Continued Erosion of the Blasius Standard: Keyser v. Curtis (Part 2)
We are discussing Keyser v. Curtis. In that case, the Chancery Court opted to apply entire fairness from the duty of loyalty rather than the compelling justification standard dictated by Blasius.
The court's interpretation amounted to a limit on the Blasius standard, rendering it inapplicable to circumstances implicating the duty of loyalty. In reaching the conclusion, the court made a number of questionable assertions. The court characterized the standard as an intermediate one, thereby viewing the application of fairness as a stricter standard. See Id. (main role of Blasius is as "a specific iteration of the intermediate standard of review laid out in Unocal Corp. v. Mesa").
For one thing, Blasius is not an "intermediate" standard. Intermediate standard is usually used to describe a standard that falls between the duty of care and the duty of loyalty. Unocal is an intermediate standard. See Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del Ch 2011) ("Because the Airgas board is taking defensive action in response to a pending takeover bid, the "theoretical specter of disloyalty" does exist—indeed, it is the very reason the Delaware Supreme Court in Unocal created an intermediate standard of review applying enhanced scrutiny to board action before directors would be entitled to the protections of the business judgment rule.").
Blasius, on the other hand, is an enhanced standard. See MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003). Indeed, the compelling justification is likely more difficult for the board to show than the traditional fairness analysis required by the duty of loyalty.
Nor was Blasius a specific iteration of Unocal. The only authority for that proposition cited by the court was Mercier, a case that called for the abandonment of Blasius in favor of Unocal, and an article making essentially the same point. Moreover, in MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003), the Supreme Court had an opportunity to equate the two standards but did not. Instead, the Court found that "the special import of protecting the shareholders' franchise within Unocal's requirement that any defensive measure be proportionate and 'reasonable in relation to the threat posed.'"
There is a reason why the two standards are not the same. Unocal is a significantly lower standard than Blasius and merely requires a showing of reasonableness. Under the approach, boards could impair the franchise if reasonable. Because courts routinely defer to the board's decision on reasonableness, the standard in reality gives management almost unlimited discretion to act so long as the process is proper. Certainly this was made clear in the Air Products decision. The net effect of a reasonableness standard would be to give shareholders substantially less protection that what is currently provided in Blasius.
Indeed, the court in Keyser suggested that it would be enough to sustain the actions of the board by showing "fair dealing." See Keyser ("because [the director's] self-dealing was motivated by a desire to prevent [the company's] shareholders from electing a new Board—a motive that is inherently suspect under Delaware law—the Defendants must show that [the director] undertook a considerably robust process in order for the Court to come to the conclusion that [director's] actions were entirely fair."). In other words, compelling justification would be replaced with proper process.
Of course, the recognition by the Chancery Court that boards would need to employ a "considerably robust process" was an acknowledgement that in fact the traditional "entire fairness" analysis required by the duty of loyalty was not good enough to ensure the protection of the franchise. As a result, the court was effectively calling for a higher standard of entire fairness. Yet this "higher" standard was decidedly lower than compelling justification.
For awhile, Mercier stood alone in seeking to transform the Blasius standard into a reasonableness analysis. Keyser ended the isolation. The Supreme Court will eventually have to intervene. When it does, the presumption of the race to the bottom suggests that it will side with the Chancery Courts and effectively replace the Blasius standard with a more management friendly approach.
Primary materials in this case are posted on the DU Corporate Governance web site.