No time for my own analysis, but I though readers should be aware of this recent paper. Sharfman, Bernard S., Shareholder Wealth Maximization and its Implementation under Corporate Law (May 16, 2013). Florida Law Review, Vol. 65, No. 5 (2013). Full text available at SSRN.
Abstract: As its theoretical foundation, this article accepts shareholder wealth maximization as both the primary norm of corporate governance and the objective of corporate law. If so, then any model of corporate law must explain why courts have historically shown little interest in reviewing a board decision to determine if shareholder wealth maximization was actually achieved. To explain why this restrained approach has been used, this article utilizes a model of corporate law that describes a world where the courts have designated the board of directors as the locus of authority for determining whether or not a corporate decision maximizes shareholder wealth. The courts take this approach because it understands that it is the board, not the courts or shareholders, who have the information and expertise to determine if a corporate decision meets this objective. This approach is implemented by utilizing a strategy of protecting managerial discretion in corporate decision making as evidenced by the business judgment rule. The court will only interpose itself in this shareholder wealth maximizing determination if the board decision is tainted with a conflict of interest, lack of independence or where gross negligence in the process of becoming informed is implicated and exculpation clauses do not apply. Utilizing this triad of filters allows the courts to take both a light-handed and intermittent approach to board accountability, consistent with an Arrowian framework that sees great value in decision making by a centralized authority.
Conclusion: The model just described can be understood as the traditional model of corporate law and when a chancellor or judge veers from this model the judicial opinion must be closely scrutinized to see if the court had valid reasons for implementing a different approach. Such a veering from the traditional path can be found in eBay v. Newark, a recent Delaware Chancery Court case where former Chancellor Chandler, in his review of a rights plan under the Unocal test, required the directors to demonstrate that the corporate policy being defended under the first prong of the test enhanced shareholder value (the Link) even though the decision to implement the rights plan was not for the primary purpose of entrenchment, the key finding under the first prong of the Unocal test that would demonstrate that the decision was tainted. As argued here, former Chancellor Chandler was wrong in adding this additional burden to the first prong of the Unocal test without the presence of entrenchment.
The creation and application of corporate law is an enduring struggle to find the optimal amount of decision making autonomy that should be provided the board of directors. Such an optimal point will lead to the most efficient decision making in the context of maximizing shareholder wealth. Statutory corporate law tries to achieve this optimal point by providing a large number of default rules and relatively few mandatory rules that it believes to be “market mimicking.”216 That is, these rules “would be universally adopted by contract, assuming the parties thought about them.”217 The judiciary, on the other hand, tries to achieve this optimal point in corporate law by using a strategy of maintaining the locus of corporate decision making in the hands of the board of directors unless the decision is tainted with interest, lack of independence or gross negligence in the process of making the decision. The judiciary takes this approach because they recognize that the board of directors has a decided competitive advantage in terms of information, decision making skill and the ability to make timely decisions.
However, when the judiciary diverts corporate decision making from the board of directors to itself without cause (absence of taint), then there is a great risk that sub- optimal corporate decision making will occur as such decision making is placed in the hands of a less efficient decision maker, the courts. As Professor Bainbridge has stated, “the power to review differs only in degree and not in kind from the power to decide.”218
As we have already discussed, this is the basic flaw in the Revlon duty even though it has been partially corrected by Lyondell in the context of director liability. It is also the basic flaw in the Link, where a Revlon style review for shareholder wealth maximization is required in the absence of taint.
This criticism of the Link is not to say that Chancellor Chandler was not a Chancellor of great distinction and many wonderful opinions. However, even the most outstanding jurist gets it wrong from time-to-time. Unfortunately, this is what occurred in ebay and it is hoped that the case will be treated as a sport not only in subsequent applications of the Unocal test but also in all other cases where, in the absence of taint, the courts may be tempted to expand its review of corporate decisions for shareholder wealth maximization.
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