Directors and Officers (1997—2001)
The Defining Tension in Corporate Governance in America
E. Norman Veasey, 52(2): 393–406 (Feb. 1997)
Corporations are governed by a textured fabric of enabling legislation, private ordering, independent directors, good counseling, and judge-made fiduciary duties. The tension in corporate governance today is between judicial deference to directors' decisions and the scope of judicial review. That tension is often defined by the nature of the issue: whether it is an enterprise, ownership, or oversight issue. There are some common threads and some analytical differences between the interests of investors in enhancing corporate performance and the focus of courts in liability adjudication. Yet, consistent, good corporate governance practices and the emphasis on the independence of directors is clearly a common denominator. This Article explores the defining tension and the interplay of the aspirations of sound corporate governance practices with the reality of the court's examination of directorial conduct in adjudicative settings.
The Responsible Board
Ira M. Millstein, 52(2): 407–18 (Feb. 1997)
In this third Article in a series on the role of corporate boards, the author asserts that boards have an important role in ensuring that management endeavors, where possible, integrate societal demands with the polestar of shareholder gain. See The Evolution of the Certifying Board, 48 BUS. LAW. 1485 (1993); The Professional Board, 50 BUS. LAW. 1427 (1995). Careful and conscientious performance of this balancing act is central to a prosperous economy, to the corporation's continued freedom to act, and to the perpetuation of the private sector.
From Kahn to Carlton: Recent Developments in Special Committee Practice
Gregory V. Varallo, William M. McErlean, and Russell C. Silberglied, 53(2): 397–427 (Feb. 1998)
Recent case law has contributed to a better understanding of practice with special committees assigned to negotiate corporate transactions and so-called special litigation committees as well. This developing case law has made clear that committees formed to negotiate corporate transactions should be rigorously independent and design their negotiation strategy so as to attempt to simulate arm's-length bargaining. Likewise, a recent series of decisions in the special litigation committee area have elucidated the "second step" of Delaware's Zapata test and answered a number of previously unanswered questions that arise in connection with such committees.
Outside Counsel as Director: The Pros and Potential Pitfalls of Dual Service
Micalyn S. Harris and Karen L. Valihura, 53(2): 479–506 (Feb. 1998)
When outside counsel serves as a director of a corporation or other entity for which the lawyer also acts as legal counsel, many thorny issues may arise. Dual service may be difficult to refuse and difficult to perform. This Article seeks to present a balanced view of the advantages and disadvantages of dual service by providing: (i) an overview of existing law and commentary both supporting and criticizing dual service; (ii) an analysis of the risks and benefits of such dual service; and (iii) some practical suggestions for minimizing risks and maximizing benefits when dual service is undertaken.
The Line Item Veto and Unocal: Can a Bidder Qua Bidder Pursue Unocal Claims Against a Target Corporation's Board of Directors?
J. Travis Laster, 53(3): 767–97 (May 1998)
Although the issue of a potential acquiror's standing to raise a breach of fiduciary duty claim under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), and its progeny is frequently litigated, the fundamental question remains unresolved. Existing Delaware decisions rely on a problematic analytical framework and reach conflicting results. This Article attempts to answer the question by considering the nature and role of standing doctrine, reviewing the conflicting precedents, and discussing the conceptual problems with the competing results. The Article concludes by setting out the pragmatic solution that recent Delaware decisions have crafted sub silentio to permit potential acquirors to raise breach of fiduciary duty claims under certain circumstances.
Breaking Up Is Hard to Do: Avoiding the Solvency-Related Pitfalls in Spinoff Transactions
Richard M. Cieri, Lyle G. Ganske, and Heather Lennox, 54(2): 533–605 (Feb. 1999)
This Article examines several of the legal traps that may accompany a typical spinoff transaction. Specifically, it discusses the issues surrounding officers' and directors' fiduciary duties and the spinning corporation's solvency, the possibility for a veil-piercing analysis, and the potential unwinding of the transaction as a fraudulent conveyance or illegal dividend. The Article offers practical suggestions throughout for the practitioner advising a client in a spinoff situation.
Director Ownership, Corporate Performance, and Management Turnover
Sanjai Bhagat, Dennis C. Carey, and Charles M. Elson, 54(3): 885–919 (May 1999)
One of the goals of the corporate governance movement has been to replace current procedurally based duty of care with an equity-based model. For such an approach to be viable, a linkage between better director management monitoring and heightened board equity ownership must be demonstrated. This Article finds such a linkage empirically. The authors report that, based upon an examination of a substantial number of public companies, the greater the dollar value of the outside director equity ownership: (i) the better the company's overall performance and (ii) the more likely in a poorly performing company there will be a disciplinary-type CEO turnover.
Corporate Governance Out of Focus: The Debate Over Classified Boards
Richard H. Koppes, Lyle G. Ganske, and Charles T. Haag, 54(3): 1023–55 (May 1999)
Corporate governance activists have become increasingly critical of classified boards. This Article examines the arguments for and against the use of classified boards, arguing that their use is not necessarily inconsistent with good corporate governance. The Article begins by reviewing the legal framework surrounding classified boards, focusing on applicable (i) state corporate statutes, (ii) directors' fiduciary duties, and (iii) federal securities laws. After a review of the debate over classified boards, the Article suggests that activists' general attacks on classified boards are misplaced and that these boards may be used effectively as part of a well-run corporate governance program.
Exorcizing the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis
J. Travis Laster, 55(1): 109–34 (Nov. 1999)
In Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), the Delaware Supreme Court created a heightened standard of review for control-related decisions by target boards of directors in responding to threats to corporate control based upon the concern that the directors could be acting primarily in their own interests. Ten years later, in Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995), the Delaware Supreme Court announced that outside directors, who also hold substantial equity stakes in the target corporation, will be presumed to act in their own best economic interests as stockholders and, absent proof to the contrary, will not be influenced by the prestige and perquisites of board membership. Unitrin's holding suggests that the justification for Unocal review does not exist where a majority of a corporation's directors are outsiders with substantial equity stakes and that, as a result, a decision by such a board should be reviewed under the more deferential business judgment rule. This Article explores the viability of a potential exception to Unocal review for boards where a majority of the directors are outsiders with substantial equity stakes and examines the potential implications of such a rule for Delaware law.
Roundtable on the Role of Independent Investment Company Directors: Issues for Independent Directors of Bank-Related Funds, Variable Insurance Product Funds, and Closed-End Funds
Diane E. Ambler, 55(1): 205–42 (Nov. 1999)
This Article analyzes the role of independent directors of three specific types of mutual funds: bank-related funds, variable insurance product funds, and closed-end funds. It was originally prepared for presentation at a Roundtable sponsored by the SEC on the role of independent investment company directors and considers the extent to which legal obligations of mutual fund directors differ in kind or emphasis in the context of these three specific types of funds, which have their own distinct legal and practical issues.
Understanding Fiduciary Outs: The What and the Why of an Anomalous Concept
William T. Allen, 55(2): 653–60 (Feb. 2000)
This Essay is addressed to the corporate law specialist. It addresses in a basic way the purpose and rationale of fiduciary-out provisions in merger agreements. These provisions are challenging to understand in theory and in practice. The Essay suggests that, in important part, these provisions constitute a lawyerly recognition that courts are fallible human institutions and that, as a result, directors are at risk of courts misunderstanding the reasons why boards have acted as they have. Thus, these provisions protect target directors by affording them a last opportunity—not at the time of contracting but after relevant facts have been fully developed—to assess the risk that the court may mistakenly conclude that a term in a merger agreement violates the board's fiduciary duty.
Equity Ownership and the Duty of Care: Convergence, Revolution, or Evolution?
R. Franklin Balotti, Charles M. Elson, and J. Travis Laster, 55(2): 661–92 (Feb. 2000)
The fiduciary duty of care is one of the pillars of Delaware corporate law. Under the traditional corporate model, courts police the duty of care by examining the process directors followed in rendering a decision. This model has weaknesses, including the ease with which an adequate record may be constructed and the lack of any necessary connection between procedural rituals and optimal decisionmaking. A viable and compelling alternative would be for a court to consider whether the directors who made the decision also were substantial stockholders. If so, then the directors' enlightened self-interest should have operated to ensure that the decision reached was the best option available. Courts therefore could adopt a rebuttable presumption that directors who also are substantial stockholders have acted with due care. Three lines of authority are converging in support of such a presumption. Rather than a revolutionary change, such a presumption would represent an evolutionary development in the analysis of directors' fiduciary duties.
A Process-Based Model for Analyzing Deal Protection Measures
Gregory V. Varallo and Srinivas M. Raju, 55(4): 1609–47 (Aug. 2000)
Recent case law has led to debate regarding the appropriate standard of review for so-called deal protection measures (i.e., "no shop" clauses, stock options, termination fees and related provisions). In the authors' view, the debate is neither necessary nor productive. Because courts consistently have focused their analysis upon the process designed and executed by the board and its advisors in connection with negotiating and eventually agreeing to deal protection measures, this should also be the principal focus of lawyers called upon to advise directors concerning the discharge of their fiduciary duties in this regard. This Article contends that a process-centric model for reviewing deal protection measures not only explains the existing case law but should also be of great utility to corporate practitioners in advising directors in merger and acquisition transactions.
Corporate Director's Guidebook
Corporate Laws Committee, 56(4): 1571 (Aug. 2001)