Shareholder Access, Private Ordering and the Prescient Views of a Delaware Vice Chancellor

There is no question that one of the most unique and independent voices on the Delaware Chancery Court has come from Vice Chancellor Laster.  As a longstanding practitioner in Delaware, he knows the players and the plays.  His opinions often reflect a common sense understanding of the actual dynamics of shareholder litigation. 

This could be seen, for example, in La Mun. Police Emples. Ret. Syst. v. Morgan Stanley, 2011 Del. Ch. LEXIS 42 (Del. Ch. March 4, 2011).   This was an inspection case where shareholders sought documents that would look into the reasons why the special litigation committee of the board declined to bring a derivative suit in a "demand refusal" context. 

In the opinion, the context mattered.  He noted that when directors are asked to consider demand in a derivative context, it "typically happens" that they "refuse" to bring the action.  Moreover, plaintiffs are stuck with an almost impossible standard of review.  "[A] decision to refuse a litigation demand is reviewed under the business judgment rule, which forces a plaintiff to overcome the rule's powerful presumptions before a court will examine the merits of the directors' decision."  As a result, they are entitled to reasonable inspection rights.  "The highly deferential standard for reviewing a demand-refusal decision makes it critical that an accountability mechanism exist in the form of a limited right to information under Section 220."

This approach was also apparent in the Vice Chancellor's common sense remarks about the current debate on shareholder access.  The SEC adopted a shareholder access rule, only to see it struck down by the DC Circuit.  Whatever one thinks of shareholder access, the approach taken by the DC Circuit was analytically weak.  For an analysis of the decision, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC. 

The decision eliminated mandatory access but purportedly left in place a system of "private ordering."  Shareholders are allowed to submit access proposals under Rule 14a-8.  So far this season, approximately 16 have been submitted. 

Yet the likely outcome of this "private ordering" approach is that management will resist and oppose access proposals, largely ensuring that they are not adopted.  This is because shareholders have little actual authority to "bargain" with management over corporate governance reforms.  See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom. 

In other words, the outcome of "private ordering" in the shareholder access area will probably result in a categorical approach that does not permit access.  Access, however, is inevitable.  To the extent that the "private ordering" dynamics does not allow it to happen, shareholders will be forced to lobby regulators (the Commission and Congress) for reform. 

Vice Chancellor Laster recognizes these dynamics.  According to BNA, the Vice Chancellor, speaking on a panel at the AALS conference in Washington earlier this morning, "urged corporate America to take advantage of the Securities and Exchange Commission's new shareholder proposal approach to proxy access, or prepare for the return of a federal mandatory access rule." As he further stated, according to the BNA article:

“You asked for it, you got it, you better use it,” Laster continued. If not, institutional investors will lobby Congress for the return of a federal rule, he said. “In a Democratic administration, you're going to get something more detailed that won't have the same type of outcome” that Rule 14a-11 faced.

It is a common sense and correct view.  To the extent companies implement access provisions in a private ordering context, it will take pressure off the need for a Commission or congressional alternative, one that will likely be categorical and mandatory.  Yet this advice notwithstanding, the pattern so far has been for management to resist access rights.  The result has been greater SEC and congressional involvement in the area (witness the provision of Dodd-Frank that clarified the SEC's authority in the area). 

Perhaps this time matters will be different.  With the advice coming from a Vice Chancellor of Delaware, those in the boardroom may be more likely to listen.   

For more insight into the Vice Chancelor's perspective on Delaware law, there is a nice eight minute interview worth watching.