DealLawyers.com Blog

August 18, 2015

An Interview with Delaware Chief Justice Strine

This NACD interview with Delaware Chief Justice Leo Strine covers a number of topics including certain potential adverse consequences of federal attempts to regulate corporate governance and the Delaware Supreme Court’s decision in Nabors addressing the reasonableness under the circumstances of actions by the buyer’s board where the buyer was giving up control. [Don’t forget our own upcoming webcast: “An M&A Conversation with Myron Steele & Jack Jacobs.”] Here’s an excerpt:

Q. After your first year-plus on the high court, what cases do you feel are most important in terms of their effect on how directors do their jobs on a day-to-day basis?

A. The Nabors decision, in a very dynamic M&A environment, is one that directors would probably find noteworthy. It emphasizes that directors are given credit for dealing with the contextual circumstances that they face, that the world is a dynamic place and not every deal is exactly the same, and that there can be unusual situations where boards have to do something innovative, and that as long as they do it with care and good faith, then they get credit under our law.

Q. As you know, the Nabors decision overturned a trial judge who apparently had ordered the board to hold a 30-day auction—which leads me to ask how far the board needs to go to determine that a deal that they have signed off on is the best deal possible for shareholders.

A. One of the things that people say they like is discretion, but then what they really like is to be told exactly what to do. With discretion comes the responsibility to exercise it responsibly. The way our law works is you get credit for exercising good faith judgment. Different deals present different contexts. Nabors was an unusual situation because, remember, the person—the party on the buy side—was giving up control. If you’re a buyer, that affects how you deal with the world, so there’s no simple answer.

The key thing that was reaffirmed in Revlon is a reasonableness test. Directors get credit for acting reasonably under the circumstances, and although there’s heightened scrutiny, the court cannot grant relief unless it has a belief that directors have not acted reason ably under the circumstances.

In terms of what sort of market check is appropriate, that’s contextual, and what directors get credit for is their thoughtful reflection on the particular circumstances facing their company and making reasoned judgments about the best way to obtain the best value for their stockholders.

Q. And so, if that gets called into question, then they just have to demonstrate that they have exhibited reasonableness?

A. Right. If you’re actually going to do something like engage in a change-of-control transaction—which is as important a topic as a board of directors is going to address—the court, plaintiffs, and stockholders are going to ask hard questions like: Did you consider all of the relevant options? Who were the likely strategic buyers? Who were the likely private equity buyers? Were people given an opportunity to look at the situation without the inhibition of deal-protection measures? These are all the things that you would typically expect boards to consider when they face the question of whether they’re going to sell control of the company.

What Nabors makes clear is that in a contextual situation and when a board pursues a reasonable course of action, then they get credit for that. And that has been the law for a long time, and it echoes the iconic decision in QVC.

Q. The passage of Dodd-Frank in 2010 increased the federalization of some corporate governance mandates. How does that affect the courts?

A. The increased federalization has actually probably helped Delaware because we’re a place of stability and dependability compared to the federal environment, where you get crisis-driven and federal responses that seem to have no logical connection to the crisis.

For example, at the federal level, there’s nothing about the banking crisis that’s connected to some of the mandates around activism. It’s actually fairly implausible. Frankly, the risk taking that companies were engaged in was, well, it tended to be favored by the investment community. And so you would think, if anything, the policy response would be to make people focus more on issues of substantial risk and long-term durability. But you get a response that actually, in some ways, makes companies more, not less, accountable to the immediate whims of short-term traders. In Delaware, our law is relatively stable and dependable, and that actually tends to increase people’s desire to at least use Delaware, because they can depend on that element in their governance structure.

I don’t know that it affects the courts directly, but it certainly affects boards of directors. The concern of federalization—and you have to include the increased mandates of the exchange rules as well—in my view is what I call the “more, more, more” problem. It was a pretty bad disco-era song, and it also is a very bad way to run the world.

I tend to analogize. If you have a kid at one of these schools where they give way too much homework—we don’t have a very long school year in the U.S.A., so we tend to compensate by giving a lot of homework—and if the kid already has a full load of math, science, English, history, and a foreign language, there really isn’t any time to do more homework. One of the problems we’ve done with boards of directors is we’ve assumed that we can just list more things for boards to do. When you create checklists of legal requirements, people tend to do the things that they legally need to do first. There isn’t a checklist requirement that says: spend a quarter of your time as a board making sure you have a good business strategy, spend another quarter of your time making sure that you are looking forward to what the key risks are to the business whether legal, financial or any other kind, right?

Q. What troubles you about that?

A. One of the things that troubles me is the assumption that directors have a lot more time to give. My sense is directors are spending more hours than they ever have. That doesn’t necessarily mean that they’re spending them in in the wisest way. And one of the concerns about federalization is the effect on how the board spends its time. One of the things that we need to think about is: What are the most important subjects?

Let’s make sure that any mandates align with that. And if there are things that are less important, take them out of the mandatory category. We have to be careful when we talk about ourselves internationally that we don’t harm ourselves as a nation because sometimes we have debates within our own borders and fail to understand how that might be perceived abroad. We might think that Sarbanes-Oxley or Dodd-Frank went too far—and that may be true—but from an international, comparative perspective, there might still be much more flexibility for American corporate managers to make decisions than there would be in other markets.