Regulatory

Delaware appraisal and judicial activism

by David Marcus   |  Published August 4, 2015 at 1:22 PM

"Judicial activism" is the most charged phrase in American legal theory. Arthur Schlesinger Jr. injected it into popular discourse in a 1947 Fortune magazine article on the U.S. Supreme Court, and liberals and conservatives seized on it as a term of opprobrium for jurisprudence they did not like, usually in a highly political area and usually from the nation's high court.

But the extremes of judicial activism, such as Roe v. Wade for those on the right and Citizens United v. Federal Election Commission for liberals, obscure a serious question that the phrase assumes away. Judges have broad leeway to shape the law, and their decisions about the limits to impose upon themselves are dictated at least as much by personality and temperament as by ideology.  

The difficulty of those choices is clear in a recent Delaware decision on appraisal, a subject of growing concern within Delaware corporate law.

On July 13, Vice Chancellor J. Travis Laster (pictured) issued a ruling in which he held that institutional investors may not seek appraisal of their shares of Dell Inc., which was sold last year to an investor group led by company founder and CEO Michael Dell.

The Dell decision involves the definition of "shareholder of record" under Delaware law, a surprisingly convoluted point because of changes in the 1970s in how shares are held. The current interpretation of the law governing the definition bars several of Dell's institutional shareholders from seeking appraisal, Laster wrote. But he encouraged the state's Supreme Court to revisit an issue on which it ruled five years ago. In that case, Crown Emak Partners LLC v. Kurz, the high court specifically declined to take up concerns surrounding the definition, saying it was one for the legislature.

Laster wrote the lower court opinion in Crown Emak and reiterated the argument he made there for the Supreme Court to tweak the definition of "holder of record" to account for the creation of securities depositories Cede & Co. and the Depository Trust Co.

"The Delaware courts play a particularly significant role in the corporate arena," Laster wrote in his Dell decision. "Historically, the judiciary, rather than the General Assembly, has taken the lead when addressing corporate law issues. Two leading commentators have noted that the Delaware Supreme Court has not traditionally deferred to the prospect of legislative action." Instead, the pair - Edward Rock of the University of Pennsylvania Law School and Marcel Kahan of New York University Law School - wrote, "The Delaware Supreme Court has shown a certain degree of discomfort with, perhaps even hostility to, legislative intrusions into its domain."

That assessment has at least some validity, which shows that what constitutes judicial activism varies depending on context. But even individual judges may have different views on how far their ambit extends. It may be that Leo E. Strine Jr., the current chief justice of the Delaware Supreme Court, is more aggressive than his predecessor Myron T. Steele.

As Laster noted at the end of the Dell opinion, the corporate bar's focus on appraisal has increased along with the incidence of appraisal arbitrage, a controversial practice in which opportunistic shareholders file for appraisal to extract a quick settlement. The effect of the rise of appraisal arbitrage on the position the Supreme Court takes on the issue is ambivalent. On the one hand, the benefit of a realistic definition of "holder of record" would arguably be greater than it was five years ago; on the other, the Delaware Supreme Court now would be more closely scrutinized for wading into the area. It's easier to be activist when no one is looking.

Judicial activism refers to a court's willingness to overturn laws or venture into areas of social policy, and it's most relevant to appeals courts that focus on questions of law rather than fact. The Court of Chancery's focus on corporate law allows it to address questions like the one Laster faced in Dell, but it is also a trial court. As such, its judges must decide how aggressively to manage the cases before them. That question permeates the treatment of the fiduciary duty cases that accompany virtually every acquisition of a publicly traded Delaware corporation. 

Led by Laster, the judges on the Court of Chancery have become increasingly aggressive in rejecting settlements of those duty cases in which target company shareholders receive only additional disclosures. (Because the cases are styled as class actions, judges must approve proposed settlements.) On July 8, Laster refused to approve a proposed settlement of litigation brought by shareholders of Aeroflex Holding Corp. who challenged the company's sale to Cobham plc. He was particularly concerned by the release from future litigation against Aeroflex that the settlement included.

On the same day, Vice Chancellor John Noble pondered the issue of global releases in deferring a decision about whether to approve a proposed settlement in shareholder litigation arising from the $8.3 billion sale of Intermune Inc. to Roche Holding AG. The coincidence of the Aeroflex and Intermune hearings led some observers to wonder if the Court of Chancery was setting out a major change in policy on global releases.

The judges may be further emboldened by an objection that Fordham Law School professor Sean Griffith filed to the proposed settlement of shareholder litigation arising from the $3.6 billion sale of Riverbed Technology Inc. to Thoma Bravo LLC and Teachers' Private Capital. Along with Penn's Jill Fisch and Steven Davidoff Solomon of the University of California School of Law, Griffith earlier this year published "Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform," in which the authors argue that disclosure-only settlements provide no value to shareholders and that judges should reject them as a basis for fee awards.

Griffith bought a few shares in Riverbed and other target companies in order to challenge disclosure-only settlements. But it's unclear why the courts should treat him with any more deference than they generally give shareholder plaintiffs who buy a few shares of stock in order to bring a fiduciary duty case (or, more accurately, have a plaintiff's lawyer bring it for them). Institutional shareholders and public pension funds are fully capable of challenging disclosure-only settlement but virtually never do so, either because they like a system that continually forces companies to disclose more information and gives judges some oversight over the sales processes in even non-conflicted deals or because the economic impact of the settlements and the payment plaintiffs' lawyers' fees is immaterial to them.

Most class-action litigation involves a dispersed group of individuals who generally lack the means and sophistication to engage in complex litigation. That isn't the situation in Delaware fiduciary duty litigation. Institutions such as Fidelity Management and Research and the California Public Employees' Retirement System don't need Sean Griffith to speak for them, and Delaware should be wary of allowing him to do so.