This Article examines a question that Delaware law has grappled with for several decades: whether and when approval by independent directors, without a supplemental majority-of-the-minority (MOM) approval, is sufficient to cleanse corporate actions involving a controller conflict. After decades-long swings of the judicial pendulum, a recent legislative amendment to the Delaware General Corporation Law (DGCL) permits independent director approval to serve in all non-freezeout settings as a cleansing mechanism. In this Article, we explain that the case for general reliance on independent director approval outside freezeouts is untenable; the incentives of independent directors that were elected and can be replaced by the controller are just as problematic in non-freezeout setting—if not more so—than in freezeout settings.

We then put forward a unified approach to protect public investors from controller-related conflicts in an effective and internally consistent manner. Under this approach, for all decisions requiring a statutory vote—including not only freezeouts but also charter amendments and reincorporations—the case for applying the MFW framework is strong and cleansing should require MOM approval. However, for decisions where a vote is not statutorily required, cleansing could also be achieved through approval by “enhanced independence” directors—that is, directors whose appointment received MOM approval.

Delaware courts have expanded the cleansing effect of a shareholder vote, thereby endowing shareholder votes with greater normative weight than at any time in the modern period. Outside the context of a conflicted transaction involving a controlling shareholder, a fully informed uncoerced disinterested shareholder vote on a transaction is treated as a full defense against any claim for breach of fiduciary duty. This implicitly bundles the consummation of the transaction with the cleansing of fiduciary duty breaches. We argue that this weight is misplaced from an internal corporate law perspective and represents a departure from the traditional treatment of shareholder ratification. A vote by a majority of target shareholders in favor of a transaction can be seen at most as evidence that share-holders believe that the value of their shares will be higher if the transaction takes place than if it does not take place as of the time of the vote—but such a vote does not indicate fairness and should not substitute for a fairness analysis. As a more rational regime, we suggest holding separate votes on the transaction and cleansing. Importantly, though separate, a board may decide to couple these votes by making consummation of the transaction contingent on an affirmative vote to cleanse. This explicit private ordering bundling has two advantages over the present implicit bundling by fiat: boards can limit the scope of breaches submitted for a cleansing vote; and the board’s decision to condition a transaction on a cleansing vote could itself be analyzed for whether it amounts to coercion. Given the conceptual problems with imputing a cleansing effect to a vote on the transaction, what then explains the confidence in the normative significance of shareholder votes? We suggest that judges adopted a legal fiction in response to what was perceived to be excessive deal litigation. If that is the case, the question becomes whether it is a useful legal fiction or whether relying on other measures to reduce deal litigation would have been preferable.

Delaware corporate law has long recognized that stockholders are generally not fiduciaries and do not owe fiduciary duties to the corporation and its other stockholders. Controlling stockholders are the exception and owe fiduciary duties only in limited circumstances. Historically, stockholders are deemed controlling if they either own majority voting power or near-majority voting power and exercise control over the business affairs of the corporation. Over the years, however, decisions by Delaware courts deemphasized the importance of stock ownership and placed greater focus on other indicia of influence, thereby ascribing control to stockholders with increasingly smaller voting stakes.

This Article illuminates another twist in the de facto controlling stockholder doctrine from recent decades: the creation of “transaction-specific control” as an alternative pathway to pleading controller status. As we demonstrate, this doctrinal extension began with a series of brief statements in Delaware Court of Chancery decisions from the early 2000s, without discussion of its novelty or merits. These decisions cited the canonical opinion Kahn v. Lynch. But Lynch did not in fact hold that a stockholder takes on fiduciary duties if it “controls” a specific transaction rather than the business affairs of the corporation. Subsequently, these Court of Chancery cases were cited in yet others, creating a chain of case law embedding the notion of transaction-specific control into doctrine. After tracing this evolution, we consider the unintended and negative consequences that result. We argue that Delaware corporate law should jettison the concept of transactional control as a distinct concept, which is one of the aims of the newly created statutory definition of controlling stockholder.

This Article examines controversies surrounding certain recent Delaware corporate law decisions from the perspective of the jurisdictional competition among states for corporate charters. I begin with the assumption that Delaware has state-of-the-art and up-to-date corporate law interpreted in a legal environment void of corruption. Delaware’s dominance in the jurisdictional competition for corporate charters, however, may be in jeopardy nevertheless, as significant stockholders increasingly express an interest in fleeing Delaware for other states, and Delaware lawyers and corporate advisors express unprecedented unease about the legal environment in Delaware. The apparent vulnerability of Delaware is understandable when one recognizes that sometimes even outstanding products fail in the marketplace. Products sometimes fail because they are too complicated or risky to use, or because the people who make the decision to buy the product assign a low or even negative value to their supposedly superior characteristics. Here I argue that this is happening in Delaware. The problem is exacerbated by what is perceived to be the “suspicious and negative tone [adopted] toward corporate boards and management” in certain opinions that weaken the contracting power of controlling shareholders and afford legal “protection” to minority and noncontrolling shareholders who neither want nor value the “protections” foisted on them. These protections appear to be unwelcome by controlling shareholders and their advisors who are highly influential in the decision about where to incorporate. Their increasing dissatisfaction with the Delaware legal landscape explainsthe actual and threatened departures from Delaware.

The Article makes three points about the recent decisions and the intervention by the Delaware legislature to unwind those decisions. First, while these decisions alienated important Delaware constituents, particularly controlling shareholders, the minority shareholders who ostensibly were the beneficiaries of those decisions did not perceive any benefits from the decision and actually opposed the decisions when they had the opportunity to do so. Support for my contention that recent opinions “protecting” minority shareholders did not really protect them is found in: (a) empirical findings that Delaware law does not improve the value of controlled firms, and may decrease it; (b) votes of Tesla non-controlling shareholders to approve Tesla CEO Elon Musk’s pay both before and after a ruling “protected” those very shareholders from Musk by striking down his pay; and (c) the willingness of non-controlling shareholders to invest in companies (like Moelis) after being fully informed of the very contractual arrangements between the controlling shareholder and the company that were subsequently struck down by the Delaware Chancery Court. Second, the Delaware constituents most involved in making chartering decisions are increasingly uncomfortable advising firms to charter in Delaware because they have been targeted by the recent decisions. Prominent among these constituents are controlling shareholders and transactional attorneys and their advisors. Finally, while the Delaware legislature can, and did, reverse decisions that harm Delaware’s competitive position, the legislature cannot change the anti-controlling-shareholder tone in those decisions. As such, the risks to Delaware’s competitive position seem to be higher than at any other time in recent history.

To date, Caremark cases against directors for corporate trauma arising from woefully deficient cybersecurity have failed, even when cybersecurity was a mission critical risk for the company because, as explained in SolarWinds, Caremark requires a legal violation, and inadequate cybersecurity generally does not violate positive law. This Article shows that Caremark claims to recover for corporate trauma from cyber-events can succeed in an important class of cases: when (1) the company made unlawful materially misleading statements to private and public sector customers about its cybersecurity quality; (2) lying to customers about cybersecurity constituted a mission critical legal risk because, given the nature of the company’s product, customers’ willingness to deal with the firm depends on their confidence that the company has good cybersecurity, confidence which would be shattered by the confluence of a breach and disclosure that the company mislead its customers; (3) directors knowingly did not satisfy their Marchand/Caremarkduties relating to cybersecurity disclosure; and (4) the company suffered corporate losses (including from government enforcement actions for customer lies that reached shareholders) proximately caused by the company’s misleading statements to consumers. This Article elucidates the potential scope of Caremark liability for materially misleading cybersecurity disclosure and shows that had the derivative plaintiffs in SolarWinds sought recovery for the corporate trauma caused by SolarWinds’ misleading disclosure they likely would have prevailed. The framing identified in this Article also should be applicable for corporate traumas arising from safety violations by companies that lied about product safety.

Using Experience Smartly to Ensure a Better Future: How the Hard-Earned Lessons of History Should Shape The External and Internal Governance of Corporate Use of Artificial Intelligence

Leo E. Strine Jr.

Artificial intelligence or “AI” has transformative potential. But that reality should not obscure the fact that our society has longstanding experience with the corporate development of novel technologies that pose the simultaneous potential to better human lives and to create massive harm. This article, prepared for the occasion of the 50th anniversary of the Journal of Corporate Law and for the Rome Conference on AI, Ethics, and the Future of Corporate Governance, looks backward at the prior experience with corporate profit-seeking through the development and use of transformative technologies to suggest policy measures that might help ensure that the benefits of AI’s development by for-profit business entities to society far exceed its downside.