Delaware Vice Chancellor Travis Laster Says Bill Barr Could Use Some Help on Delaware Law

The universe regularly provides reminders to remain humble, including reminders that having expertise in one area does not make you an expert in adjacent areas. Former Attorney General Bill Barr recently provided one of those reminders with his opinion column in the Wall Street Journal, titled Delaware Is Trying Hard To Drive Away Corporations.

There are many legal topics where AG Barr has vast knowledge and experience. On those subjects, his opinion should carry weight. His column demonstrates that Delaware law is not one of them.

Let’s start by giving credit where credit is due. AG Barr accurately describes the opportunity that then-Governor Woodrow Wilson and the New Jersey Legislature gifted Delaware by passing the Seven Sisters Acts. After that, his column jumps the track.

AG Barr claims that “Delaware is falling in line with other blue states in embracing ESG, which rejects shareholder value as corporate law’s lodestar.” That assertion is doubly wrong.

First, Delaware is not a stakeholder state. It has a board-centric model in which fiduciary duties run to the corporation for the ultimate benefit of the stockholders. That’s why Robert T. Miller, an Iowa law professor with impeccable conservative bona fides, recently authored an article titled Delaware Law Requires Directors to Manage the Corporation for the Benefit of its Stockholders and the Absurdity of Denying It. It’s a good place to start.

Second, there are many forms of ESG, and not all contest that directors’ duties run to the stockholders. Some versions justify ESG as a means of promoting stockholder value. Because of the stockholder-focused orientation of fiduciary duties under Delaware law, only those versions are consistent with Delaware law. To the extent directors of Delaware corporations decide in good faith to pursue an ESG initiative, they must have a rational reason to believe it will promote the value of the corporation for the long-term benefit of its stockholders.

So yes, Judge Montgomery-Reeves was right when she said in 2021 that Delaware law allows directors “to consider interests of broader constituents,” such as “stakeholders other than stockholders.” A business that does not treat is employees or customers well cannot build value for stockholders. Directors would be stupid and short-sighted not to consider the interests of broader constituents. But when the board makes its decision, the directors must believe in good faith that the path chosen will promote the value of the corporation for the long-term benefit of its stockholders.

AG Barr next depicts Caremark as a vector for “social-responsibility topics,” and he criticizes former Chief Justice Strine for identifying ESG issues as a risk that directors should consider. All Caremark requires is that directors make a good faith judgment regarding an information system to make them aware of potential threats to the corporation, then respond in good faith to information about threats. If employees are planning to strike, a board should want to know about it, and they should make a business judgment about what to do about it. Chief Justice Strine is spot on.

Caremark only supports liability when directors act in bad faith by either (i) consciously ignoring a threat to the corporation or (ii) failing to try in good faith to establish an information system that will provide information about threats. That is why Caremark gains the most traction for legal noncompliance. A corporation’s first obligation is not to make money for stockholders. It is to comply with the law. Delaware only authorizes corporations to pursue “any lawful business.” As Chief Justice Strine eloquently put it, “Delaware does not charter lawbreakers.” So if directors knowingly approve a business plan that violates the law, they act disloyally. Or if directors knowingly fail to try to set up an information system to monitor for corporate wrongdoing, they act disloyally. Conceptually, directors could breach their duties if they knowingly fail to respond to other types of risks, but it would be a much tougher case.

From there, AG Barr calls out a recent Court of Chancery decision that denied books and records to a Disney stockholder who wanted to explore why the board made a business decision to oppose Florida’s Parental Rights in Education Act. That decision applied the business judgment rule. AG Barr seems to think the business judgment rule only protects progressive decisions, but that is simply wrong. As long as a board has acted with due care, in good faith, and loyally, a court will not second-guess the content of a board decision. That is what happened in the Disney case. Vice Chancellor Will found that the plaintiff lacked a proper purpose for inspecting Disney’s records. There was no credible basis to suspect wrongdoing because the plaintiff could not offer anything to suggest that the board had not made a legitimate business decision. She also found that the demand was pretextual because the plaintiff was rather acting as a front for a politically motivated group.

To return to where I started, there are many subjects where I would not have the knowledge to engage with AG Barr. On this topic, I think I could help him out. If any institution or organization would like to host a public discussion between the two of us, I would be happy to participate. His sense of Delaware law is profoundly misguided, and he’s too smart a guy to get it so wrong.

Travis Laster is vice chancellor on the Delaware Court of Chancery. This post first appeared on LinkedIn, here.