Delaware and Corporate Governance: The Current Stance

The interplay between Delaware, particularly the courts, and the SEC, is becoming more pronounced and more complex.  We will examine over the next week or two some Delaware decisions that demonstrate the need for a federal response, particularly from the Securities and Exchange Commission. 

In particular, we will discuss the Chancery Court opinion in City of Westland v. Axcelis, the case where the board refused to accept the resignations of three directors who did not receive a majority of the votes cast under a majority vote provision.  Shareholders followed up the action with an attempt to use their inspection rights to examine the basis for the decision.  The Chancery Court, as we predicted, said no, effectively rendering these decisions unreviewable under any kind of fiduciary duty analysis.  The case demonstrates the largely meaningless nature of majority vote provisions.  It also shows why the SEC needs to step in and add disclosure in this area to the obligations that trigger a current report on Form 8-K.

We will also revisit Amylin Pharmaceuticals, a case where the Chancery Court approved poison puts, those claused in debt instruments that require repurchase of the debt at face value where there is a change of control at the board level, all but eliminating any possibility of a proxy contest for control, at least where it is uneconomical to repurchase the debt.  The case made its way to the Delaware Supreme Court and, five days after oral argument, the high court took a very important and difficult issue and affirmed with a one sentence order (although there was a three sentence footnote).  In so doing, the Court all but reaffirmed the now clear approach that the courts would refuse to require that  boards be informed of certain material developments such as provisions that would disenfranchise shareholders.  The effect of the opinion was to reaffirm the standard that its better for directors of companies incorporated in Delaware to be uninformed than informed. 

Finally, we will review an interview recently given by Chief Justice Steele on current developments.  His remarks are, as always, insightful, and relatively clearly lay out his philosophical approach in the current upheaval over corporate governance.

Enjoy.