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Tuesday
Jan012013

Delaware's Top Five Worst Shareholder Decisions for 2012 (#5: Keyser v. Curtis) 

Shareholders have a tough time in Delaware, perhaps explaining why an increasing amount of litigation is brought in jurisdictions outside of Delaware.  The law of the Delaware may apply but shareholders presumably think that they can get a better result if the law is applied by a judge outside the state.

Delaware, however, still determines the substantive law.  In most cases, shareholders confront difficult hurdles in moving forwad with challenges to board behavior.  There are a few actions, however, where the standard of review arguably favors shareholders.  One of them is the Blasius standard.  This standard applies when the board takes actions in an effort to disenfranchise shareholders.  A board motivated by a desire to disenfranchise must show a compelling justification for the action, a very tough standard for directors to meet. 

The Chancery Court, however, has been trying to overturn the standard.  They have sought to reduce the number of standards applicable to actions by shareholders (care, loyalty, modified business judgment rule, compelling justification).  One case suggested that the compelling justification standard should be replaced with the reasonableness standard developed in Unocal

If such a test were adopted, the practical import would be to eliminate a level of protection for shareholders since a reasonableness standard is, for the most part, an approach that turns on process.  If disenfranchisement were subject to the same test as poison pills, shareholders would rarely if ever succeed.

Keyser v. Curtis, 2012 Del. Ch. Lexis 175 (Del. Ch. July 31, 2012), was the latest salvo in eroding the Blasius standard.  We discussed the case back in October.  In effect, the court found that in a case implicating both the duty of loyalty and the standard from Blasius, it would apply the standard from the duty of loyalty.  In other words, the court opted for the test that was easier for the board to meet.  Moreover, the court did so largely by disparaging the Blasius standard, portending further erosion.  Id.  (opinion stating that the main role of Blasius "to the extent it has one" is as an iteration of the intermediate standard from Unocal).  

If the Chancery Court has its way, the need for "compelling justification" will go the way of the Dodo.  Disenfranchisement will become easier and the federal government will have an additional reason to intervene and preempt state law. 

Primary materials in this case are posted on the DU Corporate Governance web site.

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