The Legacy of Chancellor Chandler

Chancellor William Chandler has announced that he is stepping down from the Delaware Chancery Court after a more than two decade run.  The commentary so far has been filled with accolades (see the comments by Francis Pileggi and Steve Bainbridge) and they are deserved.  He is smart, judicial in his demeanor, and will be missed (we say that even though he has not been entirely happy with the content of this Blog).  In some of the most difficult areas, his reasoning was more tempered and reasonable (compare his approach, for example, on the approach to backdating in Ryan and Tyson with the reasoning in Desimone). 

His legacy is, however, complicated.  A search of the opinion data base revealed that during his tenure he wrote almost 1000 published opinions.  They span the gamut of issues that have been confronted by the court. 

Of those opinions, three stand out.

Most recently, he wrote the decision in Airgas upholding the company's poison pill.  It is clear that he felt hemmed in by the state of the law and, that had he been writing on a clean slate, he likely would have struck the pill down.  After all, it was an all cash offer that had been outstanding for a year, with plenty of opportunity for alternative bids to surface at a higher price, which they never did. 

But his frustration was with an approach to jurisprudence that he spent most of his two decades helping to put in place.  The law hemmed him in because it is less concerned with the economics of these deals and more concerned with the management friendly nature of the analysis.  To some degree his hands were tied by a Supreme Court prepared to reverse those at the Chancery Court that stepped too far out of line, as he experienced with his staggered board decision in Airgas.  Nonetheless, he played an active role in promoting the approach.

He also wrote the decision in In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009), a decision that not only exonerated the board for its role in the meltdown of the financial institution (to be expected) but went so far as to conclude that directors had no role in supervising risk taking by management.  The opinion read as if plaintiffs wanted the board to second guess risk taking for every transaction, something that would be both impractical and would interfere with the management of the company.

Plaintiffs asked for no such thing.  They asserted that the board had a role in reviewing risk where the level was so extreme that it ultimately came within inches of bankrupting the company, a circumstance likely prevented by the near nationalization of the financial institution.  The decision had a Lochner like feel in that it expressed a view of the role of the board that would quickly become out of date and treated as an anachronism. In fact, the decision was largely overturned within a year with the adoption of Dodd-Frank and the requirement that boards of financial institutions take an active role in the oversight of risk.  

Finally, we note one of the decisions in the Disney cases.  Not the one that actually found there was no breach of fiduciary obligations but the first published opinion, the one that examined the board to determine if it was independent.  See In re Walt Disney, 731 A.2d 342 (Del. Ch. 1998), rev'd in part, 746 A.2d 244 (Del. 2000).  It was a board full of persons with potential conflicts of interest, whether because of contributions to their charitable organization, the payment of consulting fees, business given to a company owned by the director's spouse, or prior service as an officer of Disney.

Each was carefully explained away, sometimes with inconsistent reasoning (the need for payments to meet a standard of subjective materiality but not with respect to fees paid to board members).  In effect, the court considered the issue so clear that it could effectively be decided on a motion to dismiss, without the benefit of discovery.  Moreover, the decision could be juxtaposed against the verdict in the marketplace.  One periodical described the board as the worst in the country from a corporate governance perspective. The case put in plain view the weakness of the director independence standard in Delaware. 

Although stepping down from the court, we expect to see continued influence from Chancellor Chandler.  Moreover, he will have greater freedom to address jurisprudential concerns when off the bench.  It will be interesting to see the direction that any such influence will take.