Networks of Heightened Scrutiny in Corporate Law

Abstract

This Article is a follow-up to a previous article, Networks of Fairness Review in Corporate Law (Fairness). After an overview of the fundamentals of the fairness standard and network theory, Fairness deployed network and statistical analyses to conduct an empirical study of the fairness doctrine as articulated by the Delaware Supreme Court and the Delaware Court of Chancery. This initial analysis focused on the fairness standard for one principal reason: it is considered to be the most plaintiff-friendly standard of review, in marked distinction to the well-known business judgment rule (BJR). But there are also four other prominent standards of heightened scrutiny in Delaware jurisprudence, each of which purports to protect plaintiffs beyond the BJR: Unocal/Unitrin with respect to defensive measures in the face of a change-in-control transactions, Revlon in the context of auctioning a change-in-control, Blasius where the shareholder franchise might have been violated, and the Zapata "two-step" which sometimes requires a court to exercise its business judgment in the context of presuit demand. Despite the intuition of commentators that such standards get watered down, they had yet to be explored in a systematic fashion.

Building on the work in Fairness, this Article seeks to perform a network analysis of these heightened standards of review. The discussion is structured into three principal sections. Part I outlines what these standards of review are and what they purport to do. Part II describes the empirical methods used - from data gathering to analysis to the display of results. It culminates in four network maps, one for each standard. Finally, Part III considers the implications of the analysis, with a focus on whether these heightened standards offer more than rhetorical solace to shareholder-plaintiffs.

Keywords: corporate law, network theory, judicial review

JEL Classification: K22, K41, K00, G30, G34, C40