berlin (here), questions arose whether a director could be dismissed from an action challenging a merger transaction when the standard of review was the entire fairness test. (The “entire fairness standard” is triggered where a majority of the directors approving the transaction are interested or where a majority stockholder stands on both sides of the transaction.)


In its May 14, 2015 decision in the In re Cornerstone Therapeutics case (here), the Delaware Supreme Court clarified that the Emerald Partners case “merely stood for the mundane proposition that a defendant cannot obtain dismissal on the basis of an exculpatory provision when there is evidence that he committed a non-exculpated breach of fiduciary duty.”


As the law firm memo notes, the appellate court’s decision in the Cornerstone Therapeutics case clarified that “Delaware courts will dismiss claims for money damages against a corporate director who is protected by an exculpatory charter provision, unless the plaintiff pleads facts supporting a rational inference that the director breached the duty of loyalty (or engaged in other non-exculpated conduct), even when the underlying standard of review is entire fairness.”


The third and final of the three decisions involved questions arising the Delaware Supreme Court’s 2009 decision in Gantler v. Stephens (here), and in particular to the questions of when the “entire fairness” standard of review applied, where the transaction had been approved by a majority of disinterested shareholders. In its October 2, 2015 decision in Corwin v. KKR Financial Holdings LLC (here), the Delaware Supreme Court held that an uncoerced, fully informed vote of disinterested stockholders in favor of a challenged transaction provides an independent basis to assess the transaction under the business judgment rule, rather than under the entire fairness standard.


Among other things, the Supreme Court said that “For sound policy reasons, Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests.”


As the law firm memo notes in conclusion, the three recent Delaware Supreme Court opinions “provide helpful guidance to Delaware practitioners and corporate planners and reinforce the power and ability of a disinterested board to directors to exercise its business judgment without fear of liability, regardless of the standard of review.”


Break in the Action: During the next few days, I will be away from my desk attending the PLUS International Conference in Dallas, Texas (about which refer here). I am hoping to see many readers at the conference as well. If you see me at the conference, hope you will make a point of saying hello, particularly if we have not met before. While I am traveling, there will a break in this site’s normal publication schedule.