Business entities are generally formed state-by-state. While this separatist approach has many shortcomings, scholars and policymakers have considered only one alternative: the federalization of business entity formation. Yet limiting the choices to two is false and distortive. It is false because another alternative – multistate formation and regulation of business – is possible. It is distortive because it deprives policymakers of the advantages of multistate corporations and other business entities. In a new article, we show that multistate business entities are, in fact, preferable to both state separatism and federalization.
Background on the Market for Entity Formation
When entrepreneurs … Read more
A Delaware vice chancellor recently lamented that “Delaware should not be determining employment law for the country and for the world.” That remarkable assertion was a reference to the gradual expansion of the internal affairs doctrine, which provides that the law applicable to the internal governance of a business entity is that of the chartering jurisdiction. The contours of the internal affairs doctrine have never been defined with precision, which is why several recent developments have placed new pressures on the doctrine’s boundaries. These fall into roughly three categories:
Corporate governance for noninvestors. Especially in the ESG era, … Read more
Top practitioners, judges, regulators, and scholars gathered at Columbia Law School on December 2 to offer their unique perspectives and cutting-edge insights on a variety of topics related to M&A and corporate governance. The topics included current M&A market trends, the role of institutional investors and shareholder activists in dealmaking, and the impact of the SEC and litigation developments on M&A.
The day-long event started with a panel exploring current trends and trajectories in the M&A market. The panel was moderated by Professor Jeffrey N. Gordon of Columbia Law School and included panelists Lauren Hirsch, a reporter for DealBook at … Read more
Corporate law prohibits companies from pursuing profits through criminal misconduct. It uses the fiduciary duties imposed on boards under the Caremark doctrine, and the threat of personal liability of directors for deliberate breach, to help motivate directors to make sure their companies comply with the law. Yet Caremark has largely failed: Most boards have neither adopted effective systems to deter corporate crime nor asserted effective oversight over investigations. Caremark did not require directors to obtain information about material compliance failures or detected misconduct, information essential to effective oversight. To induce directors to deter misconduct – even when it is … Read more
The number of securities lawsuits filed since January has remained steady compared to the first half of 2021. We have already seen many notable developments in securities law this year. This mid-year update provides an overview of the major developments in federal and state securities litigation in the first half of 2022:
I. Filing And Settlement Trends
According to Cornerstone Research, although new filings remain consistent with the first half of 2021, the number of approved settlements is up over 30% from the same time last year, and the median settlement amount has rebounded from the low that we reported … Read more
As we get closer to the October 17th scheduled trial date for the Twitter lawsuit to compel Elon Musk to complete his proposed $44 billion acquisition of Twitter, the charges and allegations are getting wilder and woolier. Once, this was a case in which the party seeking to escape the merger agreement (i.e., Musk) asserted that the percentage of Twitter accounts that were “bots” (or fake) amounted to a “material adverse change” that permitted the buyer to back away. Given both Delaware’s strong commitment to deal certainty and Musk’s seemingly reckless indifference to due diligence, most law professors saw Musk … Read more
After determining that the DOJ failed to meet its burden of proof, a Delaware federal court denied the government’s request to enjoin the $315 million acquisition of Imperial Sugar by U.S. Sugar. The court found that the DOJ failed to prove a proper antitrust market and criticized the government’s expert for, among other things, failing to take account of the realities of the sugar industry in the United States. The public version of the court ‘s opinion was docketed on September 28. The DOJ has appealed, and the Third Circuit ordered expedited briefing but denied the DOJ’s motion for an … Read more
On September 6, 2022, in Construction Industry Laborers Pension Fund on behalf of SolarWinds Corporation, et al. v. Mike Bingle, et al. (“SolarWinds”), the Delaware Chancery Court granted a motion to dismiss a derivative suit against directors of SolarWinds Corporation, a provider of information technology infrastructure management software, for allegedly breaching their fiduciary duty of loyalty by failing to oversee the company’s cybersecurity risk, which, plaintiffs claimed, resulted in a major cyber breach in 2020.
Vice Chancellor Sam Glasscock III held that plaintiffs failed to allege demand futility with sufficient particularity, as required to pursue litigation derivatively … Read more
Corporate law – and fiduciary law in general – has struggled with how to handle loyalty duties that are harmful to society. For example, a director’s act of loyalty to shareholders that harms the environment, or a director’s effort to benefit her corporation by breaking the law. Not all of these cases are easily resolved by refinements to the law. In some cases, though, the courts have indicated that the conduct at issue is not merely unacceptable, but also inconsistent with the fiduciary’s own obligation to be loyal. A notable instance is when directors intentionally violate the law to benefit … Read more
For over 45 years, Delaware law has permitted directors of Delaware corporations to be exculpated from personal monetary liability to the extent such protections are set forth in the certificate of incorporation, subject to certain exceptions. However, such protective statutory provisions did not reach officers. As contemplated in our April 2022 memorandum, Delaware has now adopted important amendments to Delaware’s General Corporation Law that would expand the right of a corporation to adopt an “exculpation” provision in its certificate of incorporation to cover not only directors (as has been allowed and widely adopted since 1986, following Smith v. Van … Read more
Access to corporate information plays a pivotal role in stockholder litigation. One key to that access is stockholders’ statutory right to inspect a corporation’s books and records prior to filing litigation, enshrined in the Delaware General Corporation Law’s Section 220. In the context of derivative actions – i.e., actions brought by a stockholder on behalf of a company – Section 220 takes on an even greater importance. In order to maintain standing to pursue those claims, the stockholder plaintiff either must have made a wrongfully refused demand of the relevant board that it institute litigation, or must proceed on a … Read more
On July 19, 2022, in the Twitter v. Musk litigation, Chancellor Kathaleen McCormick presided over what was likely the most widely observed hearing on a motion to expedite in the Delaware Court of Chancery’s history. While deal bust-ups are front page fare for the financial press, the high profile of this case brought the Court of Chancery further into the national consciousness than usual (though who among us hasn’t asked “what is a chancery?”). On the day of the hearing, the public access telephone line was, indeed, “lit,” hitting its maximum capacity with merger arbs (and other interested … Read more
Every pundit and commentator has by now analyzed the ongoing battle between Elon Musk and Twitter over Musk’s attempt to walk away from their deal. Almost all of these evaluations have rated Twitter as having a considerably stronger case, because (among other reasons) Musk did no due diligence, was well aware of the “bot” (or fake user) problem, negotiated no contractual protections directly addressed to these risks, and generally behaved inequitably, disparaging Twitter and toying with the SEC’s rules. Okay, but that raises an interesting puzzle: If the facts favor Twitter, and if Musk’s offer was for $54.20 a share … Read more
Though Elon Musk’s controversy with Twitter has grabbed the headlines, another going-private legal development also merits attention: Meade v. Christie et al., an Iowa Supreme Court decision dismissing shareholder class action claims against directors who approved a going-private merger. The Meade dismissal was based on a director liability shield patterned on Model Business Corporation Act (“MBCA”) Section 2.02(b)(4). As interpreted and applied in Meade, the MBCA shield is more protective than the comparable Delaware provision, DGCL Section 102(b)(7). Equally important, Meade answers procedural questions that aren’t fully resolved by the MBCA shield text, illustrating key pleading requirements for … Read more
In 1978, the American Law Institute (ALI) authorized a project originally intended to result in a Restatement of corporate law. The drafters intended their project to be a departure from traditional restatements. As they visualized it, the project was to offer “a combination of classic Restatement, forward looking guidelines, and perhaps also model provisions.” Their efforts, however, met with immediate resistance. When Tentative Draft No. 1 was published in 1982, it was widely criticized for failing to restate the law but rather proposing major and dramatic changes in the law.
As the decade-long drafting process continued, … Read more
In early 2020, in BlackRock Credit Allocation Income Tr., et al. v. Saba Capital Master Fund, Ltd.,1 the Delaware Supreme Court reiterated that Delaware courts will enforce clear and unambiguous advance notice bylaws according to their terms using ordinary contractual principles. Its ruling reversed a decision by the Court of Chancery and held that a dissident stockholder was barred from presenting its slates of nominees for two closed-end investment funds and a trust because the nominees failed to provide supplemental information within the time period set by clear and unambiguous bylaws.
The Delaware Supreme Court highlighted that there … Read more
Since the creation of the poison pill in the 1980s as a response to hostile takeovers, the corporate world has seen the rise of stakeholder governance, ESG, and stockholder activism and a host of other dramatic developments. The stock market decline following the outbreak of COVID-19 prompted a resurgence of pills, and with the recent Williams decision, the structure and strength of pills have changed in meaningful ways. In a new paper, we examine modern poison pills and propose some new ground rules for pills. These rules, we believe, would effectively balance, on the one hand, a board’s interest in … Read more
Let’s be clear about this: The Twitter board was under no legal compulsion to accept Elon Musk’s offer for the company and, from a corporate governance structural point of view, was in an unassailable position until the 2024 shareholders meeting. The single motivating factor in its decision, apparently, was that the deal was a good one for Twitter shareholders, without apparent regard for how Musk might run the company and the consequence for the social media infrastructure that Twitter had created, much less the public welfare. In my opinion, the board’s conduct was shockingly near-sighted, and the predictable adverse consequences … Read more
The question of corporate purpose has been much in the news of late, triggering renewed attention by legal scholars to corporate social responsibility, ESG, and shareholder value maximization. Many of these scholars have been strongly influenced by the late Lynn Stout’s work on the topic. Ten years ago, Stout published her book, The Shareholder Value Myth,  which built on her earlier article, Why We Should Stop Teaching Dodge v. Ford. As the latter title suggests, Stout’s principal doctrinal foil was the Dodge case.
Stout’s focus on Dodge was well chosen, since the case and “its statement … Read more
On April 12, 2022, the Corporation Law Section of the Delaware State Bar Association (DSBA) approved proposed amendments to the Delaware General Corporation Law (DGCL) that include provisions that, if enacted, would authorize exculpation clauses limiting or eliminating the monetary liability of certain officers, make appraisal rights available to beneficial owners of stock and facilitate domestications of non-U.S. entities and consummations of other corporate transactions related to domestications.
Exculpation of Senior Officers
Since its adoption in 1986, Section 102(b)(7) has authorized a corporation’s certificate of incorporation to contain an exculpation clause that limits or eliminates the personal liability of its … Read more