So, with the Chicago School in retreat and Judge Posner undergoing conversion, we turn to the Delaware model of corporate law. 

Despite Chief Justice Steele's protestations to the contrary ("It’s important to let people know about Delaware law and to correct the inaccurate view that some have that Delaware is pro-management."), the Delaware approach to corporate governance is pro-management both in its philosophy and its result. 

With respect to philosophy, the Chief Justice acknowledged in the same interview that he adheres to a “'contractarian' view of the law" and one where he expects "to continue writing more about the principles of freedom of contract."  Yet to the extent this contractarian approach suggests some type of negotiating between shareholders and managers (private ordering, in other words), the Chief Justice is adhering to a decidedly pro-management position.  As a matter of empirical evidence, shareholders, at least in public companies, have little ability to "bargain."  Thus, the output from "bargaining" reflects not a give and take of contract negotiations but positions of managment who entirely dominate the process.  This was discussed at length in Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.  In other words, the contractarian approach often means the right of management to impose. 

The pro-management bias can be seen in the actual ouput of the state courts and legislature.  Over the last quarter of a century, there has been considerable erosion of shareholder rights.  The duty of care is gone, killed both by judicial interpretation (Disney is the poster child) and the adoption of Section 102(b)(7), where "private ordering" and a contract approach to corporate governance resulted not in give and take negotiations but in a categorical rule eliminating damages for breach of the duty of care.  See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.  With respect to the duty of loyalty, particularly executive compensation, requirements of fairness have been all but eliminated, with the result that companies can pay compensation without effective limits.  See Returning Fairness to Executive Compensation. 

Despite total compensation that can climb to around $700,000, directors are legally allowed to maintain an ostrich approach to governance (Citigroup is the best recent example) and need not be informed about contractual provisions that limit the franchise of shareholders.  Derivative suits mostly turn on the independence of the board yet the courts have adopted standards (particularly excessive pleading standards) that prevent any meaningful exploration of the concept of director independence.  The result is that non-independent boards are treated as independent and derivative suits routinely dismissed.  See Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty. 

Inspection rights have been emasculated through the use of the credible evidence standard.  Owners can't exercise their inspection rights to look at materials that were used by the board in paying what was arguably excessive compensation or in refusing to accept the resignation of directors who did not receive majority support from shareholders.  The requirement that shareholders must prove bad faith to recover attorneys' fees in inspection rights cases effectively means that litigation has become a routine expense associated with the exercise of inspection rights and one that effectively limits exercise of the rights. 

The Blasius standard is under assault.  The court declined to apply it in Axcelsis.  VC Strine in Mercier has suggested that it be scrapped and transformed into the far more malliable and pro-management standard.  Equal treatment of shareholders of the same class was eliminated in Unocal. 

With law and economics no longer sustaining this pro-management philosophy, what justifies the approach?  We will address that in one final post on the subject.