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Abstract:
The duties owed by independent directors of large corporations to monitor the corporation's affairs have never had more political salience. Given the Enron-era debacles, the recent meltdown in our nation's financial sector, the dependence of workers on equity investments to secure their retirements, the globalization of American corporate law principles, and the complexity of managing corporations with international operations, the legal standards used to evaluate whether directors have complied with their fiduciary duties will be a subject of growing international policy interest. This article addresses an important dimension of that issue by examining the role of good faith in corporate law, and its use as the definition of the state of mind with which a director must act to comply with the fiduciary duty of loyalty. In particular, this article employs an historical, etymological, and policy-oriented analysis to address the question of whether the obligation of directors to act in good faith is a separate, free-standing fiduciary duty, or a fundamental aspect of the core duty of loyalty.

We conclude, consistent with the Delaware Supreme Court's recent decision in Stone v. Ritter, that in the American corporate law tradition, the basic definition of the duty of loyalty is the obligation to act in good faith to advance the best interests of the corporation. What this article also shows is that the duty of loyalty has traditionally been conceived of as being much broader than the duty to avoid acting for personal financial advantage. The duty of loyalty also precludes acting for unlawful purposes, and affirmatively requires directors to make a good faith effort to monitor the corporation's affairs and compliance with law.

Finally, we highlight a critical policy implication resulting from Stone v. Ritter, which is that an independent director who is accused of having failed in her monitoring duties may only be held liable if a court finds that she breached her duty of loyalty by consciously failing to make a good faith effort to comply with her duty of care. By requiring a finding of bad faith before imposing liability on an independent director, the corporate law, as explicated by Stone, protects the policy interests underlying the business judgment rule from erosion.

Good faith, Loyalty, Fiduciary duties, Corporate governance, Directors, Boards, Shareholders, Director liability, Monitoring

Abstract:
PROFESSOR HAMERMESH: Let me introduce our panelists, but do that after a few opening words about the subject of our presentation. Vice-Chancellor Jacobs' story about the predictions of the dominance of Rule 10(b)(5) in corporate governance, in corporate law generally, prompts me to make the following observation. The content of this panel will include forward-looking information. There can be no assurance that the actual outcome of future events will correspond to what is suggested here. Such outcomes will depend upon many factors, including business results, marketing changes, etcetera, etcetera. And having discharged my duty under the Private Securities Litigation Reform Act of 1995, we can now proceed with the substance. It was a very happy accident that occurred to me one day a little over a year ago that the hundredth anniversary of the enactment of the original Delaware General Corporation Law coincided, pretty closely anyhow, with the millennium. And with the deluge of millennial thinking, it prompted me to wonder whether or not it might be an opportune time for us to gather to think about major changes forthcoming in corporate law over the next hundred years.

The occasion was not purely the product of a chronological accident. The speakers in our previous panel have already pointed out major seismic changes in the world in technological progress, globalization, all interrelated, all of which will have an enormous effect on the way we do business as lawyers and as business people in the coming years.

Picking up on Dick Agnich's suggestion, I start out this panel with one blindingly obvious observation: a revolution has occurred in corporate law through the advent of the institutional investor. The term "institutional investor" is one that perhaps twenty years ago didn't roll off the tongue as commonly as it does today, but it does roll off the tongue all the time today for very good reason. As Dr. Carolyn Brancato will explain in specific numerical graphic detail, the institutional investor has arrived as a major economic force and, therefore, a major force in corporate governance and the structure of corporate law generally. Our job in light of this sea change seismic development with the advent of the institutional investor is to consider what its likely impact is going to be on corporate law and Delaware general corporate law in particular in the coming years.

I have the pleasure to have here with us today some of the very top people who are in a position to analyze that question and tackle that job. Dr. Carolyn K. Brancato is the director of the Global Corporate Governance Research Center of the Conference Board, the author of two major books on corporate governance, Institutional Investors in Corporate Governance, Best Practices for Creating Corporate Value,1 and Getting Listed on Wall Street.2 Dr. Brancato has twenty-five years of experience in this field and I think judging by her curricular performance and what materials she's churned out, I think it's fair to characterize her as one of the deans, one of the top analysts of institutional investor behavior. So it's definitely a pleasure to have you with us this morning. I will say for the benefit of those who would prefer to be out sailing on a nice day like today that Dr. Brancato has given up that opportunity, has abandoned her vessel moored usually in Annapolis and is with us today instead.

Let me next introduce Michael Price. Mr. Price is also someone one would fairly characterize as a dean of institutional investors. The difference is that, I think Dr. Brancato would concede this, he is an active practitioner of the art as opposed to an accomplished analyst of it. Mr. Price is distinguished, in part, by having received a Doctor of Humane Letters from the University of Oklahoma from which he graduated, but I think among the minds of most of us he's most distinguished by his long and distinguished career as an institutional investor and a leader in what might be described broadly as the corporate governance movement. He's the Chairman of the Board of Franklin Mutual Advisers and Franklin Mutual Series Fund, formerly chairman of Mutual Shares Fund. And we're also very pleased to have his insights with us today.

As commentators, aside from myself, I want to introduce two very distinguished people. First of all, let me introduce Joseph Rosenthal of the Wilmington firm of Rosenthal, Monhait, Gross & Goddess. I would characterize Joe as being someone who has used his long years in the Bar to stride the colossus of the plaintiff's bar and corporate class action litigation with a deep devotion to shareholder rights and a commanding knowledge of shareholder litigation. And I'm most interested in having his observations about how his field dovetails with the institutional investor phenomenon we'll be looking at here today. Last and certainly not least, Chancellor William B. Chandler, III, Chancellor of the Delaware Court of Chancery. Chancellor Chandler has made it, as many of you are well aware, a practice of commenting publicly on corporate law developments, and he and the other members of his Court and the Delaware Supreme Court to my mind are to be complimented for their extracurricular devotion to the subject that brings us here today, corporate law and corporate governance.

Abstract:
The July 16, 2002 preliminary report of the American Bar Association Task Force on Corporate Responsibility recommends a variety of reforms in corporate governance through changes in listing standards, rules of professional conduct for lawyers and other practices.

Recommendations in the report relating to corporate governance are:

- A substantial majority of the members of a board of directors should be independent.

- Corporate governance committees should consist entirely of independent directors, and be responsible for identifying and contacting potential independent directors. They also should recommend a corporate code of ethics and conduct, including a means for corporate employees and agents to advise independent directors of information about material violations of law and breaches of duty to the corporation.

- Corporate audit committees should consist entirely of independent directors. They should be authorized to recommend or take action to hire or remove outside auditors, engage independent accounting or legal advisers, and establish policies governing matters that could affect the independence of outside auditors.

- Corporate compensation committees should consist entirely of independent directors, and should recommend or take action on compensation for senior executive officers or engaging independent executive compensation and legal advisers as necessary or appropriate.

- All material transactions between the corporation and a director or executive officer should be reviewed and approved by a committee of independent directors, taking into account fairness, the rationale for the transaction, and appropriate public disclosure.

- The board of directors should adopt procedures for routine executive session meetings between corporate officers responsible for implementing internal controls and the corporate governance committee or the audit committee, or both.

The report also recommends that public companies consider designating a lead independent director or an independent board chair, establishing policies to set board meeting agendas, considering policies to set term limits or rotate service on board committees, maintaining director training programs, and adopting procedures to evaluate the effectiveness of meetings, information flow, diversity of experience among directors and contributions of individual directors.

The report proposes that a number of changes in the ABA Model Rules of Professional Conduct be considered by the ABA Standing Committee on Ethics and Professional Responsibility. The changes the task force proposes to the ABA Model Rules would:

- Require lawyers who know or reasonably should know of misconduct by corporate officers, employees or agents to disclose the misconduct to higher corporate authorities, in some cases directly to the board of directors.

- Broaden permission for lawyers to disclose information about corporate conduct that has resulted in or is reasonably certain to result in substantial injury to the financial interests or property of another. The report acknowledges that the ABA House of Delegates rejected a similar proposal in February, before many of the corporate failures occurred and before the task force was created.

- Require disclosure of confidential information to prevent client conduct known to the lawyer to involve a crime, including violations of federal securities laws, which is reasonably certain to result in substantial injury to the financial interests or property of another.

The report also urges creation of direct lines of communication for outside counsel to inform the general counsel of any potential violations of law or breaches of fiduciary duties to the corporation.

The ABA Task Force has invited written comments, and the report will be considered at one or more public hearings, and expects to present final recommendations to the ABA House of Delegates this year.

Abstract:
The Delaware Supreme Court's opinions in Weinberger and Technicolor have left a troublesome uncertainty in defining the proper approach to the valuation of corporate shares. That uncertainty - increasingly important as going private mergers become more frequent - can be resolved by a blend of financial and doctrinal analysis. The primary problem - the potential opportunism by controlling shareholders in timing going private mergers - can be addressed by a more complete understanding of corporate finance. The definition of fair value must include not only the present value of the firm's existing assets, but also the future opportunities to reinvest free cash flow, including reinvestment opportunities identified, even if not yet developed, before the merger. This issue has been incompletely articulated by the courts. On the other hand, value created by the merger that can only be achieved by means of the merger itself - such as reduced costs of public company compliance - should not be included in determining fair value. We also show that except in the case of acquisitions by third parties (where actual sale value, minus synergies, is a useful measure of fair value), hypothetical third party sale value does not and should not ordinarily be taken as a measure of fair value.

Delaware appraisal law, corporate finance, valuation

Abstract:
From a first-hand perspective, the author reviews the mechanisms by which Delaware creates its corporate law, and identifies various explanations for Delaware's prominence and its corporate lawmaking ("race" theories, Roe's identification of active or dormant federal power as a limiting influence, and Kahan and Rock's description of "symbiotic federalism"). Although finding support for all of these accounts, the author maintains that none fully expresses the considerations that are actually salient for Delaware corporate law policymakers. The author suggests, rather, that the following considerations are dominant: (1) enhancing flexibility to engage in private ordering, (2) deferring to case-by-case development of the law, and avoiding legislation that is prescriptive and proscriptive, (3) avoiding impairment of preexisting contractual relationships and expectations, and (4) most importantly, avoiding legislative change in the absence of clear and specific practical benefits. Because of the dominance of these considerations, the author suggests that Delaware is unlikely to expand materially the regulation of corporate actors by means of either statutory or common law change. While additional federal regulation of corporate governance will emerge sporadically in response to political crises, any effort by Delaware to anticipate or respond to such additional federal regulation will involve small steps that will not significantly alter the existing allocation of power and authority among corporate constituencies.

Abstract:
The implicit minority discount, or IMD, is a fairly new concept in Delaware appraisal law. A review of the case law discussing the concept, however, reveals that it has emerged haphazardly and has not been fully tested against principles that are generally accepted in the financial community. While control share blocks are valued at a premium because of the particular rights and opportunities associated with control, these are elements of value that cannot fairly be viewed as belonging either to the corporation or its shareholders. In corporations with widely dispersed share holdings, the firm is subject to agency costs that must be taken into consideration in determining going concern value. A control block-oriented valuation that fails to deduct such costs does not represent the going concern value of the firm. As a matter of generally accepted financial theory, on the other hand, share prices in liquid and informed markets do generally represent that going concern value, with attendant agency costs factored or priced in. There is no evidence that such prices systematically and continuously err on the low side, requiring upward adjustment based on an implicit minority discount.

Given the lack of serious support for the IMD in finance literature, this Article suggests that the Delaware courts may be relying on the IMD as a means to avoid imposing upon squeezed-out minority shareholders the costs of fiduciary misconduct by the controller. Where either past or estimated future earnings or cash flows are found to be depressed as a result of fiduciary misconduct, however, or where such earnings or cash flows fail to include elements of value that belong to the corporation being valued, the appropriate way to address the corresponding reduction in the determination of fair value is by adjusting those subject company earnings or cash flows upward.

This approach to the problem of controller opportunism is more direct, more comprehensive in its application, and more in keeping with prevailing financial principles, than the implicit minority discount that the Delaware courts have applied in the limited context of comparable company analysis. The Delaware courts can therefore comfortably dispense with resort to the financially unsupported concept that liquid and informed share markets systematically understate going concern value.

corporations, corporate appraisal, implicit minority discount, IMD, control shares, valuation, fair value, controller opportunism

Abstract:
This Article makes several contributions to the literature on Delaware appraisal law. We first argue that the "going concern value" standard adopted by the Delaware courts as the measure of "fair value" in share valuation proceedings is superior to its two main competitors, market value and third-party sale value, on grounds of both fairness and efficiency. Application of the going concern value standard has two important consequences. First, it is critical that going concern value be measured in a way that includes not only the present value of the existing assets of the corporation, but also the present value of the reinvestment opportunities available to and anticipated by the firm at the time of merger. Second, going concern value should not include the value of corporate control in a case where the merger creates control through the aggregation of previously dispersed shares. In that case, the benefits created by the aggregation of shares belong to the party that created the increased value.

We address differently, however, the situation where a pre-existing controlling shareholder squeezes out the minority. Our concern here is the potential for a controlling shareholder to acquire the minority shares at a price that fails to reflect the firm's going concern value. Where a controller fails to present a valid discounted cash flow analysis and relies instead on a comparable company analysis that is based solely on historical data, the minority shareholders and the court are deprived of access to projections of future free cash flows of the firm. We therefore advocate that in this situation the courts adopt a penalty default in the form of a presumption that fair value includes the value of control as reflected in comparable company acquisitions. Such a presumption is consistent with common law doctrines of fiduciary duty and the entire fairness standard, as well as adverse evidentiary inferences drawn from failure to produce relevant evidence. The controller as faithful fiduciary can avoid the proposed presumption by preparing and submitting to judicial scrutiny a valid discounted cash flow analysis. The opportunistic controller, on the other hand, is subjected to a fair value determination that amounts to third-party sale value minus synergies.

Corporations, takeovers, squeeze-out mergers, corporate valuation fair value, going concern value, synergies, implicit minority discount, control value, control premium, controlling shareholder, discounted value flow analysis, comparable company analysis, acquisition premium

Abstract:
With director monetary liability for lack of care (appropriately, in the author's view) fading or disappearing altogether since Smith v. Van Gorkom, litigation invoking the duty of care seems increasingly unlikely to serve as a vehicle for public scrutiny of, and reputational sanctions for, director conduct that is substandard but does not involve self-interest or lack of good faith. It is therefore increasingly important to examine when information obtained through the exercise of stockholder inspection rights can be made public. A recent case involving the Walt Disney Company - but not the well-known litigation involving Michael Ovitz' termination compensation - addresses the issue of confidential treatment of such information. Prompted by the Court of Chancery's treatment of the issue, this Article proposes that the courts review and balance a number of factors - the subject matter of the information, the level of public interest in the information, the motives of the stockholder in seeking the information and (perhaps) ultimately seeking to make it public, and the context in which the information was generated - to determine whether information afforded pursuant to stockholder inspection rights should remain confidential.

corporation law, Delaware, duty of care, stockholder inspection rights, confidentiality, directors

Abstract:
Introductory speech for the Delaware General Corporation Law for the 21st Century symposium presented at Widener Law School's Delaware campus on May 5, 2008, and the articles published in this issue of the Delaware Journal of Corporate Law.

Delaware, Journal, Corporate, Law, Delaware General Corporation Law for the 21st Century, Introduction, Widener Law School

Abstract:
Culminating in this year's decision in Kahn v. Roberts and Arnold v. Society for Savings Bancorp., the Delaware Supreme Court has had increasingly frequent occasion to consider the scope of the corporate director's duty of disclosure to stockholders. That trend may accelerate even further, as constriction of federal securities law remedies prompts increasing resort to state law theories of recovery for disclosure shortcomings. As the Kahn decision illustrates, however, the courts have only begun to illuminate the contours of the director's fiduciary duty of disclosure. To some extent, judicial decisions have defined that duty overbroadly, perhaps driven by the moral quality of fiduciary rhetoric. To define the director's fiduciary disclosure duty more appropriately, this Article supplies an analytical framework for the further development of this aspect of fiduciary doctrine.

In developing this analytical framework, the Article first examines and rejects the claim that the director's fiduciary disclosure duty arises, under Delaware law, from a corporate statute repealed in 1967. The Article then reviews the common law development of the duty and identifies four distinct contexts in which a fiduciary disclosure duty on the part of directors has been found. The duty appropriately has been most exacting where directors seek stockholder approval in order to validate transactions in which their personal interests conflict with those of the corporation or its stockholders generally. Such a disclosure duty has also increasingly been identified where directors purchase stock from outside stockholders on the basis of information gained through their function as directors. More recently, a fiduciary disclosure duty has been applied where directors seek stockholder action with respect to transactions in which they have no conflicting personal interest. This Article urges that the fiduciary disclosure duty must be more restrained in this disinterested context, and should require proof of negligence, reliance and damages as a predicate to director monetary liability - like the analytically equivalent tort of negligent misrepresentation. Finally, the Article concludes that the question left unresolved in. the recent Kahn opinion - whether directors have a fiduciary disclosure duty when they make statements which do not involve soliciting or recommending stockholder actions should be answered in the negative. Where disinterested directors do not recommend or seek stockholder action, no reliance on superior informational resources is present, and no fiduciary disclosure duty should be found to exist.

delaware, corporations, fiduciary duty, directors, officers, disclosure, stockholders

Abstract:
The following lecture was presented on March 21, 2005 on the occasion of Professor Lawrence A. Hamermesh's installation as the first Ruby R. Vale Professor of Corporate and Business Law. This is the first endowed professorship created at the Widener University School of Law, and is therefore a significant milestone in the growth of the Law School. The generosity of the Ruby R. Vale Foundation in funding this professor-ship is expected to support future research, lectures and symposia on the subject of Delaware business entity laws. Professor Hamermesh's lecture followed introductory remarks by The Honorable Jack B. Jacobs, Justice of the Delaware Supreme Court. In this speech, Professor Hamermesh discusses some of Ruby R. Vale's contributions to legal scholarship as well as the impact those contributions had on the legal community. Additionally, Professor Hamermesh explains how he can continue Mr. Vale's scholarly purpose as the Ruby R. Vale Professor of Corporate and Business Law.

Delaware, Journal, Corporate, Law, Ruby R. Vale, lecture, first endowed professorship, The Honorable Jack B, Jacobs, Widener

Abstract:
Because corporate statutes empower stockholders to adopt bylaws unilaterally, bylaws have a potentially significant role in corporate governance. To what extent does that power conflict with the statutory mandate that the business and affairs of the corporation be managed by or under the supervision of the board of directors, absent contrary provision in the certificate or articles of incorporation? This article examines that potential conflict and concludes that in the absence of specific statutory authority, bylaws may not place direct limits on the board's managerial powers. The article also explores the normative question of whether direct stockholder control of corporate action through bylaw amendments is desirable. Drawing on public choice theory and experience in direct political democracy, the article cautions against uncritical acceptance of notions of "stockholder democracy" to justify the use of bylaws as a means of direct control by stockholders. The article also examines collateral questions such as whether stockholders may as a matter of Delaware law adopt a bylaw that precludes boards of directors from subsequently amending the bylaw, and what current law already prescribes as valid subjects for control by stockholder-adopted bylaws.

stockholders, shareholders, corporate law, corporate governance, corporation law, bylaws