Airgas and the Management Friendly Nature of Delaware Law (Part 3)

We noted in the last post a series of cases that can be described as management friendly.

Occasionally, however, a few cases slip through that cannot be characterized in that fashion.  Two come to mind.  Kurz, a decision by VC Laster, among other things, found for insurgent shareholders and did away with management's control over the omnibus proxy.  Airgas found that a staggered board provision was ambiguously written and, compelled by state law principles, interpreted the provision in a manner most consistent with the shareholder franchise. 

Why are such decisions so rare?  There are no doubt a variety of explanations but one of them has to be the risk of reversal.  It seems that while an individual Chancellor or Vice Chancellor might occasionally deviate from the management friendly approach, the Supreme Court is less likely to do so.  Part of the explanation may arise from the collective decision making process.  On courts with multiple judges, a single Justice who seeks to make decisions that goes against the grain will likely have a difficult time and often fail. 

But there is something else going on here.  The Delaware Supreme Court has five justices.  Three of them (CJ Steele, and Justices Berger and Jacobs) all first served on the Chancery Court.  In other words, they had a very clear record on corporate governance matters, something that would be known, for example, to any bar committee vetting their nominations or any governor making the ultimate selection.  The vetting process presumably helps ensure a consistency in view and reduces the likelihood of the appointment of a "maverick" to the bench.  Such a Court would likely be counted on to view "maverick" decisions by the Chancery Court less favorably.  Indeed, both Kurz and Airgas were reversed.  

In short, even if trial courts want to make decisions that deviate from the common approach in Delaware, they know that there is a high risk of reversal.  Like shareholders who know that there is a high risk of defeat in a proxy contest because of a poison pill with an exceedingly low threshold (say 5%) and, as a result, forgo the opportunity in the first instance, those on the Chancery Court know that there is a high risk of reversal for certain types of governance decisions and, therefore, may opt to forgo the effort.