October 16, 2019
When Chief Justice Leo Strine of the Delaware Supreme Court retires this fall after more than 20 years on the bench, he will leave a legacy of decisions that have changed or clarified significant matters often raised in corporate and stockholder litigation. As Chief Justice of the state’s only appeals court since 2014 and before that on the Court of Chancery, Chief Justice Strine displayed creativity, acerbic wit and an unparalleled clarity in complex matters of Delaware corporate law, which frequently serves as a model for business jurisprudence in other states.
Although he has authored hundreds of opinions over the years, some of which were more shareholder-friendly than others, two decisions from his tenure as Chief Justice illustrate Strine’s influence over principles of Delaware law and corporate governance matters.
Firstly, in June of this year, in Marchand v. Blue Bell Creameries, 212 A. 2d. 805 (Del. 2019) (“Blue Bell Creameries”) the Delaware Supreme Court reinforced a corporate board’s duty to oversee company management, reversing a Chancery Court ruling that had dismissed a derivative action asserting so-called Caremark claims. The Blue Bell Creameries plaintiffs had alleged claims based on the directors’ failure to oversee the proper management of the company’s safety risks as related to a fatal food poisoning outbreak and product recall. Writing for the court, Chief Justice Strine reinforced the guiding principles relevant to the board’s duty of oversight in the context of stockholder derivative litigation as originally articulated in the landmark decision In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 106 (Del. Ch. 1996).
In Blue Bell Creameries, plaintiffs had alleged that defendants breached their duties of care and loyalty by “knowingly disregarding contamination risks and failing to oversee the safety of Blue Bell’s food-marketing operations.” In addition to finding that one director’s very close and personal ties to the Company’s CEO rendered him conflicted and not able to objectively consider a demand on the Board to investigate the alleged claims, the Supreme Court found that “Blue Bell[’s] board failed to implement any system to monitor Blue Bell’s food safety performance or compliance.” Citing Caremark, Chief Justice Strine wrote that “[a] board’s ‘utter failure to attempt to assure a reasonable information and reporting system exists’ is an act of bad faith in breach of the duty of loyalty.”
Reinforcing the board’s duties, the Court held that under Caremark, a board is required to “make a good faith effort to put in place a reasonable system of monitoring and reporting about the corporation’s central compliance risks.” With this holding, Chief Justice Strine provided additional clarity to potential Caremark claims emphasizing that “[i]f Caremark means anything, it is that a corporate board must make a good faith effort to exercise its duty of care. A failure to make that effort constitutes a breach of duty of loyalty.” Based on Chief Justice Strine’s analysis of Caremark, the Supreme Court reversed the Chancery Court’s decision and sustained the derivative plaintiffs’ claims. There is little doubt that Blue Bell Creameries will be relied upon by shareholder litigants for years to come.
The second opinion, which Chief Justice Strine authored in 2015, caused a sea-change in the types of merger litigation filed in Delaware Chancery Court. In Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015), Chief Justice Strine took the opportunity to clarify and reconcile application of the business judgment rule for directors in a post-closing damages action involving an arms-length merger where there was a fully informed non-coercive shareholder vote. Writing for a unanimous court, Chief Justice Strine confronted, among other things, the proper application of the business judgment rule in the context of an ostensibly arms-length merger transaction. After concluding that the transaction did not involve a controlling stockholder which would have implicated the duty of loyalty and negated application of the business judgment rule, Chief Justice Strine concluded that where “the [vote] of a disinterested stockholder majority [ ] determines that a transaction with a party other than a controlling stockholder is in their best interests,” Delaware will apply the business judgment rule. The decision ultimately eliminated what was perceived as wasteful pre-merger litigation in the Delaware courts, while still permitting stockholders to challenge coercive, self-dealing, misleading or otherwise unfair corporate transactions.
These two cases are prime examples of Chief Justice Strine’s lasting influence over Delaware corporate law. While the specifics of his next move are unknown, he recently issued a research paper published by the University of Pennsylvania Law School’s Institute for Law and Economics indicating that the scale of his ambition is no less than legal and regulatory reform to change the behavior of U.S. corporations and institutional investors. Entitled “Toward Fair and Sustainable Capitalism,” his proposal aims to “reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans.” To achieve this goal, Strine says, he will push for laws and regulations that require corporations and institutional investors to “give appropriate consideration to and make fair disclosure of their policies regarding” what Strine calls “EESG”—in which he adds “Employees” to the now-familiar trio of Environmental, Social and Governance policy. The comprehensive list of proposals includes everything from changes in tax law (closing the carried-interest loophole, establishing a financial transaction tax, and lengthening from one to five years the holding period for long-term capital gains), corporate behavior (requiring some corporate boards to create “workforce committees” to address employee concerns and expanding corporate disclosure requirements to include their impact on society, the environment, workers and consumers) and institutional investing (requiring heightened EESG disclosures).
Although retiring from the bench, clearly Chief Justice Strine will remain active and engaged in pursuing policies reflecting his view of the appropriate balance between corporations and their stockholders as reflected in this most recent paper. Whether as an academic or in some other context, his future contributions will undoubtedly generate significant debate among all interested constituents.