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It would be strange for the Delaware Bar Council to have proposed this on their own because if it limits litigation, it sounds like it's bad for the Delaware bar, certainly on the plaintiff side and maybe on the defense side too.
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So there's an interesting political economy story here where the I mean, ultimately it has to be adopted by the legislature, but the legislature has shown that they just they do adopt what is put in front of them about the corporate law, understanding that if they don't do it, they might have to raise taxes on people.
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But it's interesting that this one is maybe curbing litigation more than the other ones did, and it's not coming from the Delaware Bar Council as all of the other ones always have.
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You're listening to Bite-Size Business Law, where we discuss big issues in small doses.
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This podcast is sponsored by the Fordham University School of Law Corporate Law Center, which is run by Fordham Law Professor Richard Squire, and me, your host, Amy Martella.
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Okay, let's get down to business.
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Welcome back to Bite-Sized Business Law.
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First there was Brexit.
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Now there's Dexit.
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The Delaware legislature has introduced a bill, Senate Bill 21, that some say would usher in sweeping changes to long-settled Delaware general corporation law, but others argue will quell the trickle of corporations leaving Delaware to reincorporate elsewhere.
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Here helping us hash this all out today are my friends Sean Griffith and Richard Squire.
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Both Sean and Richard are esteemed scholars and professors of business law here at Fordham Law School, and former Sean and current Richard, faculty directors of the Fordham Corporate Law Center.
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Welcome to you both.
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Thank you, Amy.
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It's great to be back.
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Thank you both for joining us again.
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Last time you were both here, we were discussing the second Delaware Chancery Court opinion, again striking down Elon Musk's pay package in Tesla, even after the ratification vote.
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So I wanted to start us off by telling our listeners, how does that case tie into what we'll be discussing today?
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Today we are discussing proposed amendments to the Delaware General Corporation Law that would have an effect, I think in many ways, would change the analysis that Chancellor McCormick applied in the Tornada case, what you were talking about.
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That's the Musk pay package from Tesla case, if they had been applicable, issued her rulings.
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Now, it turns out the proposed language, at least as it currently reads, is not retroactive to the Musk case.
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So you can see this as a way for the Delaware legislature, if it enacts these amendments, to say to courts, don't do anything like that in the future, apply a different standard, but not a direct overruling in the Musk case itself.
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In other words, uh, if this is enacted, it doesn't guarantee that Musk is going to get his$56 billion worth of stock options after all.
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So you can see what's happening here as partly a reaction to that holding, to those cases, uh those rulings by Chancellor McCormick, which are now on appeal to the Delaware Supreme Court.
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There are also, however, there's some other cases that this these proposed amendments are can be read as addressing as well.
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In some ways, I think a case that is even more thoroughly reflected is one that it's less famous, but among uh Delaware corporate law scholars was certainly just as important.
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And that is the match case, the Henry Match group uh derivative uh litigation issued there by the Supreme Court of Delaware back in April of last year.
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And there's a lot here that I see in these amendments that seem to be directed to that ruling as well.
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So why don't we talk about uh high level?
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What are some major changes that SB21 that we should all be aware of?
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I wrote down eight major changes.
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And this is not the only way to organize this.
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Um, some of this might have sub changes.
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A lot of people are talking about, and with good reason, about how SB21, the proposed amendments, affect the rules for transactions involving a controlling shareholder.
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But some of these amendments are related to the rules for uh transactions, self-dealing transactions.
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It's all about self-dealing transactions involving merely a director.
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So it could be, for example, a director's uh if the director has a pay package, if he or she is also an officer and has a salary or something like that, or is getting stock options.
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And there were some statutory safe harbors in section 144, which are going to be amended that apply to directors, which were about circumstances under which the burden on the director normally to show that if he's engaging in self-dealing, that the self-dealing is entirely fair to the corporation and its shareholders under the uh standard duty of loyalty.
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Where if certain procedural kind of safe harbors are satisfied, the taint of self-dealing would be cleansed and the director wouldn't have to show entire fairness anymore.
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And there are some changes here that make it easier for the director to establish that the safe harbors have been satisfied.
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And what hasn't changed here, and this is going to carry through, however, there are two kinds of procedural safe harbors that are available for director self-dealing.
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One is that the independent directors on the board and the disinterested ones, the ones that are not subject to the transaction that has the conflict of interest, are informed, they're independent, disinterested, and so on, and they vote in favor of the transaction, saying that it's good for the corporation.
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And then an alternative would be that the facts are presented to the shareholders and the shareholders are fully informed, they don't have a worse vote, and they ratify the transaction.
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And the rule has always been with directors that those two possible safe harbors are or.
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You can do one or the other and get the full benefit of the cleansing of the burden to show loyalty and sorry, to show fairness under the duty of loyalty.
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So there have been some changes to what a director has to do.
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It's a little bit easier now for a director to satisfy either of those safe harbor options, but the or is still an or there.
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Uh it's one or the other, and you get the benefit of the full safe harbor.
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Where we see kind of more commentary on SP21 is with respect to self-dealing by controlling shareholders, where a shareholder is engaging in a transaction either with the corporation he controls or with the minority shareholders, like through the mechanism of the corporation itself.
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That type of transaction also implicates the controlling shareholders' duty of loyalty.
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He normally would have to show its entire fairness to the corporation.
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Over time, the Delaware courts started developing a system of safe harbors that were in some ways parallel to the ones that were found in the statute in section 144, as applied just to directors who, by negative implication, were not also uh controlling shareholders.
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But that was also all common law, what the courts were doing.
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And they were going in a direction, and this was finally kind of reached its zenith in the recent recent match case I mentioned, which basically said that those two safe harbor options I mentioned for a director, where it's either or for a controlling shareholder to get the full benefit of safe harbor so that the taint of self-dealing was fully cleansed, the or was instead an ant.
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He would have to show not only that disinterested directors or a committee of disinterested directors approved the transaction with certain requirements in terms of their independence and so on, but then also a majority of the minority shareholders ratified it.
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Then he would get the full benefit.
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That was common law, and there and the or had been changed to an ant.
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This statute does a couple of things with respect to that self-dealing by controlling shareholders.
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First of all, it puts rules with respect to self-dealing by controlling shareholders and safe harbor rules specifically into the statute as well.
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So we're taking something that was purely common law before and is now being partly codified in section 144 as well.
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And then in addition to codifying some of these rules, it also overrules some of what the Delaware Supreme Court has done.
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A big change here is says that unless the transaction is a going private transaction or a squeeze-out transaction, but it's another type of self-dealing, like in the Musk case, where if we, and by the way, under these amendments and we can talk about this, Musk wouldn't even be a controlling shareholder anymore.
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But assuming that he was, the and would be an or.
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So it would be more like the way we would treat just a regular director.
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And so that directly overrules the match case as well, because match set held held that the or the and standard, the belt and suspenders rule as it was kind of was held as been described.
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Previously, it had been clearly established to apply to going private transactions by controlling shareholders, but now it applied to any self-dealing by controlling shareholders.
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That's overruled by these statutes, statutory amendments.
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It would change with respect to that type of controlled transaction.
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The AND really is an or.
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But then there's additional language here for controlling shareholders that limits the, as I was just saying, the definition of a controlling shareholder so that MUS couldn't be held to be one in the future based on the stock interest that he had in Tesla at the time, because it was less than one-third of the outstanding shares with voting power.
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And then there's some other rules about kind of the nitty-gritty, the nuts and bolts of how exactly you have to constitute the committee of independent directors, what defines independent or disinterested directors, and what defines ratification from a shareholder vote.
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The voting rules have been changed a little bit.
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So there's some kind of nuts and bolts there as well.
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But I would say the big two changes, maybe the biggest two here that getting the most attention are first of all, is that we're going to have now some statutory safe harbors for self-dealing by controlling shareholders.
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And outside the going private context, the Delaware Supreme Court is being overruled and it's not belt and suspenders anymore.
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Controller can satisfy either of the two safe harbors and get the way the courts would say it, once they've been satisfied either one, the full benefit of the business judgment rule, saying that we're going to defer fully to the board as if it was exercising unconflicted business judgment when it approved the self-dealing by the controlling shareholder.
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When the business judgment rule applies, the way I teach it to my students is basically the court saying to the plaintiff, what else you got?
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You got another theory of the case, because I'm not going to give you relief based on theory of self-dealing in violation of the duty of loyalty.
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Maybe you can allege bad faith or maybe you can allege gross negligence or something like that, but the self-dealing is it's blocked as a path to relief.
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One way to approach it from a sort of higher level of generality is that, you know, Delaware corporate law is all about the standard of review.
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It's about the business judgment rule, the entire fairness rule, and then there's a small category of intermediate scrutiny cases.
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And basically, the standard of review determines the outcome.
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So if the business judgment rule applies, the defendants win.
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If the entire fairness rule applies, the plaintiffs don't necessarily win, but the defendants can't get a dismissal of the case.
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Definitely not at the motion to dismiss, and probably not at summary judgment either.
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So the case goes on and probably settles in a way that's beneficial to plaintiffs.
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In that way, the Delaware corporate law is a lot like constitutional law.
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So, you know, if you remember the tiers of scrutiny analysis for certain kinds of rights cases, First Amendment cases, and so on, you've got strict scrutiny where the person who's challenging the government tends to win.
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Then you've got rational basis review, where the government always wins.
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And then there are some cases that are in the middle, but not many.
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Delaware law is just like that.
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There are many parallels, interestingly, between constitutional law and Delaware law.
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And one of the areas where you had an entire fairness or plaintiffs tend to win situation is in conflict transactions.
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As Richard said, the conflict transaction can be with a controlling shareholder, or it can just be with an interested member of the board of directors.
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And so if you break down the SB21, what's it sort of breaks down the world of conflict transactions into three scenarios.
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The first scenario is where there's a controlling shareholder who has a conflict and they're taking the company private.
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And so in that case, that was the original context of the MFW case.
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That case is changes the least here.
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So if you have a controlling shareholder in a going private transaction, they have to get both approval of the special committee and a majority of the minority shareholder vote.
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There are some changes, as Richard mentioned, procedurally, like where you might not have to have the special committee uh approval rights set up from the beginning or the thing has to be set up from the beginning.
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But basically the the and is in effect for that for that transaction.
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And then you also have at the other end of that, you have the uh the conflicted board problem, where a member of the board is conflicted.
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And under the old law, either a special committee or a majority of the minority could get that transaction done at a lower level of scrutiny.
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But what the change is that, and it's brought on by that match case that Richard mentioned.
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The match case basically said everything is MFW.
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Everything that a controlling shareholder does is MFW.
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So you had this middle category of cases where you had a controlling shareholder, but it was not a take private transaction.
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It was just something else that the controlling shareholder wanted to do with the corporation, where arguably the controlling shareholder got a benefit from it.
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And in that setting, the match case says that's MFW2, meaning the AND applies, special committee and majority of the minority.
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And the I think the biggest uh change here is that now, as a result of SB21, the OR would apply.
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So in a controlling shareholder transaction that is not a take private, the deal could be approved either by a special committee or a disinterested board members or the ratification of a majority of the minority shareholders.
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Okay, so you both agree that the bringing back the or paradigm to that middle group of cases is the biggest change here.
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I also think it's interesting that they're defining what it means to be a controlling shareholder, like with a numerical number of how much, how many shares you own.
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So maybe we can talk about that, and that will lead us into this a discussion of how the Torneta case may have come out under this paradigm.
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There's been some movement in the Delaware case law suggesting that what we would normally think of as a controlling shareholder, which is somebody who has a majority of the shares, and so is but can basically hand select the board of directors because they're they're selected by majority vote.
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That traditional definition of controlling shareholder is much too narrow.
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There are other types of people out there who have far less in terms of their shareholdings, but still are effectively exercising control over the board and the corporation because some combination of shares that they do own and influence they have.
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And this is really bringing us into the Musk, the Tornetta case, where Musk is was called, um, it's been called by observers and Chancellor McCormick cited the law review article on this, saying he was a superstar CEO.
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Certainly he is.
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I mean, he's kind of, I think he has legendary status at Tesla.
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And so the concern would be, even though at the time of the relevant transaction, he had maybe 21% of the outstanding shareholders, but and he was also on the board of directors, he was just kind of legendary at the company.
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And he also, as far as Chancellor McCormick was concerned, exercised control over the particular negotiations of his pay package in a way that suggested that he really did have outsize control, that he really was a controlling shareholder.
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A lot of it was about the style in which the other directors negotiated with him.
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She thought that they were showing a high degree of deference to him, letting him be in the driver's seat in a way that suggested what they were just, you know, they must have been under his thrall.
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She also thought there were a lot of personal and maybe some financial connections between them that may have may have contributed to their deference and therefore to him being kind of effectively a controlling shareholder.
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These statutory amendments would greatly reduce the ability of courts to find somebody as a controlling shareholder in circumstances like that.
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In fact, the way I read the amendments is that Musk could never now be a controlling shareholder under Delaware law, under those facts, because the statute says you basically have two options.
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You either have a majority of the shares, again, the traditional, so more than 50% of the outstanding shares, the traditional definition.
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In fact, sometimes people use the term controlling shareholder and majority shareholder interchangeably, almost reflecting that that was the traditional sense.
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Um, indeed, if you're not a controlling shareholder, but there is a controlling shareholder, what you're called under dollar law is a minority shareholder, which suggests there is that the controller is a majority controlling shareholder.
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That still clearly is a controller.
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However, there still is this other option where you can exercise kind of de facto control, but it has to be based on control that you're exercising that is based on your, it says it based on your shareholdings, not based on another source of power.
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And you have to have at least one third of the shares voting power of the company.
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So Sean is dividing things into threes here.
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That's a useful way to do it.
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So I would say the statute divides things into threes for controlling shareholders.
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If you have more than half, you're a controlling shareholder.
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At least you're presumptively one.
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We can imagine you'd enter into contracts where you promise never to vote your shares.
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You tied your own hands, and courts might recognize that.
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But presumptively, more than half, you're a controller.
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Less than a third, you are absolutely not a controlling shareholder.
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There needs to be some other basis to go after you.
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If you have a third or uh or more, but less than a majority, maybe you are a controlling shareholder based on, we're going to look at other facts, the way that courts often do.
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But there's this language in there suggesting, again, that that power, if you are a controller, has to derive from your shareholdings, that you are effectively a controller based on your voting power and not based so much on other sources of influence you might have over the board of directors.
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So that right there would, if applicable to the tornado case, which it's not by according to the current language because it's not retrospective, but if applicable to the tornado case, would require a remand to Chancellor McCormick to say, we need you to analyze this case again, not finding without a base without finding that Elon Musk was a controlling shareholder of Tesla.
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Because according to the statute, he wouldn't be.
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So I would think that's an actually great point to make about the what the legislature would really be doing is overruling that transaction-specific control aspect of the Tornada decision.
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Another important thing to note from SB21 is the way that it deals with independence or disinterestedness, which may also be different from the way that the chancellor dealt with it in the Tornada case.
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Again, big picture, Delaware had been moving in a direction where a certain set of transactions could be treated as, well, a certain set of relationships could be treated as relationships which call into question the independence of those board members.
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So, for example, there was a famous case involving Oracle, where a number of members of the board and the special committee, the board that were the defendants in the derivative suit and the special committee that were brought on, all had a common nexus of relationship to Stanford University.
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The one guy was the PhD supervisor of the special committee member, and the other, some of the other defendants were big donors to Stanford University.
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And in that case, even though that wasn't traditional family or familial conflict of interest, the chancellor in that case, I think he was a chancellor, then maybe he was just a vice-chancellor strein, said that calls into question the independence.
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And so independence all of a sudden meant more than just material, financial, or familial conflict of interest.
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That kind of reasoning appeared in different cases from time to time.
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There was another important case involving Martha Stewart, where the court said, look, it can't just be that they're all friends and they all go to the same weddings and they're all part of the same social nexus, but they have to have some real thick ties or something.
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But this was all fact-specific and very difficult to say what the law really is in a fact-specific analysis like that.
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The chancellor's analysis of the Elon Musk relationships with other members of the board have a lot of that sort of Oracle type relationship consideration.
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Like they invested in other companies together, they had social relationships, they skied together, or they were guests in each other's homes.
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And the question is, does that call into question the disinterestedness of the board?
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And in SB21, the answer to that would seem to be mostly not.
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And in particular, the bill reaches points to stock exchange rules as a place to look for the definition of independence.
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So the bill says someone who's not disinterested if they have a financial or familiar relationship.
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And then they say that directors of a corporation that have stock listed on a national securities exchange, and the board finds them to be disinterested, and as long as they satisfy the relevant criteria for the exchange, they're likely to be treated as disinterested.
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And that's that's what independence, in other words, means.
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So independence, the statute seems to be saying, doesn't refer back to fixed social relationships.
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It refers to like the stock exchange rules.
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And the stock exchange rules, they have a rather restricted view of what independence means.
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It's financial conflict of interest.
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I feel like when I read these proposed amendments, there's more work being done in terms of the first thing that you mentioned today, which was this notion that in Delaware it's all about the burdens.
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And so you're right that there's this definition of independent director or disinterested director that starts with this interesting power of the board itself to find that a director is disinterested.
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There's a bit of a circularity problem here because you might think, well, if the board itself is interested, why should it have the power to determine that somebody is disinterested?
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There's a presumption being applied effectively by the statute that says that, well, if you're a director and you've been elected by the shareholders, we're going to defer to you to.
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Certain extent on that basis.
00:22:01.920 --> 00:22:07.839
And so, first of all, the power is in the board itself to designate a director as disinterested.
00:22:08.079 --> 00:22:14.559
The board can do so, as you said, but with reference to stock exchange rules, if the company is if the company is publicly traded.
00:22:14.880 --> 00:22:16.960
But that's not the end of the matter, right?
00:22:17.359 --> 00:22:21.519
That designation can be reviewed, but there's a presumption in favor of it.
00:22:21.599 --> 00:22:32.079
And so that language about the stock exchange director independence definition goes on to say that there is a presumption, then, if the the board has made this designation, that the director is independent.
00:22:32.240 --> 00:22:46.720
And it says that the presumption shall be heightened and may only be rebutted by substantial and particularized facts that such director has a material interest in such actor transaction or has a material relationship with a person that has a material interest in such actor transaction.
00:22:46.960 --> 00:22:51.519
So a motivated judge, we might say it this way, could go in there and say, you know what?
00:22:51.759 --> 00:23:03.359
I find that the plaintiffs have shown a material interest or a material relationship that is so strong that it overcomes this heightened burden, this heightened presumption in favor of the board's designation.
00:23:03.519 --> 00:23:08.160
And so I can still say that this directory lacks disinterestedness, lacks independence.
00:23:08.319 --> 00:23:13.039
And if it goes on, then there's also a definition of material relationship in these amendments.
00:23:13.279 --> 00:23:32.799
I'm calling our attention to this because you were talking correctly, Sean, about how Delaware courts have gone all the way back to the Oracle case, which was then a little bit of a different the older Oracle case, what was in the context, not of self-dealing, but of a special litigation committee under the Zapata line of cases, because there was a motion to dismiss a derivative suit.
00:23:33.039 --> 00:23:34.240
And what's the rule there?
00:23:34.319 --> 00:23:40.559
And at the time, Van Vice Chancellor Strine again looked at the thickness of the personal relationships, the professional relationships.
00:23:40.640 --> 00:23:46.400
They all, all these directors at Oracle, they lived in Palo Altar together, they were connected through Stanford University.
00:23:46.559 --> 00:23:53.200
And then we saw a similar probing of kind of personal lives in a way in the Tornetta case as well.
00:23:53.440 --> 00:23:55.200
Chancellor McCormick did something similar.
00:23:55.359 --> 00:23:58.960
But here's what material relationship is defined at in this in the amendments.
00:23:59.039 --> 00:24:09.279
It says a familial financial professional employment or other relationship that in the case of director of a director would reasonably be expected to impair the objectivity of the director's judgment.
00:24:09.359 --> 00:24:12.720
Um, and then in the case of a stockholder would be material to the stockholder.
00:24:12.880 --> 00:24:14.480
That still seems pretty broad to me.
00:24:14.559 --> 00:24:21.680
It could be any type of relationship, familial, financial, professional employment, or other that could reasonably do inspected to impair the objectivity.
00:24:21.839 --> 00:24:31.920
So I'm actually seeing once we get down to the definition itself of a material relationship, I still think there's a lot of room there for the judge to find conflict.
00:24:32.079 --> 00:24:35.039
I think that the difference here is more in the burdens.
00:24:35.279 --> 00:24:41.359
The judge has to be much more deferential initially to the board's designation than she would have been otherwise.
00:24:41.519 --> 00:24:46.000
So the burden's kind of on the plaintiff more than it would be otherwise to overcome a presumption.
00:24:46.160 --> 00:24:54.319
But the types of things that the plaintiff can point to, the types of we skied together and we are colleagues at the same university and so on.
00:24:54.400 --> 00:24:56.079
I think all of that is still in the mix.
00:24:56.319 --> 00:24:57.440
I agree that it's in the mix.
00:24:57.519 --> 00:25:07.119
And I think this is actually a really interesting point to raise about the bill, which is where is it still susceptible to judicial interpretation and where isn't it?
00:25:07.359 --> 00:25:28.720
The critics of the bill want to call it unbalanced, and they and they want to say that what's happening here is Delaware is moving towards a more statutory, bright line way of doing corporate law and away from the traditional judge-based, fact-specific equity jurisprudence that has characterized Delaware corporate law forever.
00:25:28.880 --> 00:25:33.680
And that so what it's happening is it's sort of hardening into a more rule-based system.
00:25:34.160 --> 00:25:39.200
And I think that's probably overstated for the reason that you said, and for some other reasons besides.
00:25:39.440 --> 00:26:01.119
So I quite agree that that the the what the way that you would challenge independence is by saying, you know, the second part of that definition which you read, which is something like they can bring, they can plead particularized facts, and the and the judge would be free to find particularized facts suggesting a lack of independence, even if they qualified under the stock exchange standard.
00:26:01.359 --> 00:26:05.759
And then the word other in the in the definition of disinterested as well.
00:26:05.920 --> 00:26:21.359
There's a third place, and which is when the the stockholders vote to ratify, there is a requirement, of course, that the vote, the ratification vote only counts if they're fully informed, you know, language going all the way back to Smith versus Van Gorkham.
00:26:21.519 --> 00:26:33.839
If they're fully informed of all material facts leading up to the vote, there's plenty of room for shareholder plaintiffs to bring actions claiming that the vote was not fully informed because some piece of information was missing.
00:26:34.000 --> 00:26:39.359
And I'll just point out that this happens all the time, for example, in merger litigation.
00:26:39.759 --> 00:26:48.240
Shareholders bring cases and claim that the disclosures were inadequate, that certain disclosures have to be added in order to make the disclosures not misleading.
00:26:48.400 --> 00:26:51.440
And then the, you know, that gets sorted out how it gets sorted out.
00:26:51.599 --> 00:26:56.400
But I will say that courts haven't been extremely aggressive in saying, no, the disclosure is just fine.
00:26:56.559 --> 00:26:58.240
Thank you very much, dismissed.
00:26:58.400 --> 00:27:00.240
That has tended not to be the case.
00:27:00.319 --> 00:27:03.839
And there would be plenty of room for the same type of jurisprudence here.
00:27:03.920 --> 00:27:20.559
And we have seen similar cases like that in the MFW context, where a large line of MFW cases have been brought claiming that the disclosure to the shareholders in the vote was not adequate, and thereby allowing a plaintiff to challenge the vote itself.
00:27:20.799 --> 00:27:25.839
And I think that comes back to sort of the big picture of what is the corporate law product that you get in Delaware.
00:27:26.000 --> 00:27:36.319
When you go and incorporate in Delaware, you're getting a corporate law product which is basically fly spec'd by the plaintiff's bar and subject to interpretation by the judiciary.
00:27:36.559 --> 00:27:40.480
I think what SB21 is doing is moving a little bit away from that.
00:27:40.559 --> 00:27:46.640
But as Richard, as you say, that's if you read it closely, it's in a fairly narrow context that it really changes very much.
00:27:46.799 --> 00:27:51.200
Some people are saying that it changes a lot, but I mean that well, I guess we'll see.
00:27:51.359 --> 00:27:56.240
But that is one type of corporate law product, which is principally judge-based law.
00:27:56.480 --> 00:28:06.960
You know, on the question of whether companies want to leave Delaware, there might still be plenty of room for other states to compete with Delaware by providing something that is genuinely different.
00:28:07.200 --> 00:28:16.799
Corporate law that has legitimate bright line rules about what kinds of cases can be brought and what can't be brought, what minimum amounts for recovery would be, and so on.
00:28:16.960 --> 00:28:20.880
And so the Delaware product really still is a judicial product.
00:28:21.200 --> 00:28:21.839
Yeah, that's right.
00:28:22.079 --> 00:28:31.519
You could see another state, for example, establishing clear, safe harbors that judges can't overthrow on the definition of a disinterested and independent director.
00:28:31.759 --> 00:28:43.839
You know, I don't know if anybody has creatively tried to write a statute that says that if a director has the following characteristics, then he is conclusively, he is conclusively established to be disinterested and independent.
00:28:44.319 --> 00:28:52.720
So it sounds like at the end of the day, SB21 may not be as effective as its fans had hoped or as detrimental as the naysayers feared.
00:28:52.960 --> 00:29:04.720
Just maybe, you know, a very small, like you said, Sean move away from straight up common law, but still in the ballpark of a lot of wiggle room for creative lawyering and for judge interpretation.
00:29:05.119 --> 00:29:07.519
Well, I don't want to say that it's totally small.
00:29:07.680 --> 00:29:10.079
And I guess that you know the proof will be in the pudding.
00:29:10.319 --> 00:29:15.920
One area that I I haven't heard people talking about is so if if I'm right that there are three big categories.
00:29:16.000 --> 00:29:28.880
There's the conflicted, there's the conflicted controller squeeze out transaction, then there's the controller other transaction, and then there's the interested board transaction.
00:29:29.839 --> 00:29:30.960
Interested director, yeah.
00:29:31.200 --> 00:29:34.000
Yeah, interested, interested director transaction, right.
00:29:34.319 --> 00:29:46.079
And my question is like, so where does and and what all of these do is they say you're not going to have litigation because you're there's no the the first line of the statute says something like no equitable or other kind of relief will be granted.
00:29:46.160 --> 00:29:52.960
In other words, dismiss, which is something like business judgment rule, but these are transactions with conflict problems.
00:29:53.200 --> 00:30:01.920
Whether it's a controlling shareholder or just a just an interested board member, these are transactions where there's a conflict.
00:30:02.160 --> 00:30:07.920
And from the perspective of shareholder justice, they're the types of transactions you would worry about the most.
00:30:08.240 --> 00:30:16.799
There's a whole other category of transactions that don't have a controlling shareholder or conflicted board of directors, and those are Revlon type transactions.
00:30:16.960 --> 00:30:23.599
Now, when I was talking about the tiers of scrutiny analysis in Delaware, those are our intermediate scrutiny transactions.
00:30:23.680 --> 00:30:29.200
They're not business judgment rule, they're not entire fairness, but they're this sort of intermediate standard.
00:30:29.359 --> 00:30:35.599
The court comes in and says, Did you really try to maximize the price in the sale process?
00:30:36.000 --> 00:30:52.079
Because there's no controller and because there's no conflict of interest problem per se in those transactions, there's a strong argument that those transactions deserve at least the same treatment as conflict transactions.
00:30:52.319 --> 00:31:08.960
So if what we're saying in this statute is that you go straight to dismissal in a conflict transaction, if you can get committee approval, a disinterested shareholder vote, by implication, you ought to be able to get to the same place in a Revlon transaction too.
00:31:09.279 --> 00:31:12.799
And all Revlon transactions require shareholder votes.
00:31:13.119 --> 00:31:23.599
Basically, Revlon transactions should immediately get dismissed because as long as there's not a conflict on the part of the board of directors, you have a disinterested board approval.
00:31:23.839 --> 00:31:35.200
And as long as there's a shareholder vote where the that votes in favor of the transaction, which you would always have to have in order to close the transaction anyway, you get a majority of the minority approval or whatever.
00:31:35.359 --> 00:31:44.240
And so it seems to me that it one implication of the statute is that Revlon type challenges should all get dismissed too, provided that they can uh deliver a shareholder vote.
00:31:44.559 --> 00:31:53.519
It's useful to note there that the original Revlon case itself did involve what looked like a very strong conflict of interest by a board of directors.
00:31:53.599 --> 00:31:56.079
It was favoring a white knight over a hostile raider.
00:31:56.319 --> 00:32:01.759
And there seemed to be a very large entrenchment motive that was causing it to favor the white knight.
00:32:02.000 --> 00:32:10.960
There was some imprecise language in that opinion that suggested that the heightened scrutiny the court was applying applied to any sale of the company, triggered this heightened scrutiny.
00:32:11.119 --> 00:32:17.440
One of the things that Justice Strine did on the Supreme Court, I think very helpfully would say, actually, there's two different things going on here.
00:32:17.680 --> 00:32:22.240
One is true Revlon, where there's an entrenchment motive, and the other is just sale of the company.
00:32:22.319 --> 00:32:29.119
And I think for sale, just pure sale of the company transactions, he did more or less push it in the direction of a large amount of deference.
00:32:29.200 --> 00:32:34.319
Indeed, in McClorwin case, he said if the if the shareholders have substantially ratified the transaction, that's good enough.
00:32:34.480 --> 00:32:36.880
That eliminates any possibility of judicial review.
00:32:37.039 --> 00:32:42.400
So I think, Sean, for that strand of Revlon cases, we are already pretty close to that.
00:32:42.559 --> 00:33:02.079
For hardcore entrenchment cases where you see a board playing favorites, there are multiple, so the company is in play, there are multiple competing bidders, and the company favors a white knight over a raider, that does feel more like the board really is conflicted, is entrenching itself, and then heightened scrutiny would still be justified.
00:33:02.160 --> 00:33:04.559
And I think that's kind of where we are with the law, anyway.
00:33:04.880 --> 00:33:07.119
If we think about the entrenchment motive, right?
00:33:07.279 --> 00:33:12.400
So it's usually not that the entire board of directors is going to be carried on by the private equity buyer.
00:33:12.480 --> 00:33:19.359
Like Forceman Little was not going to bring on the entire board of directors from Revlon into the into the private equity company.
00:33:19.440 --> 00:33:22.640
He was going to, but the idea is that the main players were going to stick around.
00:33:22.880 --> 00:33:31.200
So if the logic of the conflict is that if you're sticking around, you have an interest, then there are board members who are not sticking around.
00:33:31.440 --> 00:33:40.720
And so those would be under Senate Bill 21, would be the type of board members who would be in a position to bless the transaction.
00:33:40.880 --> 00:33:41.200
Right.
00:33:41.359 --> 00:33:56.480
So directors who aren't staying, directors who are not in some way, like also CEOs, like part of the story in Revlon is also that the CEO, Bergerac, wants to keep running the company and he's going to get to keep running the company in private equity, but not if there's a sale to Ron Perelman.
00:33:56.640 --> 00:33:58.960
If you take those people out, their vote doesn't matter.
00:33:59.039 --> 00:34:06.559
But if you're left with, and I think maybe something else we should talk about about SB21, is that what you need in order to get board approval.
00:34:06.720 --> 00:34:12.559
I think the old rule was something like you needed a majority of the board to be disinterested.
00:34:12.800 --> 00:34:16.960
That majority of disinterested directors have to approve the transaction.
00:34:17.119 --> 00:34:35.760
But the new rule, and now I'm not going to be able to find it in my stack of papers, I think is something like as long as any members on the board of directors don't have the conflict, as long as they can sort of sit on a committee and this has just recently been revised from one to two, then those directors can cleanse the conflict.
00:34:35.920 --> 00:34:37.119
My point is just this.
00:34:37.360 --> 00:34:56.639
If those disinterested directors can cleanse the conflict in the most worrying situation, which is a conflict of interest transaction, where one of the where there's a material financial conflict of interest, then surely the non-entrenched directors ought to be able to cleanse the entrenchment problem in the Revlon situation.
00:34:56.880 --> 00:34:59.280
Maybe that's an implication of this rule as well.
00:34:59.840 --> 00:35:00.880
That's an interesting proposal.
00:35:00.960 --> 00:35:11.519
The idea would be that when the company is being sold, if the board has at least two directors, because under these amendments, you would need uh that independent committee to have at least two disinterested directors.
00:35:11.679 --> 00:35:21.360
But if at least there are two who have no reason to favor one bidder over the other, and they think that the transaction is the best interest, the one that the board's going with is the best interest of the shareholders.
00:35:21.519 --> 00:35:22.400
That should be enough.
00:35:22.559 --> 00:35:25.039
I do think that logically is consistent with what we're seeing here.
00:35:25.360 --> 00:35:29.760
Okay, I don't want to keep you both too much longer, but I want to get some policy questions out there.
00:35:30.000 --> 00:35:36.079
Richard, how do you respond to the idea that the Delaware General Assembly is just caving to Musk and other powerful insiders?
00:35:36.400 --> 00:35:38.000
When you say insiders, what do you mean?
00:35:38.480 --> 00:35:44.000
Controlling executives and oh, uh insiders in right.
00:35:44.400 --> 00:35:50.320
It's a little bit, and I know this is the way you're not the only one saying it this way, but it's tengentious to say they're just caving.
00:35:50.559 --> 00:35:58.159
The question would be should the concerns of people like Musk and others be of genuine kind of interest to the Delaware legislature?
00:35:58.400 --> 00:35:59.760
And I think they should be.
00:35:59.920 --> 00:36:13.119
I think that there's a practical question which says that if people who are very influential insiders and corporations really don't like Delaware law, they're gonna go elsewhere and Delaware will lose the franchise tax revenue associated with this.
00:36:13.199 --> 00:36:16.480
This is a big source of the state of Delaware's overall revenue.
00:36:16.719 --> 00:36:25.920
If you think that the legislators in Delaware have a fiduciary to the citizens of Delaware, then they shouldn't want Dexit to occur, right?
00:36:26.000 --> 00:36:31.199
There's a lot of uh money that's gonna leave, and then they'll have to raise taxes on the citizens of Delaware.
00:36:31.280 --> 00:36:33.360
So you could look at it from that perspective as well.
00:36:33.519 --> 00:36:42.159
But it's also possible that insiders like Musk and others, who were feeling like that the courts are going too far, could have a good argument on the merits.
00:36:42.320 --> 00:36:51.599
What is being overturned is not a lot of long-standing old Delaware law that people like Musk and others just kind of couldn't stand anymore.
00:36:51.760 --> 00:36:59.119
There's been a lot of, I would say, innovation, the MFW line, but then with the match case, applying it to other types of control, shareholder transaction.
00:36:59.360 --> 00:37:07.360
Also, there's, in my view, what Chancellor McCormick did in the uh Torneta case in terms of finding transaction-specific control was innovative.
00:37:07.440 --> 00:37:09.360
Uh, and it was only in the last couple of years.
00:37:09.519 --> 00:37:23.280
So it may very well be a kind of a on the merits putting the money aside question, a useful corrective where and that and the legislatures may be convinced of that, that there is, you know, this is checks and balances in any constitutional system.
00:37:23.440 --> 00:37:31.440
And if the courts are going maybe a little bit too far in a particular direction, this is a way to rein them in a bit while still giving them a certain amount of discretion.
00:37:31.599 --> 00:37:34.159
And I think that that signal is I fit here.
00:37:34.239 --> 00:37:35.039
There's no doubt about it.
00:37:35.119 --> 00:37:38.239
I think the legislature is saying, you guys have gone a little too far here.
00:37:38.559 --> 00:37:40.000
We got to pull you back a bit.
00:37:40.320 --> 00:37:46.000
And that is has implications beyond just the text of the amendments itself.
00:37:46.159 --> 00:37:49.679
You asked earlier, you know, is this really all kind of a tempest in a teapot?
00:37:49.760 --> 00:37:52.159
Is there not really that much of a change here after all?
00:37:52.400 --> 00:37:57.519
Because there is uh still a large amount of discretion that Delaware judges are enjoying.
00:37:57.679 --> 00:38:02.800
I would say no, I think that the there is on some areas that discretion has been really curbed.
00:38:02.960 --> 00:38:06.320
But even beyond that, there's the text and then there's the subtext.
00:38:06.480 --> 00:38:18.400
And I think the subtext here is if you do things that a large number of academics and because it's not just the the musks that could criticize the tornado opinion, the musks of the world.
00:38:18.639 --> 00:38:20.559
Sean and I have have criticized it as well.
00:38:20.639 --> 00:38:22.960
And we don't have any kind of dog in this fight here.
00:38:23.199 --> 00:38:26.960
If you do things that are widely controversial, we will rein you in.
00:38:27.039 --> 00:38:33.599
And it's not um something that I think any person with a healthy ego can ignore.
00:38:33.760 --> 00:38:39.199
I think that the judges who feel like their rulings are being overruled here are gonna feel a little bit of a sting.
00:38:39.280 --> 00:38:41.599
They're gonna be like, oh, I've, you know, I've had my wrist slapped.
00:38:41.679 --> 00:38:42.400
That didn't feel so good.
00:38:42.480 --> 00:38:44.239
It's a little bit of a public embarrassment.
00:38:44.400 --> 00:38:51.679
And so it may affect the way they rule in future cases, even on matters that the legislation itself doesn't directly touch.
00:38:52.000 --> 00:39:15.599
One explanation for why the bill somewhat unusually says it doesn't apply transactions that are pending or that have been completed and therefore February of this year, and therefore wouldn't apply to the Trinetta case itself, could be in particular to address the perception that basically Elon Musk, the richest man in the world, just bought this bill, right?
00:39:15.679 --> 00:39:19.440
He just he just gave enough money and left influence in the right places.
00:39:19.599 --> 00:39:22.079
He's also currently in the Trump administration.
00:39:22.159 --> 00:39:25.119
I mean, he's he's influential both politically and financially.
00:39:25.280 --> 00:39:31.679
So it could look like this is just the legislature caving to him and saying, okay, here's a bill that will overturn your pay package rule.
00:39:31.760 --> 00:39:34.960
And so you do get your your$56 billion after all.
00:39:35.199 --> 00:39:41.679
That language could be in there specifically to address that concern and saying, no, no, no, this doesn't apply to the Tornetta case.
00:39:41.840 --> 00:39:48.400
The Supreme Court is going to decide that case on the old merits, the merits before this legislation.
00:39:48.480 --> 00:39:51.679
That could be there particularly to address that concern that you were raising.
00:39:51.920 --> 00:39:58.079
But then what about the commentary at the end, which says, but also feel free to ignore this non-retroactivity?
00:39:58.960 --> 00:40:03.280
I don't read it as saying ignore the ret ignore the non-retroactivity.
00:40:03.440 --> 00:40:06.559
Here's that the language in the commentary at the end of the proposed bill.
00:40:06.639 --> 00:40:17.920
The lack of retroactivity depending actions and proceedings should not in any way affect the ability of a court by reference to existing case law to reach an outcome consistent that one would be dictated by this act.
00:40:18.079 --> 00:40:34.559
So it's just making clear that a court could still rule in favor of Musk in that case, but it would have to, uh as this act would seem to require, but it would have to do so based on, it does say, uh it would have to do so by reference to existing case law.
00:40:34.880 --> 00:40:41.119
Yeah, and before this bill was even proposed, you know, we we went back and forth about whether the Supreme Court might overturn Tornetta anyway.
00:40:41.280 --> 00:40:41.440
Right.
00:40:41.599 --> 00:40:43.760
So it's just kind of saying that that world still exists.
00:40:44.079 --> 00:40:45.039
Yes, I think that's right.
00:40:45.599 --> 00:40:51.199
It's fair to characterize this as a legislative reversal of some judicial decisions.
00:40:51.280 --> 00:41:00.559
And I don't think that they're necessarily just chancery court decisions, like for example, the match decision, is which is a Supreme Court decision, is getting reversed here.
00:41:00.800 --> 00:41:03.599
So it's not just a couple of judges or anything like that.
00:41:03.760 --> 00:41:07.840
There is a real attempt to overrule some some case law in Delaware, though.
00:41:08.079 --> 00:41:16.800
There are some famous legislative reversals in Delaware law, and we sort of teach them year after year, but they're unusual.
00:41:16.880 --> 00:41:20.400
Like it's sort of like lightning striking where the legislature comes in.
00:41:20.480 --> 00:41:24.000
The legislature is fairly passive about its corporate law.
00:41:24.079 --> 00:41:33.440
Like it as long as everything's going fine and people aren't talking about leaving, and there's no question, uh, there were plenty of making plenty of money on the franchise tax, there's not really a need to consider the problem.
00:41:33.519 --> 00:41:34.719
But there are some times when they did.
00:41:34.800 --> 00:41:35.920
So I'll I'll list four.
00:41:36.079 --> 00:41:44.320
One was in 1986 after Smith versus Van Gorkham, when the Delaware Supreme Court suggested there might be monetary liability for directors under the duty of care.
00:41:44.719 --> 00:41:52.719
The legislature came in a year and a half later with 102B7, which is exculpates uh board members for a breach of the duty of care.
00:41:52.960 --> 00:42:09.760
In 2014, after a case called ATP Tour, when the Delaware Supreme Court said you could do fee shifting, the legislature came in and overruled it and said no, they had adopted a statutory provision that said, no, you can't do fee shifting, but you can do forum selection.
00:42:09.920 --> 00:42:21.360
And then last year there was a case called MOLIS, which got legislative reversed, which led to a lot of acrimony in Delaware because the case had not even been appealed all the way up to the Supreme Court and the legislature intervened.
00:42:21.440 --> 00:42:26.960
But that was about controlling shareholders, exercising control through stockholders' agreements.
00:42:27.119 --> 00:42:28.400
And then there's this one.
00:42:28.639 --> 00:42:39.360
Now, the the political economy of Delaware is that changes to the statute all come from a council, the Delaware Bar Council, which is a group of Delaware lawyers.
00:42:39.519 --> 00:42:45.840
And to ensure balance, the council consists of lawyers on both the plaintiff side and both the defense side.
00:42:46.000 --> 00:43:00.880
So if you go back and look at the history of legislative interventions, especially legislative reversals of judicial decisions, they tend to be legislative reversals that ensure that there will continue to be litigation business in the state of Delaware, which is no surprise, right?
00:43:00.960 --> 00:43:08.239
Because a political economy of lawyers dominating the lawmaking process would suggest that the lawmaking process has to be good for lawyers.
00:43:08.400 --> 00:43:10.639
And that's you can definitely see that in the other ones.
00:43:10.719 --> 00:43:18.079
You can especially see it after ATP, where the fee shifting bylaw looked like it would kill some large amount of shareholder litigation.
00:43:18.239 --> 00:43:21.280
They immediately acted to prevent that from happening.
00:43:21.519 --> 00:43:23.039
This one is interesting.
00:43:23.360 --> 00:43:32.719
According to media accounts that I've read, the motivation for this legislative intervention did not come initially from the Delaware Bar Council.
00:43:32.880 --> 00:43:38.159
It came from the governor's office and some small group of people that the governor was talking to.
00:43:38.320 --> 00:43:44.320
It's not clear who those people were, but probably they were New York lawyers and not Delaware lawyers.
00:43:44.480 --> 00:43:55.199
They were lawyers who have who bring the clients into Delaware who need Delaware representation in litigation matters, but who have who are all actually the corporate lawyers.
00:43:55.440 --> 00:44:00.480
And this legislative intervention looks like it's bad for litigation in Delaware.
00:44:00.639 --> 00:44:08.639
In other words, it looks like there will be less because the law makes these safe safe harbors, which make it difficult for litigation.
00:44:08.880 --> 00:44:21.039
It would be strange for the Delaware Bar Council to have proposed this on their own, because if it limits litigation, it sounds like it's bad for the Delaware Bar, certainly on the plaintiff side and maybe on the defense side too.
00:44:21.199 --> 00:44:37.119
So there's an interesting political economy story here where the, I mean, ultimately it has to be adopted by the legislature, but the legislature has shown that they just they do adopt what is put in front of them about the corporate law, understanding that if they don't do it, they might have to raise taxes on people.
00:44:37.360 --> 00:44:42.639
But it's interesting that this one is maybe curbing litigation more than the other ones did.
00:44:42.880 --> 00:44:48.960
And it's not coming from the Delaware Bar Council as all of the other ones always have.
00:44:49.360 --> 00:44:54.239
Well, you're both right that this is a unique bill, and it is also one that has bipartisan support.
00:44:54.320 --> 00:44:55.840
So it will likely pass.
00:44:56.000 --> 00:45:03.039
And then we'll see how it affects the direction of the law, the Tornada case, and companies' appetite to exit or stay in Delaware.
00:45:03.280 --> 00:45:09.440
Maybe at that point I can get you both to come back here and we can do another episode about the never-ending Delaware sagas.
00:45:10.000 --> 00:45:10.800
That would be a lot of fun.
00:45:11.199 --> 00:45:12.639
Well, thank you both so much for your time.
00:45:12.719 --> 00:45:14.000
This was awesome.
00:45:16.719 --> 00:45:22.079
Thanks to everyone at Fortnum Law School, especially the Dean's office and our corporate law center donors for supporting this podcast.
00:45:22.239 --> 00:45:25.119
BiteSize Business Law is produced by WeEdit Podcasts.
00:45:25.280 --> 00:45:29.840
Listen and subscribe to Bite Size Business Law on Spotify, Apple, or wherever you get your podcasts.
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00:00:00.080 --> 00:00:12.080
It would be strange for the Delaware Bar Council to have proposed this on their own because if it limits litigation, it sounds like it's bad for the Delaware bar, certainly on the plaintiff side and maybe on the defense side too.
00:00:12.320 --> 00:00:28.160
So there's an interesting political economy story here where the I mean, ultimately it has to be adopted by the legislature, but the legislature has shown that they just they do adopt what is put in front of them about the corporate law, understanding that if they don't do it, they might have to raise taxes on people.
00:00:28.399 --> 00:00:40.079
But it's interesting that this one is maybe curbing litigation more than the other ones did, and it's not coming from the Delaware Bar Council as all of the other ones always have.
00:00:43.280 --> 00:00:48.000
You're listening to Bite-Size Business Law, where we discuss big issues in small doses.
00:00:48.159 --> 00:00:57.520
This podcast is sponsored by the Fordham University School of Law Corporate Law Center, which is run by Fordham Law Professor Richard Squire, and me, your host, Amy Martella.
00:00:57.679 --> 00:01:00.240
Okay, let's get down to business.
00:01:03.359 --> 00:01:05.359
Welcome back to Bite-Sized Business Law.
00:01:05.519 --> 00:01:06.719
First there was Brexit.
00:01:06.879 --> 00:01:08.159
Now there's Dexit.
00:01:08.319 --> 00:01:22.079
The Delaware legislature has introduced a bill, Senate Bill 21, that some say would usher in sweeping changes to long-settled Delaware general corporation law, but others argue will quell the trickle of corporations leaving Delaware to reincorporate elsewhere.
00:01:22.319 --> 00:01:26.480
Here helping us hash this all out today are my friends Sean Griffith and Richard Squire.
00:01:26.640 --> 00:01:35.680
Both Sean and Richard are esteemed scholars and professors of business law here at Fordham Law School, and former Sean and current Richard, faculty directors of the Fordham Corporate Law Center.
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Welcome to you both.
00:01:37.280 --> 00:01:38.000
Thank you, Amy.
00:01:38.079 --> 00:01:38.799
It's great to be back.
00:01:39.040 --> 00:01:40.480
Thank you both for joining us again.
00:01:40.719 --> 00:01:51.439
Last time you were both here, we were discussing the second Delaware Chancery Court opinion, again striking down Elon Musk's pay package in Tesla, even after the ratification vote.
00:01:51.760 --> 00:01:57.040
So I wanted to start us off by telling our listeners, how does that case tie into what we'll be discussing today?
00:01:57.359 --> 00:02:10.479
Today we are discussing proposed amendments to the Delaware General Corporation Law that would have an effect, I think in many ways, would change the analysis that Chancellor McCormick applied in the Tornada case, what you were talking about.
00:02:10.560 --> 00:02:15.439
That's the Musk pay package from Tesla case, if they had been applicable, issued her rulings.
00:02:15.520 --> 00:02:21.039
Now, it turns out the proposed language, at least as it currently reads, is not retroactive to the Musk case.
00:02:21.199 --> 00:02:34.560
So you can see this as a way for the Delaware legislature, if it enacts these amendments, to say to courts, don't do anything like that in the future, apply a different standard, but not a direct overruling in the Musk case itself.
00:02:34.719 --> 00:02:42.159
In other words, uh, if this is enacted, it doesn't guarantee that Musk is going to get his$56 billion worth of stock options after all.
00:02:42.400 --> 00:02:52.719
So you can see what's happening here as partly a reaction to that holding, to those cases, uh those rulings by Chancellor McCormick, which are now on appeal to the Delaware Supreme Court.
00:02:52.960 --> 00:02:59.599
There are also, however, there's some other cases that this these proposed amendments are can be read as addressing as well.
00:02:59.759 --> 00:03:10.479
In some ways, I think a case that is even more thoroughly reflected is one that it's less famous, but among uh Delaware corporate law scholars was certainly just as important.
00:03:10.639 --> 00:03:19.759
And that is the match case, the Henry Match group uh derivative uh litigation issued there by the Supreme Court of Delaware back in April of last year.
00:03:19.919 --> 00:03:24.719
And there's a lot here that I see in these amendments that seem to be directed to that ruling as well.
00:03:25.039 --> 00:03:27.599
So why don't we talk about uh high level?
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What are some major changes that SB21 that we should all be aware of?
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I wrote down eight major changes.
00:03:34.960 --> 00:03:37.039
And this is not the only way to organize this.
00:03:37.120 --> 00:03:39.360
Um, some of this might have sub changes.
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A lot of people are talking about, and with good reason, about how SB21, the proposed amendments, affect the rules for transactions involving a controlling shareholder.
00:03:50.879 --> 00:03:57.199
But some of these amendments are related to the rules for uh transactions, self-dealing transactions.
00:03:57.280 --> 00:04:00.719
It's all about self-dealing transactions involving merely a director.
00:04:00.960 --> 00:04:10.080
So it could be, for example, a director's uh if the director has a pay package, if he or she is also an officer and has a salary or something like that, or is getting stock options.
00:04:10.400 --> 00:04:30.079
And there were some statutory safe harbors in section 144, which are going to be amended that apply to directors, which were about circumstances under which the burden on the director normally to show that if he's engaging in self-dealing, that the self-dealing is entirely fair to the corporation and its shareholders under the uh standard duty of loyalty.
00:04:30.319 --> 00:04:40.000
Where if certain procedural kind of safe harbors are satisfied, the taint of self-dealing would be cleansed and the director wouldn't have to show entire fairness anymore.
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And there are some changes here that make it easier for the director to establish that the safe harbors have been satisfied.
00:04:48.720 --> 00:04:56.560
And what hasn't changed here, and this is going to carry through, however, there are two kinds of procedural safe harbors that are available for director self-dealing.
00:04:56.720 --> 00:05:13.040
One is that the independent directors on the board and the disinterested ones, the ones that are not subject to the transaction that has the conflict of interest, are informed, they're independent, disinterested, and so on, and they vote in favor of the transaction, saying that it's good for the corporation.
00:05:13.199 --> 00:05:21.839
And then an alternative would be that the facts are presented to the shareholders and the shareholders are fully informed, they don't have a worse vote, and they ratify the transaction.
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And the rule has always been with directors that those two possible safe harbors are or.
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You can do one or the other and get the full benefit of the cleansing of the burden to show loyalty and sorry, to show fairness under the duty of loyalty.
00:05:35.759 --> 00:05:39.680
So there have been some changes to what a director has to do.
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It's a little bit easier now for a director to satisfy either of those safe harbor options, but the or is still an or there.
00:05:46.160 --> 00:05:49.600
Uh it's one or the other, and you get the benefit of the full safe harbor.
00:05:50.160 --> 00:06:11.279
Where we see kind of more commentary on SP21 is with respect to self-dealing by controlling shareholders, where a shareholder is engaging in a transaction either with the corporation he controls or with the minority shareholders, like through the mechanism of the corporation itself.
00:06:11.519 --> 00:06:16.000
That type of transaction also implicates the controlling shareholders' duty of loyalty.
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He normally would have to show its entire fairness to the corporation.
00:06:19.600 --> 00:06:36.399
Over time, the Delaware courts started developing a system of safe harbors that were in some ways parallel to the ones that were found in the statute in section 144, as applied just to directors who, by negative implication, were not also uh controlling shareholders.
00:06:36.560 --> 00:06:39.839
But that was also all common law, what the courts were doing.
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And they were going in a direction, and this was finally kind of reached its zenith in the recent recent match case I mentioned, which basically said that those two safe harbor options I mentioned for a director, where it's either or for a controlling shareholder to get the full benefit of safe harbor so that the taint of self-dealing was fully cleansed, the or was instead an ant.
00:07:02.879 --> 00:07:15.360
He would have to show not only that disinterested directors or a committee of disinterested directors approved the transaction with certain requirements in terms of their independence and so on, but then also a majority of the minority shareholders ratified it.
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Then he would get the full benefit.
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That was common law, and there and the or had been changed to an ant.
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This statute does a couple of things with respect to that self-dealing by controlling shareholders.
00:07:25.120 --> 00:07:33.360
First of all, it puts rules with respect to self-dealing by controlling shareholders and safe harbor rules specifically into the statute as well.
00:07:33.519 --> 00:07:40.639
So we're taking something that was purely common law before and is now being partly codified in section 144 as well.
00:07:40.879 --> 00:07:48.399
And then in addition to codifying some of these rules, it also overrules some of what the Delaware Supreme Court has done.
00:07:48.639 --> 00:08:04.079
A big change here is says that unless the transaction is a going private transaction or a squeeze-out transaction, but it's another type of self-dealing, like in the Musk case, where if we, and by the way, under these amendments and we can talk about this, Musk wouldn't even be a controlling shareholder anymore.
00:08:04.160 --> 00:08:06.800
But assuming that he was, the and would be an or.
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So it would be more like the way we would treat just a regular director.
00:08:10.959 --> 00:08:21.120
And so that directly overrules the match case as well, because match set held held that the or the and standard, the belt and suspenders rule as it was kind of was held as been described.
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Previously, it had been clearly established to apply to going private transactions by controlling shareholders, but now it applied to any self-dealing by controlling shareholders.
00:08:28.800 --> 00:08:31.680
That's overruled by these statutes, statutory amendments.
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It would change with respect to that type of controlled transaction.
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The AND really is an or.
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But then there's additional language here for controlling shareholders that limits the, as I was just saying, the definition of a controlling shareholder so that MUS couldn't be held to be one in the future based on the stock interest that he had in Tesla at the time, because it was less than one-third of the outstanding shares with voting power.
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And then there's some other rules about kind of the nitty-gritty, the nuts and bolts of how exactly you have to constitute the committee of independent directors, what defines independent or disinterested directors, and what defines ratification from a shareholder vote.
00:09:09.039 --> 00:09:10.960
The voting rules have been changed a little bit.
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So there's some kind of nuts and bolts there as well.
00:09:13.759 --> 00:09:24.639
But I would say the big two changes, maybe the biggest two here that getting the most attention are first of all, is that we're going to have now some statutory safe harbors for self-dealing by controlling shareholders.
00:09:24.799 --> 00:09:32.799
And outside the going private context, the Delaware Supreme Court is being overruled and it's not belt and suspenders anymore.
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Controller can satisfy either of the two safe harbors and get the way the courts would say it, once they've been satisfied either one, the full benefit of the business judgment rule, saying that we're going to defer fully to the board as if it was exercising unconflicted business judgment when it approved the self-dealing by the controlling shareholder.
00:09:52.960 --> 00:09:58.320
When the business judgment rule applies, the way I teach it to my students is basically the court saying to the plaintiff, what else you got?
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You got another theory of the case, because I'm not going to give you relief based on theory of self-dealing in violation of the duty of loyalty.
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Maybe you can allege bad faith or maybe you can allege gross negligence or something like that, but the self-dealing is it's blocked as a path to relief.
00:10:14.240 --> 00:10:22.080
One way to approach it from a sort of higher level of generality is that, you know, Delaware corporate law is all about the standard of review.
00:10:22.879 --> 00:10:30.720
It's about the business judgment rule, the entire fairness rule, and then there's a small category of intermediate scrutiny cases.
00:10:30.960 --> 00:10:34.080
And basically, the standard of review determines the outcome.
00:10:34.240 --> 00:10:37.039
So if the business judgment rule applies, the defendants win.
00:10:37.279 --> 00:10:43.600
If the entire fairness rule applies, the plaintiffs don't necessarily win, but the defendants can't get a dismissal of the case.
00:10:43.840 --> 00:10:48.960
Definitely not at the motion to dismiss, and probably not at summary judgment either.
00:10:49.120 --> 00:10:54.399
So the case goes on and probably settles in a way that's beneficial to plaintiffs.
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In that way, the Delaware corporate law is a lot like constitutional law.
00:10:58.399 --> 00:11:09.919
So, you know, if you remember the tiers of scrutiny analysis for certain kinds of rights cases, First Amendment cases, and so on, you've got strict scrutiny where the person who's challenging the government tends to win.
00:11:10.080 --> 00:11:14.399
Then you've got rational basis review, where the government always wins.
00:11:14.480 --> 00:11:17.440
And then there are some cases that are in the middle, but not many.
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Delaware law is just like that.
00:11:19.519 --> 00:11:23.600
There are many parallels, interestingly, between constitutional law and Delaware law.
00:11:23.759 --> 00:11:32.000
And one of the areas where you had an entire fairness or plaintiffs tend to win situation is in conflict transactions.
00:11:32.240 --> 00:11:39.919
As Richard said, the conflict transaction can be with a controlling shareholder, or it can just be with an interested member of the board of directors.
00:11:40.159 --> 00:11:48.799
And so if you break down the SB21, what's it sort of breaks down the world of conflict transactions into three scenarios.
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The first scenario is where there's a controlling shareholder who has a conflict and they're taking the company private.
00:11:56.320 --> 00:12:00.720
And so in that case, that was the original context of the MFW case.
00:12:00.960 --> 00:12:03.600
That case is changes the least here.
00:12:03.759 --> 00:12:15.120
So if you have a controlling shareholder in a going private transaction, they have to get both approval of the special committee and a majority of the minority shareholder vote.
00:12:15.279 --> 00:12:25.440
There are some changes, as Richard mentioned, procedurally, like where you might not have to have the special committee uh approval rights set up from the beginning or the thing has to be set up from the beginning.
00:12:25.600 --> 00:12:30.000
But basically the the and is in effect for that for that transaction.
00:12:30.240 --> 00:12:38.080
And then you also have at the other end of that, you have the uh the conflicted board problem, where a member of the board is conflicted.
00:12:38.480 --> 00:12:49.039
And under the old law, either a special committee or a majority of the minority could get that transaction done at a lower level of scrutiny.
00:12:49.200 --> 00:12:54.399
But what the change is that, and it's brought on by that match case that Richard mentioned.
00:12:54.559 --> 00:12:57.840
The match case basically said everything is MFW.
00:12:58.240 --> 00:13:00.879
Everything that a controlling shareholder does is MFW.
00:13:00.960 --> 00:13:07.759
So you had this middle category of cases where you had a controlling shareholder, but it was not a take private transaction.
00:13:07.840 --> 00:13:15.120
It was just something else that the controlling shareholder wanted to do with the corporation, where arguably the controlling shareholder got a benefit from it.
00:13:15.279 --> 00:13:23.919
And in that setting, the match case says that's MFW2, meaning the AND applies, special committee and majority of the minority.
00:13:24.000 --> 00:13:32.320
And the I think the biggest uh change here is that now, as a result of SB21, the OR would apply.
00:13:32.480 --> 00:13:48.960
So in a controlling shareholder transaction that is not a take private, the deal could be approved either by a special committee or a disinterested board members or the ratification of a majority of the minority shareholders.
00:13:49.279 --> 00:13:56.159
Okay, so you both agree that the bringing back the or paradigm to that middle group of cases is the biggest change here.
00:13:56.399 --> 00:14:03.840
I also think it's interesting that they're defining what it means to be a controlling shareholder, like with a numerical number of how much, how many shares you own.
00:14:03.919 --> 00:14:09.600
So maybe we can talk about that, and that will lead us into this a discussion of how the Torneta case may have come out under this paradigm.
00:14:09.919 --> 00:14:28.559
There's been some movement in the Delaware case law suggesting that what we would normally think of as a controlling shareholder, which is somebody who has a majority of the shares, and so is but can basically hand select the board of directors because they're they're selected by majority vote.
00:14:28.720 --> 00:14:33.120
That traditional definition of controlling shareholder is much too narrow.
00:14:33.279 --> 00:14:48.879
There are other types of people out there who have far less in terms of their shareholdings, but still are effectively exercising control over the board and the corporation because some combination of shares that they do own and influence they have.
00:14:48.960 --> 00:15:00.320
And this is really bringing us into the Musk, the Tornetta case, where Musk is was called, um, it's been called by observers and Chancellor McCormick cited the law review article on this, saying he was a superstar CEO.
00:15:00.559 --> 00:15:01.600
Certainly he is.
00:15:01.759 --> 00:15:06.399
I mean, he's kind of, I think he has legendary status at Tesla.
00:15:06.559 --> 00:15:16.960
And so the concern would be, even though at the time of the relevant transaction, he had maybe 21% of the outstanding shareholders, but and he was also on the board of directors, he was just kind of legendary at the company.
00:15:17.120 --> 00:15:31.360
And he also, as far as Chancellor McCormick was concerned, exercised control over the particular negotiations of his pay package in a way that suggested that he really did have outsize control, that he really was a controlling shareholder.
00:15:31.519 --> 00:15:35.919
A lot of it was about the style in which the other directors negotiated with him.
00:15:36.080 --> 00:15:44.080
She thought that they were showing a high degree of deference to him, letting him be in the driver's seat in a way that suggested what they were just, you know, they must have been under his thrall.
00:15:44.240 --> 00:15:54.080
She also thought there were a lot of personal and maybe some financial connections between them that may have may have contributed to their deference and therefore to him being kind of effectively a controlling shareholder.
00:15:54.320 --> 00:16:02.639
These statutory amendments would greatly reduce the ability of courts to find somebody as a controlling shareholder in circumstances like that.
00:16:02.799 --> 00:16:11.600
In fact, the way I read the amendments is that Musk could never now be a controlling shareholder under Delaware law, under those facts, because the statute says you basically have two options.
00:16:11.759 --> 00:16:18.720
You either have a majority of the shares, again, the traditional, so more than 50% of the outstanding shares, the traditional definition.
00:16:18.960 --> 00:16:26.720
In fact, sometimes people use the term controlling shareholder and majority shareholder interchangeably, almost reflecting that that was the traditional sense.
00:16:26.879 --> 00:16:36.720
Um, indeed, if you're not a controlling shareholder, but there is a controlling shareholder, what you're called under dollar law is a minority shareholder, which suggests there is that the controller is a majority controlling shareholder.
00:16:36.879 --> 00:16:38.639
That still clearly is a controller.
00:16:38.799 --> 00:16:52.960
However, there still is this other option where you can exercise kind of de facto control, but it has to be based on control that you're exercising that is based on your, it says it based on your shareholdings, not based on another source of power.
00:16:53.200 --> 00:16:58.080
And you have to have at least one third of the shares voting power of the company.
00:16:58.240 --> 00:17:00.559
So Sean is dividing things into threes here.
00:17:00.720 --> 00:17:02.000
That's a useful way to do it.
00:17:02.159 --> 00:17:05.519
So I would say the statute divides things into threes for controlling shareholders.
00:17:05.599 --> 00:17:08.160
If you have more than half, you're a controlling shareholder.
00:17:08.319 --> 00:17:09.839
At least you're presumptively one.
00:17:10.000 --> 00:17:13.279
We can imagine you'd enter into contracts where you promise never to vote your shares.
00:17:13.359 --> 00:17:15.680
You tied your own hands, and courts might recognize that.
00:17:15.759 --> 00:17:18.559
But presumptively, more than half, you're a controller.
00:17:18.720 --> 00:17:21.440
Less than a third, you are absolutely not a controlling shareholder.
00:17:21.519 --> 00:17:23.680
There needs to be some other basis to go after you.
00:17:23.839 --> 00:17:33.839
If you have a third or uh or more, but less than a majority, maybe you are a controlling shareholder based on, we're going to look at other facts, the way that courts often do.
00:17:34.000 --> 00:17:49.519
But there's this language in there suggesting, again, that that power, if you are a controller, has to derive from your shareholdings, that you are effectively a controller based on your voting power and not based so much on other sources of influence you might have over the board of directors.
00:17:49.680 --> 00:18:10.160
So that right there would, if applicable to the tornado case, which it's not by according to the current language because it's not retrospective, but if applicable to the tornado case, would require a remand to Chancellor McCormick to say, we need you to analyze this case again, not finding without a base without finding that Elon Musk was a controlling shareholder of Tesla.
00:18:10.240 --> 00:18:12.000
Because according to the statute, he wouldn't be.
00:18:12.400 --> 00:18:23.279
So I would think that's an actually great point to make about the what the legislature would really be doing is overruling that transaction-specific control aspect of the Tornada decision.
00:18:23.519 --> 00:18:35.519
Another important thing to note from SB21 is the way that it deals with independence or disinterestedness, which may also be different from the way that the chancellor dealt with it in the Tornada case.
00:18:35.680 --> 00:18:49.920
Again, big picture, Delaware had been moving in a direction where a certain set of transactions could be treated as, well, a certain set of relationships could be treated as relationships which call into question the independence of those board members.
00:18:50.079 --> 00:19:06.240
So, for example, there was a famous case involving Oracle, where a number of members of the board and the special committee, the board that were the defendants in the derivative suit and the special committee that were brought on, all had a common nexus of relationship to Stanford University.
00:19:06.400 --> 00:19:16.000
The one guy was the PhD supervisor of the special committee member, and the other, some of the other defendants were big donors to Stanford University.
00:19:16.160 --> 00:19:29.279
And in that case, even though that wasn't traditional family or familial conflict of interest, the chancellor in that case, I think he was a chancellor, then maybe he was just a vice-chancellor strein, said that calls into question the independence.
00:19:29.359 --> 00:19:36.000
And so independence all of a sudden meant more than just material, financial, or familial conflict of interest.
00:19:36.240 --> 00:19:39.839
That kind of reasoning appeared in different cases from time to time.
00:19:40.000 --> 00:19:53.839
There was another important case involving Martha Stewart, where the court said, look, it can't just be that they're all friends and they all go to the same weddings and they're all part of the same social nexus, but they have to have some real thick ties or something.
00:19:54.000 --> 00:20:01.440
But this was all fact-specific and very difficult to say what the law really is in a fact-specific analysis like that.
00:20:01.680 --> 00:20:10.960
The chancellor's analysis of the Elon Musk relationships with other members of the board have a lot of that sort of Oracle type relationship consideration.
00:20:11.119 --> 00:20:19.359
Like they invested in other companies together, they had social relationships, they skied together, or they were guests in each other's homes.
00:20:19.519 --> 00:20:24.720
And the question is, does that call into question the disinterestedness of the board?
00:20:24.880 --> 00:20:30.720
And in SB21, the answer to that would seem to be mostly not.
00:20:31.039 --> 00:20:39.599
And in particular, the bill reaches points to stock exchange rules as a place to look for the definition of independence.
00:20:39.759 --> 00:20:45.200
So the bill says someone who's not disinterested if they have a financial or familiar relationship.
00:20:45.359 --> 00:21:00.799
And then they say that directors of a corporation that have stock listed on a national securities exchange, and the board finds them to be disinterested, and as long as they satisfy the relevant criteria for the exchange, they're likely to be treated as disinterested.
00:21:01.440 --> 00:21:03.839
And that's that's what independence, in other words, means.
00:21:03.920 --> 00:21:10.480
So independence, the statute seems to be saying, doesn't refer back to fixed social relationships.
00:21:10.720 --> 00:21:13.119
It refers to like the stock exchange rules.
00:21:13.200 --> 00:21:16.640
And the stock exchange rules, they have a rather restricted view of what independence means.
00:21:16.720 --> 00:21:18.720
It's financial conflict of interest.
00:21:19.279 --> 00:21:31.119
I feel like when I read these proposed amendments, there's more work being done in terms of the first thing that you mentioned today, which was this notion that in Delaware it's all about the burdens.
00:21:31.359 --> 00:21:44.000
And so you're right that there's this definition of independent director or disinterested director that starts with this interesting power of the board itself to find that a director is disinterested.
00:21:44.240 --> 00:21:52.160
There's a bit of a circularity problem here because you might think, well, if the board itself is interested, why should it have the power to determine that somebody is disinterested?
00:21:52.400 --> 00:21:59.680
There's a presumption being applied effectively by the statute that says that, well, if you're a director and you've been elected by the shareholders, we're going to defer to you to.
00:22:00.240 --> 00:22:01.759
Certain extent on that basis.
00:22:01.920 --> 00:22:07.839
And so, first of all, the power is in the board itself to designate a director as disinterested.
00:22:08.079 --> 00:22:14.559
The board can do so, as you said, but with reference to stock exchange rules, if the company is if the company is publicly traded.
00:22:14.880 --> 00:22:16.960
But that's not the end of the matter, right?
00:22:17.359 --> 00:22:21.519
That designation can be reviewed, but there's a presumption in favor of it.
00:22:21.599 --> 00:22:32.079
And so that language about the stock exchange director independence definition goes on to say that there is a presumption, then, if the the board has made this designation, that the director is independent.
00:22:32.240 --> 00:22:46.720
And it says that the presumption shall be heightened and may only be rebutted by substantial and particularized facts that such director has a material interest in such actor transaction or has a material relationship with a person that has a material interest in such actor transaction.
00:22:46.960 --> 00:22:51.519
So a motivated judge, we might say it this way, could go in there and say, you know what?
00:22:51.759 --> 00:23:03.359
I find that the plaintiffs have shown a material interest or a material relationship that is so strong that it overcomes this heightened burden, this heightened presumption in favor of the board's designation.
00:23:03.519 --> 00:23:08.160
And so I can still say that this directory lacks disinterestedness, lacks independence.
00:23:08.319 --> 00:23:13.039
And if it goes on, then there's also a definition of material relationship in these amendments.
00:23:13.279 --> 00:23:32.799
I'm calling our attention to this because you were talking correctly, Sean, about how Delaware courts have gone all the way back to the Oracle case, which was then a little bit of a different the older Oracle case, what was in the context, not of self-dealing, but of a special litigation committee under the Zapata line of cases, because there was a motion to dismiss a derivative suit.
00:23:33.039 --> 00:23:34.240
And what's the rule there?
00:23:34.319 --> 00:23:40.559
And at the time, Van Vice Chancellor Strine again looked at the thickness of the personal relationships, the professional relationships.
00:23:40.640 --> 00:23:46.400
They all, all these directors at Oracle, they lived in Palo Altar together, they were connected through Stanford University.
00:23:46.559 --> 00:23:53.200
And then we saw a similar probing of kind of personal lives in a way in the Tornetta case as well.
00:23:53.440 --> 00:23:55.200
Chancellor McCormick did something similar.
00:23:55.359 --> 00:23:58.960
But here's what material relationship is defined at in this in the amendments.
00:23:59.039 --> 00:24:09.279
It says a familial financial professional employment or other relationship that in the case of director of a director would reasonably be expected to impair the objectivity of the director's judgment.
00:24:09.359 --> 00:24:12.720
Um, and then in the case of a stockholder would be material to the stockholder.
00:24:12.880 --> 00:24:14.480
That still seems pretty broad to me.
00:24:14.559 --> 00:24:21.680
It could be any type of relationship, familial, financial, professional employment, or other that could reasonably do inspected to impair the objectivity.
00:24:21.839 --> 00:24:31.920
So I'm actually seeing once we get down to the definition itself of a material relationship, I still think there's a lot of room there for the judge to find conflict.
00:24:32.079 --> 00:24:35.039
I think that the difference here is more in the burdens.
00:24:35.279 --> 00:24:41.359
The judge has to be much more deferential initially to the board's designation than she would have been otherwise.
00:24:41.519 --> 00:24:46.000
So the burden's kind of on the plaintiff more than it would be otherwise to overcome a presumption.
00:24:46.160 --> 00:24:54.319
But the types of things that the plaintiff can point to, the types of we skied together and we are colleagues at the same university and so on.
00:24:54.400 --> 00:24:56.079
I think all of that is still in the mix.
00:24:56.319 --> 00:24:57.440
I agree that it's in the mix.
00:24:57.519 --> 00:25:07.119
And I think this is actually a really interesting point to raise about the bill, which is where is it still susceptible to judicial interpretation and where isn't it?
00:25:07.359 --> 00:25:28.720
The critics of the bill want to call it unbalanced, and they and they want to say that what's happening here is Delaware is moving towards a more statutory, bright line way of doing corporate law and away from the traditional judge-based, fact-specific equity jurisprudence that has characterized Delaware corporate law forever.
00:25:28.880 --> 00:25:33.680
And that so what it's happening is it's sort of hardening into a more rule-based system.
00:25:34.160 --> 00:25:39.200
And I think that's probably overstated for the reason that you said, and for some other reasons besides.
00:25:39.440 --> 00:26:01.119
So I quite agree that that the the what the way that you would challenge independence is by saying, you know, the second part of that definition which you read, which is something like they can bring, they can plead particularized facts, and the and the judge would be free to find particularized facts suggesting a lack of independence, even if they qualified under the stock exchange standard.
00:26:01.359 --> 00:26:05.759
And then the word other in the in the definition of disinterested as well.
00:26:05.920 --> 00:26:21.359
There's a third place, and which is when the the stockholders vote to ratify, there is a requirement, of course, that the vote, the ratification vote only counts if they're fully informed, you know, language going all the way back to Smith versus Van Gorkham.
00:26:21.519 --> 00:26:33.839
If they're fully informed of all material facts leading up to the vote, there's plenty of room for shareholder plaintiffs to bring actions claiming that the vote was not fully informed because some piece of information was missing.
00:26:34.000 --> 00:26:39.359
And I'll just point out that this happens all the time, for example, in merger litigation.
00:26:39.759 --> 00:26:48.240
Shareholders bring cases and claim that the disclosures were inadequate, that certain disclosures have to be added in order to make the disclosures not misleading.
00:26:48.400 --> 00:26:51.440
And then the, you know, that gets sorted out how it gets sorted out.
00:26:51.599 --> 00:26:56.400
But I will say that courts haven't been extremely aggressive in saying, no, the disclosure is just fine.
00:26:56.559 --> 00:26:58.240
Thank you very much, dismissed.
00:26:58.400 --> 00:27:00.240
That has tended not to be the case.
00:27:00.319 --> 00:27:03.839
And there would be plenty of room for the same type of jurisprudence here.
00:27:03.920 --> 00:27:20.559
And we have seen similar cases like that in the MFW context, where a large line of MFW cases have been brought claiming that the disclosure to the shareholders in the vote was not adequate, and thereby allowing a plaintiff to challenge the vote itself.
00:27:20.799 --> 00:27:25.839
And I think that comes back to sort of the big picture of what is the corporate law product that you get in Delaware.
00:27:26.000 --> 00:27:36.319
When you go and incorporate in Delaware, you're getting a corporate law product which is basically fly spec'd by the plaintiff's bar and subject to interpretation by the judiciary.
00:27:36.559 --> 00:27:40.480
I think what SB21 is doing is moving a little bit away from that.
00:27:40.559 --> 00:27:46.640
But as Richard, as you say, that's if you read it closely, it's in a fairly narrow context that it really changes very much.
00:27:46.799 --> 00:27:51.200
Some people are saying that it changes a lot, but I mean that well, I guess we'll see.
00:27:51.359 --> 00:27:56.240
But that is one type of corporate law product, which is principally judge-based law.
00:27:56.480 --> 00:28:06.960
You know, on the question of whether companies want to leave Delaware, there might still be plenty of room for other states to compete with Delaware by providing something that is genuinely different.
00:28:07.200 --> 00:28:16.799
Corporate law that has legitimate bright line rules about what kinds of cases can be brought and what can't be brought, what minimum amounts for recovery would be, and so on.
00:28:16.960 --> 00:28:20.880
And so the Delaware product really still is a judicial product.
00:28:21.200 --> 00:28:21.839
Yeah, that's right.
00:28:22.079 --> 00:28:31.519
You could see another state, for example, establishing clear, safe harbors that judges can't overthrow on the definition of a disinterested and independent director.
00:28:31.759 --> 00:28:43.839
You know, I don't know if anybody has creatively tried to write a statute that says that if a director has the following characteristics, then he is conclusively, he is conclusively established to be disinterested and independent.
00:28:44.319 --> 00:28:52.720
So it sounds like at the end of the day, SB21 may not be as effective as its fans had hoped or as detrimental as the naysayers feared.
00:28:52.960 --> 00:29:04.720
Just maybe, you know, a very small, like you said, Sean move away from straight up common law, but still in the ballpark of a lot of wiggle room for creative lawyering and for judge interpretation.
00:29:05.119 --> 00:29:07.519
Well, I don't want to say that it's totally small.
00:29:07.680 --> 00:29:10.079
And I guess that you know the proof will be in the pudding.
00:29:10.319 --> 00:29:15.920
One area that I I haven't heard people talking about is so if if I'm right that there are three big categories.
00:29:16.000 --> 00:29:28.880
There's the conflicted, there's the conflicted controller squeeze out transaction, then there's the controller other transaction, and then there's the interested board transaction.
00:29:29.839 --> 00:29:30.960
Interested director, yeah.
00:29:31.200 --> 00:29:34.000
Yeah, interested, interested director transaction, right.
00:29:34.319 --> 00:29:46.079
And my question is like, so where does and and what all of these do is they say you're not going to have litigation because you're there's no the the first line of the statute says something like no equitable or other kind of relief will be granted.
00:29:46.160 --> 00:29:52.960
In other words, dismiss, which is something like business judgment rule, but these are transactions with conflict problems.
00:29:53.200 --> 00:30:01.920
Whether it's a controlling shareholder or just a just an interested board member, these are transactions where there's a conflict.
00:30:02.160 --> 00:30:07.920
And from the perspective of shareholder justice, they're the types of transactions you would worry about the most.
00:30:08.240 --> 00:30:16.799
There's a whole other category of transactions that don't have a controlling shareholder or conflicted board of directors, and those are Revlon type transactions.
00:30:16.960 --> 00:30:23.599
Now, when I was talking about the tiers of scrutiny analysis in Delaware, those are our intermediate scrutiny transactions.
00:30:23.680 --> 00:30:29.200
They're not business judgment rule, they're not entire fairness, but they're this sort of intermediate standard.
00:30:29.359 --> 00:30:35.599
The court comes in and says, Did you really try to maximize the price in the sale process?
00:30:36.000 --> 00:30:52.079
Because there's no controller and because there's no conflict of interest problem per se in those transactions, there's a strong argument that those transactions deserve at least the same treatment as conflict transactions.
00:30:52.319 --> 00:31:08.960
So if what we're saying in this statute is that you go straight to dismissal in a conflict transaction, if you can get committee approval, a disinterested shareholder vote, by implication, you ought to be able to get to the same place in a Revlon transaction too.
00:31:09.279 --> 00:31:12.799
And all Revlon transactions require shareholder votes.
00:31:13.119 --> 00:31:23.599
Basically, Revlon transactions should immediately get dismissed because as long as there's not a conflict on the part of the board of directors, you have a disinterested board approval.
00:31:23.839 --> 00:31:35.200
And as long as there's a shareholder vote where the that votes in favor of the transaction, which you would always have to have in order to close the transaction anyway, you get a majority of the minority approval or whatever.
00:31:35.359 --> 00:31:44.240
And so it seems to me that it one implication of the statute is that Revlon type challenges should all get dismissed too, provided that they can uh deliver a shareholder vote.
00:31:44.559 --> 00:31:53.519
It's useful to note there that the original Revlon case itself did involve what looked like a very strong conflict of interest by a board of directors.
00:31:53.599 --> 00:31:56.079
It was favoring a white knight over a hostile raider.
00:31:56.319 --> 00:32:01.759
And there seemed to be a very large entrenchment motive that was causing it to favor the white knight.
00:32:02.000 --> 00:32:10.960
There was some imprecise language in that opinion that suggested that the heightened scrutiny the court was applying applied to any sale of the company, triggered this heightened scrutiny.
00:32:11.119 --> 00:32:17.440
One of the things that Justice Strine did on the Supreme Court, I think very helpfully would say, actually, there's two different things going on here.
00:32:17.680 --> 00:32:22.240
One is true Revlon, where there's an entrenchment motive, and the other is just sale of the company.
00:32:22.319 --> 00:32:29.119
And I think for sale, just pure sale of the company transactions, he did more or less push it in the direction of a large amount of deference.
00:32:29.200 --> 00:32:34.319
Indeed, in McClorwin case, he said if the if the shareholders have substantially ratified the transaction, that's good enough.
00:32:34.480 --> 00:32:36.880
That eliminates any possibility of judicial review.
00:32:37.039 --> 00:32:42.400
So I think, Sean, for that strand of Revlon cases, we are already pretty close to that.
00:32:42.559 --> 00:33:02.079
For hardcore entrenchment cases where you see a board playing favorites, there are multiple, so the company is in play, there are multiple competing bidders, and the company favors a white knight over a raider, that does feel more like the board really is conflicted, is entrenching itself, and then heightened scrutiny would still be justified.
00:33:02.160 --> 00:33:04.559
And I think that's kind of where we are with the law, anyway.
00:33:04.880 --> 00:33:07.119
If we think about the entrenchment motive, right?
00:33:07.279 --> 00:33:12.400
So it's usually not that the entire board of directors is going to be carried on by the private equity buyer.
00:33:12.480 --> 00:33:19.359
Like Forceman Little was not going to bring on the entire board of directors from Revlon into the into the private equity company.
00:33:19.440 --> 00:33:22.640
He was going to, but the idea is that the main players were going to stick around.
00:33:22.880 --> 00:33:31.200
So if the logic of the conflict is that if you're sticking around, you have an interest, then there are board members who are not sticking around.
00:33:31.440 --> 00:33:40.720
And so those would be under Senate Bill 21, would be the type of board members who would be in a position to bless the transaction.
00:33:40.880 --> 00:33:41.200
Right.
00:33:41.359 --> 00:33:56.480
So directors who aren't staying, directors who are not in some way, like also CEOs, like part of the story in Revlon is also that the CEO, Bergerac, wants to keep running the company and he's going to get to keep running the company in private equity, but not if there's a sale to Ron Perelman.
00:33:56.640 --> 00:33:58.960
If you take those people out, their vote doesn't matter.
00:33:59.039 --> 00:34:06.559
But if you're left with, and I think maybe something else we should talk about about SB21, is that what you need in order to get board approval.
00:34:06.720 --> 00:34:12.559
I think the old rule was something like you needed a majority of the board to be disinterested.
00:34:12.800 --> 00:34:16.960
That majority of disinterested directors have to approve the transaction.
00:34:17.119 --> 00:34:35.760
But the new rule, and now I'm not going to be able to find it in my stack of papers, I think is something like as long as any members on the board of directors don't have the conflict, as long as they can sort of sit on a committee and this has just recently been revised from one to two, then those directors can cleanse the conflict.
00:34:35.920 --> 00:34:37.119
My point is just this.
00:34:37.360 --> 00:34:56.639
If those disinterested directors can cleanse the conflict in the most worrying situation, which is a conflict of interest transaction, where one of the where there's a material financial conflict of interest, then surely the non-entrenched directors ought to be able to cleanse the entrenchment problem in the Revlon situation.
00:34:56.880 --> 00:34:59.280
Maybe that's an implication of this rule as well.
00:34:59.840 --> 00:35:00.880
That's an interesting proposal.
00:35:00.960 --> 00:35:11.519
The idea would be that when the company is being sold, if the board has at least two directors, because under these amendments, you would need uh that independent committee to have at least two disinterested directors.
00:35:11.679 --> 00:35:21.360
But if at least there are two who have no reason to favor one bidder over the other, and they think that the transaction is the best interest, the one that the board's going with is the best interest of the shareholders.
00:35:21.519 --> 00:35:22.400
That should be enough.
00:35:22.559 --> 00:35:25.039
I do think that logically is consistent with what we're seeing here.
00:35:25.360 --> 00:35:29.760
Okay, I don't want to keep you both too much longer, but I want to get some policy questions out there.
00:35:30.000 --> 00:35:36.079
Richard, how do you respond to the idea that the Delaware General Assembly is just caving to Musk and other powerful insiders?
00:35:36.400 --> 00:35:38.000
When you say insiders, what do you mean?
00:35:38.480 --> 00:35:44.000
Controlling executives and oh, uh insiders in right.
00:35:44.400 --> 00:35:50.320
It's a little bit, and I know this is the way you're not the only one saying it this way, but it's tengentious to say they're just caving.
00:35:50.559 --> 00:35:58.159
The question would be should the concerns of people like Musk and others be of genuine kind of interest to the Delaware legislature?
00:35:58.400 --> 00:35:59.760
And I think they should be.
00:35:59.920 --> 00:36:13.119
I think that there's a practical question which says that if people who are very influential insiders and corporations really don't like Delaware law, they're gonna go elsewhere and Delaware will lose the franchise tax revenue associated with this.
00:36:13.199 --> 00:36:16.480
This is a big source of the state of Delaware's overall revenue.
00:36:16.719 --> 00:36:25.920
If you think that the legislators in Delaware have a fiduciary to the citizens of Delaware, then they shouldn't want Dexit to occur, right?
00:36:26.000 --> 00:36:31.199
There's a lot of uh money that's gonna leave, and then they'll have to raise taxes on the citizens of Delaware.
00:36:31.280 --> 00:36:33.360
So you could look at it from that perspective as well.
00:36:33.519 --> 00:36:42.159
But it's also possible that insiders like Musk and others, who were feeling like that the courts are going too far, could have a good argument on the merits.
00:36:42.320 --> 00:36:51.599
What is being overturned is not a lot of long-standing old Delaware law that people like Musk and others just kind of couldn't stand anymore.
00:36:51.760 --> 00:36:59.119
There's been a lot of, I would say, innovation, the MFW line, but then with the match case, applying it to other types of control, shareholder transaction.
00:36:59.360 --> 00:37:07.360
Also, there's, in my view, what Chancellor McCormick did in the uh Torneta case in terms of finding transaction-specific control was innovative.
00:37:07.440 --> 00:37:09.360
Uh, and it was only in the last couple of years.
00:37:09.519 --> 00:37:23.280
So it may very well be a kind of a on the merits putting the money aside question, a useful corrective where and that and the legislatures may be convinced of that, that there is, you know, this is checks and balances in any constitutional system.
00:37:23.440 --> 00:37:31.440
And if the courts are going maybe a little bit too far in a particular direction, this is a way to rein them in a bit while still giving them a certain amount of discretion.
00:37:31.599 --> 00:37:34.159
And I think that that signal is I fit here.
00:37:34.239 --> 00:37:35.039
There's no doubt about it.
00:37:35.119 --> 00:37:38.239
I think the legislature is saying, you guys have gone a little too far here.
00:37:38.559 --> 00:37:40.000
We got to pull you back a bit.
00:37:40.320 --> 00:37:46.000
And that is has implications beyond just the text of the amendments itself.
00:37:46.159 --> 00:37:49.679
You asked earlier, you know, is this really all kind of a tempest in a teapot?
00:37:49.760 --> 00:37:52.159
Is there not really that much of a change here after all?
00:37:52.400 --> 00:37:57.519
Because there is uh still a large amount of discretion that Delaware judges are enjoying.
00:37:57.679 --> 00:38:02.800
I would say no, I think that the there is on some areas that discretion has been really curbed.
00:38:02.960 --> 00:38:06.320
But even beyond that, there's the text and then there's the subtext.
00:38:06.480 --> 00:38:18.400
And I think the subtext here is if you do things that a large number of academics and because it's not just the the musks that could criticize the tornado opinion, the musks of the world.
00:38:18.639 --> 00:38:20.559
Sean and I have have criticized it as well.
00:38:20.639 --> 00:38:22.960
And we don't have any kind of dog in this fight here.
00:38:23.199 --> 00:38:26.960
If you do things that are widely controversial, we will rein you in.
00:38:27.039 --> 00:38:33.599
And it's not um something that I think any person with a healthy ego can ignore.
00:38:33.760 --> 00:38:39.199
I think that the judges who feel like their rulings are being overruled here are gonna feel a little bit of a sting.
00:38:39.280 --> 00:38:41.599
They're gonna be like, oh, I've, you know, I've had my wrist slapped.
00:38:41.679 --> 00:38:42.400
That didn't feel so good.
00:38:42.480 --> 00:38:44.239
It's a little bit of a public embarrassment.
00:38:44.400 --> 00:38:51.679
And so it may affect the way they rule in future cases, even on matters that the legislation itself doesn't directly touch.
00:38:52.000 --> 00:39:15.599
One explanation for why the bill somewhat unusually says it doesn't apply transactions that are pending or that have been completed and therefore February of this year, and therefore wouldn't apply to the Trinetta case itself, could be in particular to address the perception that basically Elon Musk, the richest man in the world, just bought this bill, right?
00:39:15.679 --> 00:39:19.440
He just he just gave enough money and left influence in the right places.
00:39:19.599 --> 00:39:22.079
He's also currently in the Trump administration.
00:39:22.159 --> 00:39:25.119
I mean, he's he's influential both politically and financially.
00:39:25.280 --> 00:39:31.679
So it could look like this is just the legislature caving to him and saying, okay, here's a bill that will overturn your pay package rule.
00:39:31.760 --> 00:39:34.960
And so you do get your your$56 billion after all.
00:39:35.199 --> 00:39:41.679
That language could be in there specifically to address that concern and saying, no, no, no, this doesn't apply to the Tornetta case.
00:39:41.840 --> 00:39:48.400
The Supreme Court is going to decide that case on the old merits, the merits before this legislation.
00:39:48.480 --> 00:39:51.679
That could be there particularly to address that concern that you were raising.
00:39:51.920 --> 00:39:58.079
But then what about the commentary at the end, which says, but also feel free to ignore this non-retroactivity?
00:39:58.960 --> 00:40:03.280
I don't read it as saying ignore the ret ignore the non-retroactivity.
00:40:03.440 --> 00:40:06.559
Here's that the language in the commentary at the end of the proposed bill.
00:40:06.639 --> 00:40:17.920
The lack of retroactivity depending actions and proceedings should not in any way affect the ability of a court by reference to existing case law to reach an outcome consistent that one would be dictated by this act.
00:40:18.079 --> 00:40:34.559
So it's just making clear that a court could still rule in favor of Musk in that case, but it would have to, uh as this act would seem to require, but it would have to do so based on, it does say, uh it would have to do so by reference to existing case law.
00:40:34.880 --> 00:40:41.119
Yeah, and before this bill was even proposed, you know, we we went back and forth about whether the Supreme Court might overturn Tornetta anyway.
00:40:41.280 --> 00:40:41.440
Right.
00:40:41.599 --> 00:40:43.760
So it's just kind of saying that that world still exists.
00:40:44.079 --> 00:40:45.039
Yes, I think that's right.
00:40:45.599 --> 00:40:51.199
It's fair to characterize this as a legislative reversal of some judicial decisions.
00:40:51.280 --> 00:41:00.559
And I don't think that they're necessarily just chancery court decisions, like for example, the match decision, is which is a Supreme Court decision, is getting reversed here.
00:41:00.800 --> 00:41:03.599
So it's not just a couple of judges or anything like that.
00:41:03.760 --> 00:41:07.840
There is a real attempt to overrule some some case law in Delaware, though.
00:41:08.079 --> 00:41:16.800
There are some famous legislative reversals in Delaware law, and we sort of teach them year after year, but they're unusual.
00:41:16.880 --> 00:41:20.400
Like it's sort of like lightning striking where the legislature comes in.
00:41:20.480 --> 00:41:24.000
The legislature is fairly passive about its corporate law.
00:41:24.079 --> 00:41:33.440
Like it as long as everything's going fine and people aren't talking about leaving, and there's no question, uh, there were plenty of making plenty of money on the franchise tax, there's not really a need to consider the problem.
00:41:33.519 --> 00:41:34.719
But there are some times when they did.
00:41:34.800 --> 00:41:35.920
So I'll I'll list four.
00:41:36.079 --> 00:41:44.320
One was in 1986 after Smith versus Van Gorkham, when the Delaware Supreme Court suggested there might be monetary liability for directors under the duty of care.
00:41:44.719 --> 00:41:52.719
The legislature came in a year and a half later with 102B7, which is exculpates uh board members for a breach of the duty of care.
00:41:52.960 --> 00:42:09.760
In 2014, after a case called ATP Tour, when the Delaware Supreme Court said you could do fee shifting, the legislature came in and overruled it and said no, they had adopted a statutory provision that said, no, you can't do fee shifting, but you can do forum selection.
00:42:09.920 --> 00:42:21.360
And then last year there was a case called MOLIS, which got legislative reversed, which led to a lot of acrimony in Delaware because the case had not even been appealed all the way up to the Supreme Court and the legislature intervened.
00:42:21.440 --> 00:42:26.960
But that was about controlling shareholders, exercising control through stockholders' agreements.
00:42:27.119 --> 00:42:28.400
And then there's this one.
00:42:28.639 --> 00:42:39.360
Now, the the political economy of Delaware is that changes to the statute all come from a council, the Delaware Bar Council, which is a group of Delaware lawyers.
00:42:39.519 --> 00:42:45.840
And to ensure balance, the council consists of lawyers on both the plaintiff side and both the defense side.
00:42:46.000 --> 00:43:00.880
So if you go back and look at the history of legislative interventions, especially legislative reversals of judicial decisions, they tend to be legislative reversals that ensure that there will continue to be litigation business in the state of Delaware, which is no surprise, right?
00:43:00.960 --> 00:43:08.239
Because a political economy of lawyers dominating the lawmaking process would suggest that the lawmaking process has to be good for lawyers.
00:43:08.400 --> 00:43:10.639
And that's you can definitely see that in the other ones.
00:43:10.719 --> 00:43:18.079
You can especially see it after ATP, where the fee shifting bylaw looked like it would kill some large amount of shareholder litigation.
00:43:18.239 --> 00:43:21.280
They immediately acted to prevent that from happening.
00:43:21.519 --> 00:43:23.039
This one is interesting.
00:43:23.360 --> 00:43:32.719
According to media accounts that I've read, the motivation for this legislative intervention did not come initially from the Delaware Bar Council.
00:43:32.880 --> 00:43:38.159
It came from the governor's office and some small group of people that the governor was talking to.
00:43:38.320 --> 00:43:44.320
It's not clear who those people were, but probably they were New York lawyers and not Delaware lawyers.
00:43:44.480 --> 00:43:55.199
They were lawyers who have who bring the clients into Delaware who need Delaware representation in litigation matters, but who have who are all actually the corporate lawyers.
00:43:55.440 --> 00:44:00.480
And this legislative intervention looks like it's bad for litigation in Delaware.
00:44:00.639 --> 00:44:08.639
In other words, it looks like there will be less because the law makes these safe safe harbors, which make it difficult for litigation.
00:44:08.880 --> 00:44:21.039
It would be strange for the Delaware Bar Council to have proposed this on their own, because if it limits litigation, it sounds like it's bad for the Delaware Bar, certainly on the plaintiff side and maybe on the defense side too.
00:44:21.199 --> 00:44:37.119
So there's an interesting political economy story here where the, I mean, ultimately it has to be adopted by the legislature, but the legislature has shown that they just they do adopt what is put in front of them about the corporate law, understanding that if they don't do it, they might have to raise taxes on people.
00:44:37.360 --> 00:44:42.639
But it's interesting that this one is maybe curbing litigation more than the other ones did.
00:44:42.880 --> 00:44:48.960
And it's not coming from the Delaware Bar Council as all of the other ones always have.
00:44:49.360 --> 00:44:54.239
Well, you're both right that this is a unique bill, and it is also one that has bipartisan support.
00:44:54.320 --> 00:44:55.840
So it will likely pass.
00:44:56.000 --> 00:45:03.039
And then we'll see how it affects the direction of the law, the Tornada case, and companies' appetite to exit or stay in Delaware.
00:45:03.280 --> 00:45:09.440
Maybe at that point I can get you both to come back here and we can do another episode about the never-ending Delaware sagas.
00:45:10.000 --> 00:45:10.800
That would be a lot of fun.
00:45:11.199 --> 00:45:12.639
Well, thank you both so much for your time.
00:45:12.719 --> 00:45:14.000
This was awesome.
00:45:16.719 --> 00:45:22.079
Thanks to everyone at Fortnum Law School, especially the Dean's office and our corporate law center donors for supporting this podcast.
00:45:22.239 --> 00:45:25.119
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00:45:25.280 --> 00:45:29.840
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