Retiring Delaware Chief Justice Issues A Sweeping Manifesto For Corporate Law Reform

ATTORNEY: GUSTAVO F. BRUCKNER
POMERANTZ MONITOR NOVEMBER/DECEMBER 2019

It is not controversial to say that over the last two decades, no jurist has had a greater impact on the state of corporate governance in this country than Chief Justice Leo Strine of the Delaware Supreme Court. After all, Delaware is the state of incorporation for over 50% of all publicly traded corporations in the U.S. and 60% of Fortune 500 companies. Many other states, recognizing the preeminence of Delaware courts in the field of corporate law, have looked to Delaware court decisions for guidance on resolving open corporate law questions in their own jurisdictions. So Delaware court decisions on issues of corporate law have far-reaching ramifications. Chief Justice Strine has spent the last 21 years dispensing just such opinions, the first 16 on Delaware’s Court of Chancery, and since 2014, while leading the state’s highest and only appellate court. Earlier this year, Chief Justice Strine caused a bit of a stir when he announced that he would retire this fall.

Justice Strine’s decisions, bolstered by his vast academic output, have captivated and transformed corporate America. Many of his opinions are considered among the most influential rulings in corporate law. More often than not these decisions have protected corporate boards from investor challenges to their actions.

In 2013, Justice Strine, then Chancellor, set a new, more relaxed standard of review of investor suits challenging controller-led buyouts in the In re MFW Shareholders Litigation. Because the controlling shareholder is in a position to control the actions of the company, in the past such transactions have been reviewed by the courts under the “entire fairness” standard, which puts the burden on the controller to show that the transaction was fair. Chancellor Strine ruled that when a company sells to a controlling party, forcing out minority shareholders, the deal will be subject to a more relaxed business judgment standard of review as long as it is subject to two conditions: that it was negotiated and approved by a special committee of informed independent directors on behalf of the company; and that a majority of the non-controlling stockholders, being fully informed and uncoerced, vote to approve the deal. Virtually every controller-led buyout since then has contained those two conditions, thus making those deals almost impossible to challenge successfully. Most recently, the Chancery Court has extended the application of MFW to non-buyout related controlling party transactions.

Also in 2013, Chancellor Strine ruled in the Boilermakers Local 154 Ret. Fund v. Chevron Corporation case that Delaware companies can adopt forum selection bylaws that require that Delaware be the venue for deciding claims involving the internal affairs of the corporation. This decision further cemented Delaware’s exalted position as the center of corporate jurisprudence and helped limit multijurisdictional litigation.

In 2015, perched firmly as Chief Justice, Justice Strine upheld the lower court decision in Corwin et al. v. KKR Financial Holdings, holding that the more relaxed business judgment rule is the appropriate standard of review for a post-closing damages action when a merger not otherwise subject to the heightened entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders. Because MFW had put a chill on pre-closing challenges, most merger challenges were occurring post-closing. This ruling drastically cut back the number of post-closing challenges to corporate mergers and eased the threat of stockholder litigation as a potential cudgel for an improved sale price.

And in a string of appraisal action decisions culminating this past April in Verition Partners Master Fund Ltd. et al. v. Aruba Networks Inc., Chief Justice Strine all but eviscerated the practice of appraisal arbitrage litigation by finding that the negotiated deal price is the best starting point for determining true appraisal value. Appraisal arbitrage is the practice whereby activist investors buy up the shares of a corporation to be acquired by merger in order to assert appraisal rights challenging the price of the deal. The practice is controversial because the appraisal remedy was meant to protect existing stockholders forced to sell their shares in the merger, not financial opportunists who purchased shares at the last minute, hoping for an appraisal windfall.

So, after a career of setting important board protections, it was no small surprise that on the cusp of retirement, Justice Strine has now issued a sweeping proposal for overhauling American capitalism that suggests that corporate boards need to refocus their attention on worker rights.

Among the proposals laid out in his paper, titled “Toward Fair and Sustainable Capitalism,” Justice Strine posits that companies with annual sales over $1 billion should disclose annually how they treat workers and whether they operate in an ethical, sustainable, and environmentally responsible manner. He argues that accounting rules need to be amended so as to treat investments in human capital like other long-term investments and mandates disclosure on human capital investments.

Justice Strine also believes the tax system should be updated to reduce speculation, address climate change, and promote sustainable growth, innovation, and job creation. He would change the holding period for long-term capital gains from one year to five and would impose a modest tax on most financial transactions, transferring the tax revenue to a newly created Infrastructure, Innovation, and Human Capital Trust Fund.

Justice Strine would also prohibit a public company’s political spending without 75% of shareholders’ consent and would reform the union election process by permitting card check elections to make it easier for employees to join unions and collectively bargain over wages.

These proposals, often associated with the left side of the political spectrum, carry significant weight coming from such a prominent and respected jurist who spent much of his career defending corporate boards from exactly such prodding. Only time will tell if Justice Strine’s lasting legacy are the rulings from his seat on the bench or his admonitions as he steps down.