Source: https://www.professorbainbridge.com/professorbainbridgecom/2015/03/index.html
Timestamp: 2019-04-26 10:38:29+00:00

Document:
As a practical matter, therefore, applying the Bylaw in this case would have the effect of immunizing the Reverse Stock Split from judicial review because, in my view, no rational stockholder – and no rational plaintiff’s lawyer – would risk having to pay the Defendants’ uncapped attorneys’ fees to vindicate the rights of the Company’s minority stockholders, even though the Reverse Stock Split appears to be precisely the type of transaction that should be subject to Delaware’s most exacting standard of review to protect against fiduciary misconduct. This reality demonstrates the serious policy questions implicated by fee-shifting bylaws in general, including whether it would be statutorily permissible and/or equitable to adopt bylaws that functionally deprive stockholders of an important right: the right to sue to vindicate their interests as stockholders.
Notwithstanding this stinging language, the Court found that it did not need to reach those issues, because the motion before it focused solely on the timing of the adoption of the bylaw.
With a proposal to ban fee shifting bylaws pending before the Delaware legislature, it is hard to see this unnecessary dicta as anything but a judicial intervention in the political process designed to give ammunition to the opponents of fee shifting provisions. Of course, it's not terribly surprising that a trial judge would intervene in a debate that could effect Delaware lawyer incomes and do so in a way that helps protect those incomes, but it's still disturbing.
Wha's the point of the implied covenant of good faith? Other than generating fees for lawyers?
“Modern contract law has generally recognized an implied covenant to the effect that each party to a contract will act with good faith towards the other with respect to the subject matter of the contract.” Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). Accordingly, in Delaware as well as other US jurisdictions, it is now accepted that “the implied covenant of good faith and fair dealing … inheres in every contract.” Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 168 (Del. 2002).
The implied covenant of good faith and fair dealing (hereinafter ICGF) comes up at several points in my corporate law courses. And every time it does, I find myself asking: What’s the point? What work does the damned thing do?
(ii) many basic contract interpretation principles are explained in this opinion, but one that I found especially notable is that before the court can “fix a typographical error” in a contract, it must first satisfy the exacting prerequisites that would entitle one to the remedy of reformation of a contract, just as if it were a material term apparently.
There is much more to commend this opinion for its scholarly analysis and interesting facts, including the backstory of the buyer of an investment advisory firm who thought it was entitled to millions of dollars in damages because it did not think the seller gave it everything that it thought it was buying. That is not an uncommon complaint, but I still find it interesting that it remains such a common allegation.
When a court implies a term in a contract, much less one as detailed as the Purchase Agreement, it must be very careful.
See Nemec, 991 A.2d at 1125 (“The implied covenant of good faith and fair dealing involves a cautious enterprise, inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated. . . . We will only imply contract terms when the party asserting the implied covenant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected. When conducting this analysis, we must assess the parties’ reasonable expectations at the time of contracting and not rewrite the contract to appease a party who later wishes to rewrite a contract he now believes to have been a bad deal. Parties have a right to enter into good and bad contracts, the law enforces both.”) (internal quotations omitted); Cincinnati SMSA Ltd. P’ship, 708 A.2d at 992 (noting that use of the implied covenant of good faith and fair dealing should be “rare and fact-intensive, turning on issues of compelling fairness”); Allen v. El Paso Pipeline GP Co., 2014 WL 2819005, *11 (Del. Ch. 2014) (noting that the Delaware Supreme Court has “admonish[ed] against a free-wheeling approach” to invoking the implied covenant of good faith and fair dealing), aff’d, 2015 WL 803053 (Del. 2015).
A doctrine that is to be applied cautiously, rarely, and so on is not a doctrine that’s going to do a lot of work.
We see this reluctance in other contexts, as well. In the labor low area, for example, the Third Circuit has noted that “Delaware courts have been reluctant to recognize a broad application of the implied covenant of good faith and fair dealing out of concern that the covenant ‘could swallow the doctrine of employment at will.’” Murphy v. Bancroft Constr. Co., 135 F. App'x 515, 518 (3d Cir. 2005).
Delaware courts often state the test for breach of the implied covenant as follows: “‘is it clear from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of as a breach of the implied covenant of good faith-had they thought to negotiate with respect to the matter?'" Allied Capital Corp. v. GC–Sun Holdings, L.P., 910 A.2d 1020, 1032 (Del.Ch.2006). Therefore, resort to the implied covenant is only appropriate when the contract is truly silent with respect to the matter at hand, and when the expectations of the parties were so fundamental it is clear that they did not feel it was necessary to negotiate them.
Langley v. Chase Bank USA, N.A., No. 3:10-CV-587-O, 2010 WL 8266202, at *2 (N.D. Tex. Aug. 18, 2010) aff'd sub nom. Langley v. Chase Bank USA NA, 430 F. App'x 312 (5th Cir. 2011).
With all due deference, that test makes no fraking sense. How do you know whether the contract is silent because the parties failed to discuss the issue or because they discussed it and decided to leave the contract silent? This is especially problematic when you consider that Delaware law states that “the implied covenant inquiry initially focuses on the four corners of the contact itself, and parol evidence is only admissible once an ambiguity arises from the text.” Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1033 (Del. Ch. 2006).
Second, if the issue really was so important to the parties, wouldn't you have expected them to address it? If so, isn't silence itself proof that their expectations on the relevant points were not fundamental ex ante?
Third, Delaware law makes clear that the ICGF cannot be used to add terms to the contract. See Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del.Ch.2004) (holding that "the implied covenant should not be used to give plaintiffs “contractual protections that they failed to secure for themselves at the bargaining table"). So what good is it? If the express terms don't solve the problem and you can't add terms to solve the problem, does't the problem remain unsolved?
In sum, I have come to believe that the ICGF is a judicially created tax on transactions for the benefit of lawyers. It generates a lot of litigation, but rarely changes outcomes, so it does the parties no good, while costing them huge legal fees. And, of course, the risk of ICGF litigation justifies ex ante lawyering by transactional lawyers.
I believe in the theory of Director Primacy. I believe in the Business Judgment Rule as an abstention doctrine, and I believe that Corporate Social Responsibility is choice, not a mandate. I believe in long-term planning over short-term profits, but I believe that directors get to choose either one to be the focus of their companies. I believe that directors can choose to pursue profit through corporate philanthropy and good works in the community or through mergers and acquisitions with a plan to slash worker benefits and sell-off a business in pieces. I believe that a corporation can make religious-based decisions—such as closing on Sundays—and that a corporation can make worker-based decisions—such as providing top-quality health care and parental leave—but I believe both such bases for decisions must be rooted in the directors’ judgment such decisions will maximize the value of the business for shareholders for the decision to get the benefit of business judgment rule protection. I believe that directors, and to [sic; did he mean not?} shareholder or judges, should make decisions about how a company should pursue profit and stability. I believe that public companies should be able to plan like private companies, and I believe the decision to expand or change a business model is the decision of the directors and only the directors. I believe that respect for directors’ business judgment allows for coexistence of companies of multiple views—from CVS Caremark and craigslist to Wal-Mart and Hobby Lobby—without necessarily violating any shareholder wealth maximization norms. Finally, I believe that the exercise of business judgment should not be run through a liberal or conservative filter because liberal and conservative business leaders have both been responsible for massive long-term wealth creation. This, I believe.
 I concur, of course. See my book The New Corporate Governance in Theory and Practice, especially Chapter 1 thereof. See also Director primacy, http://en.wikipedia.org/w/index.php?title=Director_primacy&oldid=621020942 (last visited Mar. 30, 2015).
 I agree with Henry Manne that an action qualifies as CSR, inter alia, only if it is voluntary and “one for which the marginal returns to the corporation are less than the returns available from some alternative expenditure.” That definition excludes a lot of stuff that we casually call CSR. But as to corporate acts that meet that definition, I think they violate directors’ duties (albeit that in most cases that will not result in liability due to the BJR).
 Agreed, subject to the provisos embedded in footnote 3.
 See my post "Corporate Law after Hobby Lobby"
 Agreed. Again, see my book The New Corporate Governance in Theory and Practice, especially Chapters 3 and 5 thereof.
 Now that gets complicated. But those complications are for another day.
Ann Lipton offers an interesting analysis of the pleading implications of the Supreme Court's recent Omnicare decision, which dealt with whether and when opinions can give rise to 1933 Act Section 11 claims.
Because I believe that the bill is intended to protect the interests of the Delaware bar, I find that a very plausible hypothesis.
Coffee goes on to offer a detailed preemption analysis, which concludes--albeit somewhat tentatively--that state laws authorizing (even implicitly) fee shifting bylaws that apply to federal securities regulation would be invalid.
The Article examines the intersection of fee-shifting bylaws and federal private securities fraud suits. Specifically, the Article hypothesizes about the effects fee-shifting bylaws would have, if enforceable, on private securities fraud litigation. It then turns to the validity of fee-shifting bylaws under federal law and concludes that they are invalid as applied to securities fraud claims. In light of this conclusion, the Article considers whether Congress should pass legislation to validate fee-shifting bylaws and determines that it should not.
Note: The Appendix at the end of the Article includes some data on corporations that have adopted fee-shifting bylaws or charter provisions between May 8, 2014 and March 16, 2015.
I recommend reading both pieces.
Badawi on "Influence Costs and the Scope of Board Authority"
Economists have long attributed the existence of firms to their ability to exercise authority through a hierarchy. Superiors can command subordinates through fiat and, in so doing, avoid the negotiation and haggling costs that come with the use of contracts. Yet the body that wields ultimate authority in the firm, the board of directors, exercises relatively little of its plenary authority to run the corporation. Boards typically make only a handful of decisions, they meet only a few times a year, and many directors have a full-time job doing something else. This Article asks why boards put such sharp limits on their day-to-day involvement with the companies they control when the exercise of authority is so central to the existence of firms.
To answer this question, this Article draws on recent developments in the theory of the firm. This work examines how firms are likely to allocate authority among different constituencies, and it identifies the dangers associated with intrafirm lobbying. If the people who care most about a decision do not have the power to make that decision, they may exert substantial effort trying to influence those choices. This Article argues that this intrafirm dynamic can help to explain why boards circumscribe their authority. If directors try to exert too much authority, managers may spend too much of their time trying to influence the board rather than devoting effort to more productive tasks. This theory suggests that the scope of authority the board exercises will depend, in part, on a tradeoff between the minimization of agency costs and lobbying costs. This Article argues that this conception of the board’s role helps to understand why the movement to make boards more independent has not been a uniform success and why corporate law takes a unique approach to the regulation of agency costs.
The recent posting hiatus resulted from my taking UCLAW's spring break to get out of town for a while. Helen, the dogs, and I took our RV up to Redding, California, visiting Coyote Valley (outside San Jose) on the way.
My Yelp review of the Coyote Valley RV Park is here.
My Yelp review of the Premier RV Resort in Redding is here.
New photos of Coyote Valley, Lake Shasta Dam, and Mt Shasta are up on Flickr.
What is it about Omnicare, Inc., that generates such awful judicial opinions? The Delaware supreme court's decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003), was one of that Court's worst decisions.
Before a company may sell securities in interstate commerce, it must file a registration statement with the Securities and Exchange Commission (SEC).
With limited exceptions not relevant here, an issuer may offer securities to the public only after filing a registration statement.
But, as a FB friend of mine observed, why didn't somebody correct the over broad opening sentence?
This is getting to be an annual rite. The U.S. Supreme Court agrees to take a case that could significantly reshape the securities class action business. Defendants get their hopes up, loading the docket with amicus briefs calling on the justices to impose new restrictions on the cases. But ultimately the justices leave the status quo more or less intact, to the relief of shareholder lawyers across the land.
Kevin LaCroix has a typically detailed and cogent analysis of the relevant legal issues on his blog. He also reprints a helpful Skadden client memo on the case.
Elsewhere Lindgren has documented that "the largest underrepresented groups in law schools today are white Christians, Christians, white Republicans, and Republicans." Consider that at UCLA there are two Republicans on a faculty of 70. That's 2.86%. Both are males, meaning that female Republicans constitute zero percent--that is nada, zilch, none--of the faculty.
Lindgren opines that these sort of disparities are "too large and too consistent to be simply the result of discrimination," arguing that "culture probably also plays an important role."
I used to think that the problem was mostly a network effect issue. While I still think network effects are important, it seems clear that at least unconscious discrimination is at work as well.
New M&A jargon from Tulane: Bumpatrage. Activists buying block & threatening to vote no on signed deal if bid isn't increased.
In “Seeking a Cure for Raging Corporate Activism,” published on March 17, 2015, in the WSJ, the author discusses a technique resurrected from the 1980’s that could, on reexamination, be “a bulwark against short-termers who roam the markets, looking to force buybacks or an untimely company sale.” Known as “tenure voting,” the concept would give investors additional votes if they hold their shares for at least a specified period of time, thus rewarding long-term holders by giving them more say in the future of the company than say, short-term hedge fund activists that may favor short-term profits over long-term business strategies.
"Modern Lessons from the Early History of Congressional Insider Trading"
The Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”) affirms that members of Congress are not exempt from insider trading prohibitions. Legal scholars, however, continue to debate whether the legislation was necessary. Leveraging recent scholarship on fiduciary political theory, some commentators contend that because members owe fiduciary-like duties to citizens, to their fellow members, and to Congress as an institution, existing insider trading theories already prohibited them from using material nonpublic information for personal gain. These arguments, while plausible, are incomplete. They rely on broad conceptions of legislators as fiduciaries, but provide scant evidence that members violate institutional norms when capitalizing on confidential information, a crucial step for fitting their trading into existing legal doctrines.
This Article fills that gap. Like other scholarship on governmental fiduciaries, it examines the foundational norms in Congress, focusing specifically on an episode not previously discussed in the literature. In 1778, Samuel Chase, a member of the Second Continental Congress, used his knowledge of plans to purchase supplies for the Continental Army to reap a substantial profit by cornering the market for flour in his home state. This Article documents the reaction to the Chase scandal and demonstrates that from the earliest days of the institution congressmen expected that members would not attempt to use confidential information for financial gain. Alexander Hamilton and other critics universally concluded that Chase had committed a “scandalous perversion of [his] trust.” This episode and other evidence compiled here strongly suggest that the STOCK Act was unnecessary to hold members of Congress liable for insider trading.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.