Volume 33 Issue 2 (2008)
ARTICLES
Bernard S. Sharfman, The Enduring Legacy of Smith v. Van Gorkom, 33 Del. J. Corp. L. 287 (2008).
Smith v. Van Gorkom (Van Gorkom) is possibly the most famous corporate law case ever decided by the Delaware Supreme Court. The enduring legacy of Van Gorkom is the understanding that corporate directors should not be held financially liable for corporate board decisions that lack due care. Of course, it was not the holding of Van Gorkom that established this, but the chain of events that occurred in its wake.
The challenge for teachers of Van Gorkom is to explain why shareholders were correct in approving exculpation clauses, even as our thinking about corporate law evolves and corporate scandals (Enron, Tyco, WorldCom, etc.) continue to influence our perspective on the correct level of corporate accountability. As this article demonstrates, applying the innovative approaches taken by legal scholars such as Michael P. Dooley, who introduced Kenneth Arrow’s understanding of the value of centralized authority into the study of corporate law, and Stephen M. Bainbridge, who has so aptly applied Professor Dooley’s work in the development of his director primacy model, and Margaret M. Blair and Lynn A. Stout, who introduced the concept of the board of directors as a “mediating hierarchy,” gives Van Gorkom new and greater meaning and reaffirms the correctness of insulating directors from duty of care liability.
The basic premise underlying this article is that the real value of the corporate form is its hierarchical nature as reflected in the centralized authority of the corporate board. This value is manifested by the corporate board’s ability to (1) efficiently filter information in its decision-making process and (2) act as a mediating hierarchy. Such organizational efficiencies create a strong presumption that the laws of corporate governance should not interfere with the corporate board’s decision-making process.
In contrast to the approach taken by both Dooley and Bainbridge, this article does not utilize a contractarian framework. More importantly, this article does not require that shareholder wealth maximization be a norm underlying the laws of corporate governance. By relaxing this standard assumption, we can, for the first time, utilize the efficiency arguments of Dooley and Bainbridge on the one hand and those of Blair and Stout on the other, as two complementary, instead of competing, arguments supporting the position that corporate board decisions need to be protected from judicial review.
Amy Y. Yeung & Charles B. Vincent, Delaware’s “No-Go” Treatment of No-Talk Provisions: Deal-Protection Devices After Omnicare, 33 Del. J. Corp. L. 311 (2008).
This article analyzes the Delaware courts’ treatment of clauses that can be treated under one interpretation as a “no-talk” deal-protection device used by corporations in friendly acquisitions. In Energy Partners, Ltd. v. Stone Energy Corp., a 2006 Delaware Court of Chancery opinion, the court focused on the narrow issue of whether a target could prevent an acquiring company from dealing with a third-party company that threatened its deal. Although the court denied injunctive and declaratory relief predominantly on ripeness grounds, an application of the facts of Energy Partners helps demonstrate how deal-protection devices have evolved since the controversial Omnicare decision. This article analyzes the recent Delaware Court of Chancery case and reaches three conclusions: (1) Omnicare continues to be restricted to its facts and could be further restricted to mergers facing review solely under Revlon; (2) provisions involving no-talk restrictions have been narrowly construed by the court in order to ensure that boards are not prohibited from exercising their fiduciary duties if a superior offer emerges; and (3) based on the court’s treatment of legal restrictions vis-a-vis a merger, litigation in Delaware related to directors’ fiduciary duties in a merger/acquisition context may be governed by the broad principle of encouraging discussions and negotiations with third parties when the directors have signaled the corporation’s entrance into the merger/acquisition moment.
Franita Tolson, The Boundaries of Litigating Unconscious Discrimination: Firm-Based Remedies in Response to a Hostile Judiciary, 33 Del. J. Corp. L. 347 (2008).
In answering the question of how judges should approach unconscious discrimination claims, scholars ignore a practical solution to this problem: by putting the burden on the firm to reduce the incidence of unconscious bias ex ante, as opposed to putting the burden on the employee of proving it in court ex post. The means of accomplishing this is multifaceted, whereby firms that have been previously exposed to extensive employment discrimination litigation use their market power to force their smaller competitors to adopt a new diversity norm. Delaware law then steps in and memorializes the new norm in the case law, transitioning the norm into a rule of law enforceable through the duty to monitor (a species of the duties of care and loyalty). While this may sound a little unusual, this article will show that it is a meaningful alternative to combating discrimination primarily addressed through Title VII of the Civil Rights Act of 1964 (Title VII) by forcing firms incorporated within the state to create an environment amenable to diversity. Such initiatives could address overt discrimination and also unconscious discrimination, which is more prevalent and the focus of this study. While unconscious discrimination is actionable under Title VII (presumably), scholars are in agreement that court regulation of it has failed. Contrary to the alternatives suggested in the literature, placing the burden on the firm to regulate discrimination ex ante is more likely to minimize unconscious, discriminatory behavior, at least more than tinkering with the ex post remedies available for those few violations that can be proven through Title VII.
This article first explains why courts have failed to address unconscious discrimination, a failure that has emerged largely out of respect for employment at will and an unwillingness to infer differential treatment where other explanations are possible. Courts can address only the most extreme cases of unconscious discrimination, which require the presence of certain factors that will allow the court to isolate the bias. Second, this article proposes other mechanisms for addressing unconscious discrimination that account for its peculiar nature, mainly firm-based remedies that will be more successful than the courts have been in addressing this problem. The difficulty comes in giving the Delaware courts an incentive to become involved in the controversy over unconscious discrimination, or in the alternative, convincing firms to address unconscious discrimination without the impetus of litigation. This article demonstrates that such incentive can come from an unlikely blend of the duties of care and loyalty, corporate norms, and economic pressure from corporate giants like Wal-Mart.
COMMENTS
Joel D. Corriero, Satellite Radio Monopoly, 33 Del. J. Corp. L. 423 (2008).
This comment examines the proposed merger agreement between Sirius Satellite Radio Inc. (Sirius) and XM Satellite Radio Holdings Inc. (XM). It begins by examining the origin of satellite radio and the current state of Sirius and XM. It proceeds by taking an in-depth look at the Federal Communications Commission’s (FCC) public interest analysis and applies that analysis to the current proposed merger. This comment shows that the proposed merger is not anticompetitive, as supported by the Department of Justice in its review of the XM-Sirius merger. Rather, the relevant product market in which satellite radio competes is far broader than satellite radio in the strictest sense. Moreover, this comment will balance the potential public interest harms of the proposed merger against the potential public interest benefits, and indicate how the benefits clearly outweigh the harms. This notion is then further substantiated by analogizing previous FCC orders in relation to the current XM-Sirius proposed merger, and by acknowledging that the shareholders of Sirius and XM have both voted in favor of the proposed merger.
Craig J. Springer, Weissman v. NASD: Piercing the Veil of Absolute Immunity of an SRO Under the Securities Exchange Act of 1934, 33 Del. J. Corp. L. 451 (2008).
Pursuant to the Securities Exchange Act of 1934 (Exchange Act), self-regulatory organizations (SROs) receive quasi-governmental immunity. The justification for this immunity is twofold: first, to enforce the minimum financial and sales practice requirements created by Congress and the Securities and Exchange Commission and second, to denounce and publicly reprimand any violators of these requirements. An issue arises, however, when SROs forfeit their responsibility for these duties by participating in actions that are solely for their own private interests.
The National Association of Securities Dealers Automated Quotation (NASDAQ) became a privatized, for-profit company in 2002, with annual profits exceeding $365 million in 2006. With profits as excessive as these, it should be inferred that Nasdaq, Inc. has transitioned their priorities from regulation to annual gross revenue. As a result, NASDAQ, like the many other publicly traded stock exchanges, has struggled to maintain its identity as an SRO.
This comment will further explore the issue of whether SROs should still receive the protections of immunity under the Exchange Act and considers the potential legal and economic impact of the Eleventh Circuit’s decision in Weissman v. NASD, Inc. In Weissman the court decided Nasdaq should no longer receive the benefits of quasi-governmental immunity in actions where Nasdaq is acting privately. This comment takes the position that Weissman was correctly decided and analyzes the legal and economic impact this decision could have on both Nasdaq and other for-profit stock exchanges.
NOTE
Linda J. Stengle, Rewarding Integrity: The Struggle to Protect Decentralized Fraud Enforcement Through the Public Disclosure Bar of The False Claims Act, 33 Del. J. Corp. L. 471 (2008).
Despite twenty years of success in returning billions of dollars to the U.S. Treasury, citizens attempting to recover damages under the False Claims Act (FCA) continue to face judicial hostility in their efforts to expose corporate fraud. Judges twist the public disclosure bar of the FCA to deny well-deserving plaintiffs a portion of the proceeds as envisioned by Congress when it resculpted the qui tam provision in 1986. Some courts have distorted the common sense meanings of words like “based upon” beyond recognition in what only can be a subterfuge for serious, underlying resentment toward citizen actions.
This note provides the long history of qui tam actions, explains basic qui tam terminology, and describes relevant portions of the FCA. An examination of judicial hostility toward the FCA follows, highlighting key areas of dispute between the circuits in interpretation of the public disclosure bar. Arguments and rationales for judicial encouragement of citizen actions are presented. Finally, congressional attempts to end the courts’ limitations on these actions through recent amendments are discussed.