Delaware Courts Research Articles

Give Me Back My Money: A Proposed Amendment to Delaware's Prepayment System in Statutory Appraisal Cases

In 2016, the Delaware General Assembly amended Section 262 of the Delaware General Corporation Law to provide surviving corporations with the option to prepay stockholders in appraisal cases. Specifically, the amendment gives a surviving corporation the option to pay, in advance of a trial to determine the stock’s fair value, whatever amount per share that it chooses. Doing so cuts off the statutory interest on the prepaid amount, which theoretically should disincentivize investors from filing appraisal petitions solely to turn a profit from the statutory interest rate—a strategy known as “interest-rate arbitrage.” But in amending the statute, the General Assembly did not specify whether the petitioning stockholders must return to the corporation any amount by which the prepayment exceeds the Court’s determination of fair value. The resulting unknown has not only caused uncertainty among litigants and costly motion practice in the Delaware Court of Chancery—a consequence, ironically, that the legislative amendment was aimed at avoiding—but has also diminished the amendment’s effect on curbing interest-rate arbitrage and, more generally, appraisal arbitrage. This article explores the history behind the prepayment amendment, including the evolution of Delaware’s appraisal statute and two Court of Chancery cases in which the Court foresaw the need for an effective prepayment system. This paper also examines the legislative history of the 2016 amendment and other scholars’ suggestions for dealing with the statutory ambiguity. Finally, the article offers a new model for legislative reform, one that retains Section 262’s core and advances the policy objectives that underlie Delaware’s appraisal system.

Generic Suboxone film on the horizon in the U.S.

Last month's news that a Delaware court is allowing Dr. Reddy's, a huge supplier of generic drugs based in India, to produce a generic version of buprenorphine‐naloxone film resulted in an immediate response from Indivior, which makes Suboxone (buprenorphine‐naloxone film) and has enjoyed a monopoly on it. Reckitt Benckiser (which Indivior spun off from in 2014) aroused outrage in the treatment field when generic versions of its Suboxone tablet came on the market and it responded by pulling the tablets, making only its patented film available. Now, Indivior will appeal the court ruling.

The Shareholder Wealth Effects of Delaware Litigation

We collect data on the record of every action in over one thousand cases involving public companies from 2004 to 2011 in the Delaware Court of Chancery, which is the leading court for corporate law disputes in the United States. We use these data to estimate how markets respond to Delaware litigation events and characteristics such as case initiations, procedural motions, case quality, and judge identity. We find that negative abnormal returns are associated with the filing of derivative and contract cases, but we observe little effect associated with the filing of the average merger challenge. When we include measures of case quality, we see that higher quality cases increase the expected impact of derivative and contract litigation on firm value. We also develop evidence that tactics associated with multijurisdictional litigation are associated with a weakened impact of litigation on firm value. This evidence is consistent with the belief that the presence of litigation in another jurisdiction allows defense lawyers to bid down competing groups of plaintiffs’ lawyers during settlement negotiations. Finally, we show that abnormal returns are not associated with information on judicial assignment at the time of case filing, nor are they associated with judge identity at case resolution. These results suggest that the judicial impact on shareholder wealth at the time of judicial assignment and the time of case termination is too small to be statistically detected.

Is a Delaware LLC the Answer to Address Risks of Personal Liability in Private Equity Investments in Brazil?

Under Delaware law, the liability of a Delaware limited liability company (LLC) is limited to the assets of the LLC. Investors in an LLC (members) are only liable for their investment in the LLC. Given the state of Delaware is highly respected worldwide and does not have the negative “tax shelter” reputation attributed to other jurisdictions, it is arguable that a Delaware LLC would protect its members against personal liability. By and large, international private equity investors use Delaware LLCs to invest in Brazil through Brazilian private equity investment funds (FIPs). Brazilian courts have “pierced the corporate veil” of corporate entities in the past and imposed personal liability upon the shareholders of those entities. However, the decision of a Brazilian court to pierce the veil of a Delaware LLC would be of little consequence if a Delaware court would not enforce the judgment against the LLCS and its members.

Delaware and Financial Risk

I argue that financial risk poses unique challenges that justify a differential application of corporate law oversight standards. The steps in my argument are as follows. First, I show how modern firms with significant exposure to financial risk are different in fundamental ways that matter crucially to the application of oversight standards. Second, I argue that, notwithstanding these differences, the major Delaware oversight cases were correctly decided, though the result might have been the opposite if complaints had been framed differently, with relevant and important facts. Third, I argue that the federal case involving the JPMorgan “London Whale” episode was wrongly decided. Unlike other scholars who have discussed director duties in the aftermath of the financial crisis, I am not arguing for any change in the oversight standards themselves. Instead, my argument is that Delaware law already provides ample support and justification for holding directors to a higher standard with respect to the oversight of financial risk. The complexities of financial risk pose unique challenges that the Delaware courts should take into account when assessing director oversight failures. Such an approach would not subject directors to unwarranted exposure for oversight failures, or have negative implications for business, and it would not change Delaware’s approach to cases that do not involve financial risk. The Delaware courts have demonstrated a capacity to respond to changes in the corporate contract, notably in Caremark itself, where Chancellor Allen recognized that the modern corporate practice of oversight had changed, and that the courts should change accordingly. Director oversight of financial risk is merely the most recent area in need of this kind of incremental judicial change. This chapter will appear in a forthcoming book, “The Corporate Contract in Changing Times,” co-edited by Professors Steven Davidoff Solomon and Randall Thomas.

The Trouble with Trulia: Re-Evaluating the Case for Fee-Shifting Bylaws as a Solution to the Overlitigation of Corporate Claims

Responding to an increase in deal litigation “beyond the realm of reason” in the early part of the 21st century, Delaware’s legal community struck a grand bargain with its corporate citizens. First, the legislature prohibited Delaware stock corporations from enacting fee-shifting bylaws or articles, which some saw as threatening Delaware’s legal community, and others—including the Delaware State Bar Association (“DSBA”) and the plaintiffs’ bar—considered to be “throwing the baby out with the bathwater.” Second, the DSBA explicitly encouraged greater scrutiny of intracorporate litigation by judges, and the adoption of forum selection bylaws by corporations, to reduce the incidence of socially wasteful litigation. Within seven months of the ban on fee-shifting, the Delaware Court of Chancery issued the Trulia decision, widely seen as a promising corrective to the problem of excessive corporate litigation, and in particular disclosure-only settlements. Almost a year later, there is reason to doubt whether this grand bargain will be sufficient to address the problem. Over sixty percent of major deals remain subject to litigation. Forum selection clauses have not served as a panacea: as critics noted at the time, they have granted an option to corporate defendants, who may choose to waive such provisions if offered a favorable settlement outside of Delaware. In the meantime, these provisions may well have revitalized deal litigation under federal law, with plaintiffs bringing securities cases against corporate defendants that have adopted forum selection clauses. Although Delaware courts have acted to rein in disclosure settlements, few courts in other jurisdictions have followed suit. This slow take-up of Trulia outside of Delaware is a result, at least in part, of the non-adversarial process that Trulia set out to correct, as parties presenting disclosure settlements outside of Delaware have little reason to cite newer Delaware authority. Against this backdrop, we argue that if Trulia fails to eradicate the problem of socially detrimental litigation, Delaware should reconsider its prohibition on fee-shifting bylaws.

Why Delaware Must Retain its Corporate Dominance and Why it May Not

Delaware’s preeminent role in corporate regulation has endured for several important reasons. Most importantly, the state’s entire approach to the corporate law has been centered on investor protection. Although, through the years the ways by which it has tried to achieve this protection have changed, it is this animating principle that defines its laws. Investors are keenly aware of this fact and seek and respect the approach. Delaware’s primary industry is corporate regulation and to maintain its franchise, it must carry out its responsibilities fairly, intelligently and responsibly. Its corporate code is the most advanced in the country. Its judiciary has unusual expertise in the field and is highly respected in the resolution of corporate disputes. In recent years, it has maintained a delicate balance between upholding shareholder power and board prerogative. It is favored as the nation’s best forum for corporate dispute resolution by both investors and managers. It possesses a powerful franchise that would be difficult for other states to reproduce both judicially and, because of the influence in other jurisdictions of local corporate interests, practically. However, Delaware’s dominance is not assured and several recent developments may ultimately reduce its power and influence. First, while the chances of enactment of a federal corporate code are slim, federal intrusion into corporate governance regulation through the Sarbanes-Oxley and Dodd-Frank Acts has been harmful to the state. A significant portion of Delaware’s influence in areas such as audit oversight and executive compensation has been superseded by federal regulation. The benefit of a Delaware court’s resolution of these types of issues is therefore diminished and the attractiveness of simply incorporating in a company’s home state at lesser cost is increased significantly. If one incorporates in Delaware for a sensible regulation of corporate issues and that regulation has shifted to the federal regime, there is little point in incorporating in Delaware. Any increased federal intervention in this area only heightens the potential for this shift. The argument for federal regulation has revolved around creating a progressive national regulatory standard. But because local federal district courts, with little corporate expertise and local corporate political pressures, will ultimately decide regulatory disputes, this may lead to the balkanization of corporate law. Delaware, oddly enough, offers a coherent national approach. Still today, Delaware regulates much corporate conduct and a shift to other states is far off, but not inconceivable. The second major threat to Delaware’s dominance may be self-inflicted. For years the process by which Delaware courts are constituted and corporate law made has been considered above partisan politics and local interests. Any action that compromises its courts or the corporate law process due to local political considerations may diminish the state’s reputation for neutrality and credibility and lead to incorporation elsewhere. This is something that the state’s leaders must be highly cognizant of and sensitive to. Delaware’s potential downfall may not come from outside the state, but from within.

Governance by Contract: The Implications for Corporate Bylaws

Boards and shareholders are increasing using charter and bylaw provisions to customize their corporate governance. Recent examples include forum selection bylaws, majority voting bylaws and advance notice bylaws. Relying on the contractual conception of the corporation, Delaware courts have accorded substantial deference to board-adopted bylaw provisions, even those that limit shareholder rights. This Article challenges the rationale for deference under the contractual approach. With respect to corporate bylaws, the Article demonstrates that shareholder power to adopt and amend the bylaws is, under Delaware law, more limited than the board’s power to do so. As a result, shareholders cannot effectively constrain the board’s adoption of bylaws with which they disagree. The resulting power imbalance offers reasons to question the scope of the contract paradigm. This analysis has two implications. First, it suggests that the Delaware courts and possibly the legislature may want to re-consider existing constraints on shareholder power in order to realize the contractual paradigm fully. In so doing, they will have to consider the normative implications of greater shareholder empowerment. Second, to the extent that Delaware law retains the existing limitations on shareholder power, this analysis suggests that courts should scrutinize board-adopted bylaws more closely.

Does the Buck Stop Here? Board Responsibility for FCPA Compliance

This article focuses on the corporation law aspect of “corporate compliance,” i.e., how the legal structure of the corporation should, but often does not, ensure compliance. It explains that a corporation’s board of directors, legally obligated to manage the business in the interests of the corporation and its shareholders, should run the firm in order to avoid costly violations of the U.S. Foreign Corrupt Practices Act (FCPA) or other laws. In addition, the article explains that because the fiduciary duties of directors are in principle enforceable by shareholders, the specter of shareholder suit against directors who violate their duties and allow the firm to operate illegally should result in corporate compliance with the FCPA, or at least should provide a remedy to shareholders if directors fail, and violations occur. This article shows, however, that the fiduciary duties of directors are at best weak reeds in practice. Although there are certainly many fine directors, fiduciary duties in fact legally require directors to do very little and it is nearly impossible for a shareholder to obtain a judicial remedy against a faithless director. This article argues that several decades of Delaware court decisions, combined with legislation enabling director exculpation in nearly every state, have resulted the evisceration of director fiduciary duties and remedies for their violation. This article then looks closely at the allegations of FCPA violations and a cover-up of the same in the mid-2000s by Wal-Mart Stores, Inc.’s Mexican subsidiary. This article looks at the ill-fated shareholder derivative suits claiming breach of fiduciary duties by the Wal-Mart board members that were filed in the wake of the FCPA allegations. This article concludes that a return to the basics of corporation law, with enforceable fiduciary duties imposed on board members, might improve compliance with the FCPA.

Courts Block Two Proposed Giant Health Insurer Mergers

Back to table of contents Previous article Next article Legal NewsFull AccessCourts Block Two Proposed Giant Health Insurer MergersMark MoranMark MoranSearch for more papers by this authorPublished Online:23 Feb 2017https://doi.org/10.1176/appi.pn.2017.3a6AbstractTwo district court rulings seem to put a halt, at least temporarily, to the trend toward increasing consolidation in the insurance industry, a trend that APA has seen as threatening to competition and patient choice.Two rulings by the District Court for the District of Columbia have blocked the Aetna-Humana and Cigna-Anthem mergers.On January 27 Judge John D. Bates ruled in favor of the U.S. Justice Department in a suit it had filed to block the Aetna-Humana merger. The Department of Justice (DOJ) had argued that it would substantially reduce competition in the Medicare Advantage market in more than 350 counties in 21 states, affecting more than 1.5 million Medicare Advantage customers in those counties. Twelve days later, Judge Amy Berman Jackson ruled against the Cigna-Anthem merger, saying it would have worsened an already highly concentrated market and likely lead to increased prices. The DOJ had also filed suit to block the merger of Anthem and Cigna. The Anthem-Cigna merger was proposed in July 2015; Aetna and Humana entered into an agreement that same month. The DOJ’s suit to block both mergers was filed in July 2016. The DOJ noted that before seeking to acquire Humana, Aetna had pursued aggressive expansion in Medicare Advantage, doubling its Medicare Advantage footprint over the past four years. The DOJ also argued that Aetna’s purchase of Humana would substantially reduce competition to sell commercial health insurance to individuals and families on the public exchanges in 17 counties in Florida, Georgia, and Missouri, affecting more than 700,000 people.DOJ said the proposed merger of Anthem and Cigna would substantially reduce competition for millions of consumers who receive commercial health insurance coverage from national employers throughout the United States. The department said consumers receiving insurance through large-group employers in at least 35 metropolitan areas, including Denver, Indianapolis, Los Angeles, New York, and San Francisco, and from public exchanges created by the Affordable Care Act in Denver and St. Louis would be most affected (Psychiatric News, August 19, 2016).The courts agreed. APA has worked to educate DOJ about the dangers of the proposed mergers, arguing that they would be detrimental to health care generally, but could especially be harmful to patients with mental illness because the mergers would diminish competition in setting rates and determining conditions of psychiatrist participation in health networks. Also, existing violations of the federal Mental Health Parity and Addiction Equity Act could be exacerbated because patients would have fewer choices among insurance providers.APA leaders hailed the court decisions. “The trend toward consolidation in the insurance market is a troubling one that threatens patient choice, which is critical in our health care system,” said APA President Maria A. Oquendo, M.D., Ph.D. “We are pleased that the court sided with the Justice Department and agreed that these mergers would reduce competition and limit patients’ coverage options.”APA CEO and Medical Director Saul Levin, M.D., M.P.A., concurred. “We applaud these two rulings, which preserve competition in the health insurance market and prevent insurers from acquiring unprecedented market power,” Levin said. “APA will continue to advocate on behalf of patients and physicians to foster more competitive health insurance markets.”At press time, Aetna and Humana announced that they would not appeal the decision. Anthem executive Joseph Swedish indicated in a statement it was likely the company would appeal. “If not overturned, the consequences of the decision are far reaching and will hurt American consumers by limiting their access to high-quality, affordable care, slowing the industry’s shift to value-based care and improved outcomes for patients, and restricting innovation, which is critical to meeting the evolving needs of health care consumers,” he said.But on February 14 Cigna announced it would terminate the proposed merger agreement with Anthem. In a statement on the Cigna website, the company said: “Cigna believes that the transaction cannot and will not achieve regulatory approval and that terminating the agreement is in the best interest of Cigna’s shareholders. To effect this termination, Cigna has filed suit against Anthem in the Delaware Court of Chancery. The suit seeks declaratory judgment that Cigna has lawfully terminated the merger agreement and that Anthem is not permitted to extend the termination date. The complaint seeks payment by Anthem of the $1.85 billion reverse termination fee contemplated in the merger agreement, as well as additional damages in an amount exceeding $13 billion. These additional damages include the amount of premium that Cigna shareholders did not realize as a result of the failed merger process.” ■ ISSUES NewArchived

Statutory Fair Value in Dissenting Shareholder Cases: Part I

The predominant standard of value employed by state courts to determine the value of minority shares in appraisal cases is fair value, which is determined by state law. In most states, fair value is the shareholder's pro rata portion of the value of a company's equity. This measure of value differs from fair market value, third-party sale value, and fair value for GAAP purposes. This article discusses the valuation approaches accepted by the courts, focusing on the Delaware courts' views as to how fair value is assessed, and contrasts Delaware's views with those of other jurisdictions that differ from Delaware in their approach to fair value.

The Corporate Objective after eBay v. Newmark

AbstractThe Delaware court's decision in eBay v. Newmark has been viewed by many commentators as a decisive affirmation of shareholder wealth maximization as the only legally permissible objective of a for‐profit corporation. The implications of this court case are of particular concern for the emerging field of social enterprise, in which some organizations, such as, in this case, Craigslist, choose to pursue a social benefit mission in the for‐profit corporate form. The eBay v. Newmark decision may also threaten companies that seek to be socially responsible by serving constituencies other than shareholders at the expense of some profit. This examination of the court decision concludes that a legal requirement to maximize shareholder value may not preclude a commitment to social responsibility and may even permit the pursuit of a social benefit objective, such as the preservation of the culture developed by Craigslist. In particular, the court's decision in eBay v. Newmark reflects unique features of the case that could have been avoided by Craigslist and by other similar companies.

Seattle Genetics invests in embattled Immunomedics

Seattle Genetics will pay up to $2 billion to license IMMU-132, the lead antibody-drug conjugate being developed by Immunomedics. The deal includes $250 million up front for licensing as well as $15 million for a nearly 3% equity stake in the New Jersey-based firm. In return, Seattle Genetics will take on development, manufacturing, and commercialization of sacituzumab govitecan (IMMU-132), which targets TROP-2 in several solid tumors. IMMU-132 is in a Phase I/II trial for breast cancer and has breakthrough therapy designation from FDA. The deal comes at a time when Immunomedics’ lead shareholder, the venture capital firm venBio, is seeking to replace board members and eventually oust Immunomedics founder and chair David Goldenberg and his wife, CEO Cynthia Sullivan. VenBio sees the Seattle Genetics deal as a tactic to delay the outcome of a shareholder vote. VenBio has filed a motion in the Delaware Court of Chancery for an injunction

The litigation of tax benefit preservation plans

PurposeThe authors study the shareholder wealth effects of the adoption and subsequent litigation confirming the validity of shareholder right plans that are enacted to protect a firm’s net operating loss (NOL) carry forwards (tax benefit preservation plans (TBPPs)). The purpose of this paper is to expand the understanding of nontraditional shareholder rights plans, which are becoming increasingly more common.Design/methodology/approachThis paper considers abnormal returns around TBPP adoptions and Delaware Court rulings that validated their use. The authors study 118 plans adopted between 1998 and 2011. Abnormal returns are measured using both a market model and a performance-matched sample.FindingsThe authors find that abnormal returns are negative at the announcement of a new TBPP. However, the full impact of plan adoption on share prices is not evident until the Delaware Courts validated their use. The Delaware Court rulings in the case of Selectica, Inc. v. Versata Enterprises, Inc. and Trilogy, Inc. are associated with additional negative wealth effects for both prior plan adopters and the firms most likely to consider adopting a plan. These results suggest that entrenchment concerns tend to outweigh the protection of NOL carry forwards when firms adopt TBPPs.Originality/valueThis study was the first to consider the adoption of TBPPs. Currently, it is the only study that considers Delaware Court rulings related to these plans, which allows us to successfully disentangle the entrenchment hypothesis from the potential alternative hypothesis that the negative announcement period returns are driven by investors updating their expectations for firm performance.

Caremark's Hidden Promise

In re Caremark, decided in 1996, established for the first time a director’s duty to monitor under Delaware law. A significant amount of jurisprudence and commentary has developed. Almost all of this literature parses the language of the case and those following, and disregards the underlying claims for damages. As a result of this linguistic focus, many have concluded that the duty to monitor largely is toothless and, importantly, deals only with claims of failure to monitor legal risk. A duty to monitor business risk has been disavowed. Following the money reveals a different story. Classifying the cases according to their damages claims reveals that, in fact, Delaware courts have gone far toward extending the duty to monitor to business risk, while at the same time doctrinally disavowing that they have done so. Closely related to this monitoring duty is the pre-conditional duty of good faith, which is breached by directors’ knowledge of wrongdoing. Once again, doctrine masks important distinctions that are revealed by a close examination of the facts of the cases. Analysis reveals that Delaware courts may be failing to make an important distinction with regard to forms of notice. Making this distinction would help to shore up the duty to monitor without imposing unreasonable demands on directors. These two lines of analysis lead to the conclusion that a meaningful duty to monitor both legal and business risk is well along in development. Extracting and reassembling the facts would realize Caremark’s original promise.

<br>Oversight Liability

תקציר בעברית: בשנים האחרונות התפתחו דיני התאגידים בישראל באופן משמעותי. פסקי דין רבים שניתנו התוו את המדיניות הראויה וקבעו את סטנדרט ההתנהגות המצופה מנושאי משרה בחברה במגוון רחב של הקשרים. הקשר אחד, מרכזי מאוד, טרם זכה להתייחסות ברורה ומקיפה בפסיקה: אחריות דירקטורים בגין מחדל בפיקוח. נושא רמת הפיקוח המצופה מהדירקטוריון על הנעשה בחברה, כמו גם אמות המידה המשפטיות בהתייחס לטענות בדבר מחדל בפיקוח, נדונו בהרחבה על ידי בתי המשפט של דלאוור. מצבים של מחדל בפיקוח אינם חוסים תחת כלל שיקול הדעת העסקי ועבורם עוצבה בדלוואר דוקטרינת המחדל בפיקוח, שאומצה על ידי מדינות רבות בארצות-הברית. על-פי ההלכה הנוהגת בדלוואר תובע המבקש להטיל על דירקטורים אחריות אישית בגין מחדל בפיקוח נדרש להוכיח באמצעות ראיות מוצקות אחת משתי חלופות: 1) כישלון חרוץ מצד הדירקטוריון בהטמעת מערכות מידע ודיווח; או 2) התעלמות מודעת של הדירקטוריון מקיום סימני אזהרה (דגלים אדומים) המעידים על כשלים בחברה. יודגש, כי בהתאם להלכה בדלוואר, לשם הטלת אחריות אישית על הדירקטורים, נדרשת הוכחה כי הדירקטורים התנהלו בחוסר תום-לב. בשונה מארצות-הברית, בישראל, כאמור, טרם אומצה משנה משפטית סדורה וכוללת בנוגע לאחריות דירקטורים בגין מחדל בפיקוח. אכן, הפסיקה הישראלית התייחסה למצבים של מחדל בפיקוח בפסקי הדין הבולטים בעניין בוכבינדר, הבנק למסחר, כפר תקוה ומתוק. אולם, פסקי דין אלו עסקו במצבי קיצון בהם מחדלי הדירקטוריון עלו כדי הפקרות מוחלטת שהובילה את החברות שבהן כיהנו הדירקטורים אל עברי פי פחת. על-כן, קשה לזקק מפסקי הדין הקיימים הלכה לגבי מקרים שבהם מידת המחדל בפיקוח מובהקת פחות - ואלו הם המקרים הרווחים בתחום של דיני התאגידים. במאמר עליו אנו שוקדים בימים אלה אנו מבקשים למלא את החלל המשפטי הקיים בדין הישראלי בנוגע לאחריות בגין מחדל לפיקוח. החלק הראשון של המאמר מציע סקירה של המצב המשפטי הקיים ביחס למצבים של מחדל בפיקוח – בישראל ובארצות-הברית. במסגרת זו, נראה כי בהקשר של מחדל בפיקוח מוענקת לדירקטורים בארצות-הברית הגנה כמעט מוחלטת. על-בסיס זה, החלק השני של המאמר יציע מסגרת להטלת אחריות בגין מחדל בפיקוח במסגרת הדין הישראלי. הצעתנו תגדיר את גזרת האחריות המשפטית בגין מחדל בפיקוח ותפרט את השיקולים האמורים, לדעתנו, להנחות את בתי המשפט הישראלים בהכריעם בסוגיה זו. English Abstract: The last few decades have seen many significant advancements in Israeli corporate law. These advancements include both legislative and judicial formulations of the legal standards for reviewing the behavior of corporate officers and directors in a wide range of contexts. However, one central issue has so far largely eluded the probing gaze of Israeli judges and remained under-developed: oversight liability of directors. Our review of the Israeli caselaw reveals cases dealing with oversight claims, all of which were extreme in that they involved egregious failures on the part of the board that drove companies to the abyss of insolvency. In fact, these cases are so extreme and unrepresentative that they provide no real guidance as to how more common and representative claims of oversight failure will be adjudicated. By contrast to the Israeli courts, the Delaware courts have created a comprehensive legal doctrine that deals with claims of oversight failure – a doctrine that has been followed by the courts of many other states as well. Under Delaware law, personal liability for oversight failure will be imposed on directors only if: (a) the board utterly failed to set up or implement a reporting or information system or controls; or (b) having implemented such a system or controls, consciously ignored “red flags.” Under either scenario, imposition of liability requires a showing of bad faith on the part of the directors. In this Article, we fill the void that exists in Israeli corporate law in the context of oversight liability. The first part of our Article surveys the Israeli and American cases pertaining to oversight liability. As we show, American corporate law places an extremely high burden on a plaintiff who brings a personal claim against a director on oversight grounds. More generally, American law provides directors with near absolute protection from personal liability in oversight cases. Based on our analysis of American law, in the second part of our paper, we develop a normative framework for oversight liability in Israel. In that Part, we also explain the rationales for the proposed legal design, which, we hope, will be of assistance to Israeli courts.

Do staggered boards harm shareholders?

We examine the Cohen and Wang (2013) conclusion that a staggered board lowers firm value based on the stock price reaction to two 2010 Delaware court rulings in the Airgas, Inc. case. The first ruling weakened the potency of a staggered board and the second restored it. We find that the Cohen and Wang results, for their sample, become insignificant after excluding a few penny stocks, stocks with value below $10 million, or over-the-counter (non-exchange) stocks. The effects of the rulings are also insignificant for an alternative sample.

White Lies and Good Faith Dishonesty: Sometimes, Presumably, Directors Must Employ Subterfuge to Protect the Corporation

The courts have long struggled with a standard for reviewing board of directors' exercise of corporate control against a fellow director through strategic unequal treatment. While validating corporate secrecy between directors raises old-fashioned questions of corporate morality, there are presumably circumstances in which it is lawful and equitable to withhold information from a fellow director in order to protect the corporation. It seems that in certain contexts, disabling corporate boards from using their best business judgment to not prematurely disclose a planned action that would impair the interests of a director who is perceived to be harmful to the enterprise, contradict their fiduciary duties and would jeopardize stockholders' welfare far more than would strategic silence.In the recent case of Optimiscorp v. Waite, the Court of Chancery and Delaware Supreme Court were called to confront head on with this fundamental question: Can a board of directors call a special board meeting without pre-disclosing its plan to encroach upon fellow director's governance rights, acting in subjective good faith and honest belief the action is in the best interests of the corporation? Although the judicial scrutiny applied to unequal treatment of directors has shifted throughout the years, courts have treated such actions with suspicion, applying general reasoning grounded in fairness principles but without articulating why or what equitable standard of conduct has been violated.This Article examines the Delaware courts' most recent response to the limits of corporate boards' authority to treat fellow directors unequally. Particularly, I argue that the Delaware Supreme Court in OptimisCorp v. Waite failed to distinguish adequately those situations in which blindsiding a director constitutes inappropriate directorial behavior that improperly encroaches upon cognizable rights from the set of situations in which merely not disclosing its plan prematurely should not eliminate directors' protection of the business judgment rule. Thus, I argue the court's analysis and standard of review of exercise of such corporate power need significant refinement.

The Rise and Fall of Delaware's Takeover Standards

The takeover standards that we learn and teach in law school, Revlon, Unocal, Weinberger, and Blasius, appear to be in decline. In this chapter for the book The Corporate Contract In Changing Times: Is the Law Keeping Up? (eds. William Savitt, Steven Davidoff Solomon, Randall Thomas), we attempt to explain the rise and fall of jurisprudential takeover standards in Delaware. We theorize that these standards were created by Delaware courts in the mid-1980s to rectify a perceived failure in the corporate governance system, principally the apparent failure of directors to act responsibly in the corporate governance eco-system. These new standards successfully channeled takeovers into certain preferred forms, but also helped ameliorate the problematic practices of that period. These new standards collectively had another effect: encouraging the rise of private enforcement activities, initially by the raiders themselves, but once hostile transactions became a less significant force, through expanded shareholder litigation. In this new environment, private litigation became increasingly unnecessary, a fact which became quite apparent with the rise in litigation rates to 96% of all takeovers. At the same time, the rise of institutional investors, coordinating bodies such as proxy solicitors, hedge fund activism and corporate governance movements, as well as the expansion of federal securities law into areas like executive compensation and board independence/monitoring, occurred. The consequence was a largely justifiable relaxation of these standards.

Independent Directors: One Head, Two Hats - A Mismatch between Delaware Corporate Law and Federal Securities Law

Although both federal securities law and Delaware corporate law have increasingly relied on independent directors in improving corporate governance, there is a fundamental mismatch between these two regimes. Federal securities law relies on independent directors to monitor the management of the corporation, while Delaware corporate law posits the independent directors as the ultimate decision-makers of the corporation, particularly in transactions in which insiders’ interests or incentives are in question. This mismatch emerged in the 1970s, when proponents of the “monitoring board” successfully campaigned for a board structure consisting of a majority of independent directors, in an attempt to transform corporate boards from ceremonial “advisory boards” to active monitors of management performance. While the SEC followed the monitoring board model, several key decisions of the Delaware courts beginning in the 1980s emphasized the decision-making function of the board, and in particular, the role of independent directors in fundamental transactions. This mismatch became salient after the Enron scandal and the 2008 financial crisis, as the SEC gained the authority to promulgate more stringent rules enhancing the independence of the board under Sarbanes-Oxley and Dodd-Frank. The mismatch may be explained either as a philosophical difference between securities regulators and Delaware judges or as an institutional difference between federal legislative bodies and common law courts. One consequence of the mismatch is that, because of the inherent tension between the monitoring and decision-making functions, independent directors are destined to under-perform both functions. I propose several solutions to reconcile the dueling functions of the board.