Watching Clouds in Delaware: Gantler v. Stephens
posted by Lawrence Cunningham
Fifteen years ago, I and my colleague Chuck Yablon, wrote the following about Delaware corporate law (in 49 Business Lawyer 1593 (1994)):
[P]redicting developments in Delaware law has always been a somewhat foolish enterprise. Many learned commentators have written careful and lucid analyses predicting the trend of Delaware case law, only to have doctrinal prognostications shattered by the next big case. Predicting the course of Delaware law from prior case law is like watching clouds. They seem, at times, to take on recognizable shapes and forms, even to resemble something familiar. But you know that whatever shapes you think you see can vanish in a puff of wind.
I can’t make the same complaint about a Delaware Supreme Court opinion released last week, Gantler v. Stephens, that’s receiving surprising attention, despite saying little or nothing new. (One champion and devotee of the minutiae of Delaware corporate law even calls it, peculiarly, “very momentous” and a “major decision.”)
True, as Usha Rodriques at Conglomerate fairly notes, the case says that corporate officers owe their corporations the same fiduciary duties that directors do. But the court makes that point by citing Delaware opinions from 1939 and 1993 and Gantler is most about directors, not officers. Scholars may have paid inadequate attention to officer duties, but this case will not likely change the focus (though Professor Rodriques’s new article on the subject in Florida Law Review may do so.)
Also true, as a Paul Weiss client report sensibly notes, the opinion clarifies that shareholders can’t be held to ratify director actions, that statute requires them to approve, except through the statutory approval process.
Other than that, the opinion is doctrinally of little moment, as the following principal points show:
• A decision not to pursue a sale of the company to a third party is not a “defensive” decision warranting special judicial scrutiny that attaches to defensive decisions.
• Decisions of directors or officers facing a conflict between personal interest and corporate interest warrant judicial examination for fairness as a potential breach of the duty of loyalty. They do not enjoy the usual judicial deference given to ordinary business judgments implicating only the weaker duty of care.
• Corporate disclosures to stockholders must not be misleading and must disclose conflicts of interest that decision makers faced.
What may be interesting about the opinion is that the Supreme Court reversed the Chancery Court on most of these points of law as applied to the case’s facts. That is unusual in Delaware, where appellate opinions tend to be unanimous and reversals rare, as David Skeel has studied in The Unanimity Norm in Delaware Corporate Law (83 Virginia Law Review 127 (1997)).
Also potentially unusual is the Delaware Supreme Court’s willingness to supervise corporate decision making. For the most part, Delaware law defers to corporate officers and directors. On the other hand, of all Delaware judges, the Gantler opinion’s author, Jack Jacobs, seems more inclined to endorse such judicial review. (See Larry Mithchell, The Puzzling Paradox of Preferred Stock (And Why We Should Care About It), 51 Business Lawyer 443 (1996)).
Perhaps most peculiar is the reception the Gantler opinion gets from those ardent devotees of Delaware corporate law, who say the opinion is momentous or otherwise overstate its significance. After all, the quote I excerpted above reflecting Delaware court opinions achieving such a status was not exactly a compliment. Recently, other scholars, including Bill Carney and George Shepherd, likewise wonder why Delaware corporate law is both so revered and yet so incoherent, unstable and ultimately unpredictable. See The Mystery of Delaware Law’s Continuing Success, 2009 Illinois Law Review 1.
On the other hand,, some scholars, including Dale Oesterle, observe that the Gantler opinion creates more uncertainty about exactly what kinds of conflicts of interest will expose directors and officers to judicial scrutiny of their decisions as potential breaches of the duty of loyalty. That kind of indeterminacy does make predicting the course of Delaware corporate law much like watching clouds.
Apparently, such a state can arise even when the court doesn’t change the law as much as it sees the facts in a different light. Or, perhaps, when it chooses to have Justice Jacobs write the opinion.