Shareholders in Delaware have a hard time getting a break, as the list of cases in this series demonstrate. Having said that, we break with tradition to note a few cases that did not push the law in a management friendly manner.
In re Del Monte Foods, 2011 Del. Ch. LEXIS 30 (Del. Ch., Feb. 14, 2011), where the court recognized a possible conflict of interest with one of the company's advisors ("Here, the taint of self-interest came from a conflicted financial advisor rather than from management.");
La Mun. Police Emples. Ret. Syst. v. Morgan Stanley, 2011 Del. Ch. LEXIS 42 (Del. Ch. Feb. 17, 2011), where the court recognized that "[b]asic notions of accountability require that stockholders be able to use Section 220 to evaluate whether the demand-refusal decision was made in good faith" and allowed access to an investigative report used by the board in responding to litigation demand.
Johnston v. Pedersen, CA No. 6567 (Del. Ch. Sept. 23, 2011), where the court found that the board breached its fiduciary duty by "structuring the stock issuance to prevent an insurgent group from waging a successful proxy contest."
Encite LLC v. Soni, 2011 Del. Ch. Lexis 177 (Del. Ch. Nov. 28, 2011), where the court recognized that "generalized contentions that [directors] relied on expert counsel during the bidding proceess" were
"insufficient to establish fair dealing." Thus, reliance on counsel was not "outcome determinative of entire fairness."
We note that our friends over at the Delaware Corporate and Commercial Litigation Blog have done a very thorough recap on the decisions issued by the Delaware courts in 2011.
Nonetheless, shareholders, as usual, had a bad year in the Delaware courts in 2011. The trend explains why efforts at reform have been shifted to the federal level and have encouraged federal preemption. Unable to obtain sufficient ability to participate in the governance process under state law, shareholders seek reform at the federal level. Thus, say on pay, shareholder access, clawbacks, and jurisidiction of audit and compensation committees have all become matters of federal law.
The shift to federal law is not without consequences. Federal law is probably more political. See Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors. Moreover, federal intervention provides greater room for participation by constituencies other than shareholders and managers. Thus, for example, Britain is considering reforms of the compensation process in part because of the importance not to owners and managers but to society.
The trend toward federalization, however, can only be arrested if and when shareholders are given a greater voice under state law. Until then, preemption is likely to continue.