Corporate Governance

Delaware Judges, Shareholder Rights, and the Appearance of Bias (Part 7)

By Armin K. Sarabi

We have been discussing the article recently published by VC Strine in the Journal of Corporation Law, "Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance," 33 J. Corpo. Law 1 (Fall 2007).

It is clear from the series of posts that we disagree with many of VC Strines observations and conclusions. But mostly we question the propriety of the entire effort. Renne Jones hasnoted that at least one possible motivation for judges on the Delaware courts to write articles is political.

• Another view is that the constant commentary has a political purpose: to shore up the legitimacy of the state's role in setting corporate policy. On this view, Delaware judges not only seek to explain their approach to corporate controversies, but promote their own superior abilities to act as arbiters in these disputes. Certainly, many articles by Delaware jurists fit this mold. If this is the motivation, we might want to take the message conveyed with a grain of salt. If part of the motivation for the articles and speeches is preserving the state's (and the judges') sphere of influence, then readers and scholars should consider such when evaluating the arguments the judges present.

To the extent political, they make the judges in Delaware one more player in the governance debate and frankly make it easier Congress to step in and preempt. Say on pay is the current potential example.

In crossing the line from judge to advocate and engaging in the political process, the judges can also betray a bias. The piece written by VC Strine demonstrates that shareholders, particularly institutional investors (worse still, hedge funds), will appear before an unsympathetic jurist. It reveals that he thinks director independence emasculates rather than strengthens the role of the board. Any party seeking to enforce meaningful standards of behavior on the part of independent directors will have an uphill battle in his courtroom.

TheDelaware canons of ethics encourage judicial participation in legal reform but specifically provide that judges may do so with respect to matters relating to "the law, the legal system, and the administration of justice."  The canons likewise stress the importance of public "confidence in the impartiality of the judiciary" and the need to maintain the integrity of the judicial process.   It is, admittedly, an amorphous standard.  But the article written by VC Strine at least straddles the line, going beyond ordinary legal issues permitted by the canons and setting out positions that could be viewed by some as threatening the public confidence in the impartiality of the judicial system.  

In any event, the comments in the article provide a gloss to his decisions. That may be unfair but it is inescapable. When shareholders lose (Portnoy being a good example), how can his decisions be seen as anything but an act of bias? In other words, his article arguably does a disservice to the Delaware courts and to his own decisions.

Full post as published by The Race to the Bottom on March 13, 2008 (boomark / email).