Panel: The Evolution of M&A Litigation in the Chandler Era


PANEL: THE EVOLUTION OF M&A
LITIGATION IN THE CHANDLER ERAt

PROFESSOR RONALD J. GILSON': This is an
opportunity that most academics do not get, which is the
chance, not only to talk to each other, but also to talk to
serious practitioners and then also to talk to judges. And
that last point-that in the room is the chancery court-adds
something at least a little odd to the presentations. So, what
comes to mind: many of you will remember a movie called
Annie Hall' and there is a wonderful scene in which Woody
Allen and Diane Keaton are waiting in line to see a movie,
and there is a couple behind them, and the gentleman is
going on and on about Marshall McLuhan3 in a pompous,
condescending way. And Woody Allen loses his temper and
berates the man and, uncomfortably, the man turns to
Woody Allen and says, "I'm a professor at Columbia. I know
all about this stuffl" At which point Marshall McLuhan-the
real person-walks up and berates the guy. So, for all of us
who are going to be talking about what the opinions mean,
this is a magical moment, for the people who really did it are
here in the room and it imposes a little bit of discipline.

The panel is going to talk about Delaware's takeover
jurisprudence. Given that there are two serious
practitioners on the panel, what I wanted to do is take a step
back and try to look at the trajectory of Delaware takeover
law through the prism of two facts. The first is what might
be a long-standing tension between the chancery court and

t Excerpts taken from panel discussion at the Columbia University
School of Law Symposium: The Delaware Court of Chancery: Change and
Continuity (Nov. 11, 2011). The editors of the Columbia Business Law
Review have added explanatory footnotes where deemed appropriate.

1 Marc and Eva Stern Professor of Law and Business, Columbia
University School of Law.

2 ANNIE HALL (Metro Goldwyn Mayer 1977).
' Herbert Marshall McLuhan (1911-1980), philosopher, writer, and

media analyst. See, e.g., HERBERT MARSHALL McLuHAN, UNDERSTANDING

MEDIA (1964).



No. 2:602] PANEL: THE EVOLUTION OF M&A LITIGATION

the Delaware Supreme Court. The Supreme Court
announces a relatively vague rule, the chancery court spends
a number of years trying to operationalize it, and then the
Supreme Court decides to change the rule. I want to discuss
that in connection with a second characteristic. As we all
know, the chancery court is one of equity, and I suggest that
the Supreme Court ends up being, in effect, a court of law,
and tension between the two courts reflects the merger of
law and equity, in effect, in Delaware.

In 1985, the Supreme Court decides Unocal.4 We get a
two-level test. Is there a threat? Is it proportional? We read
the opinion; we do not have a clue about what any of it
means. For the next five years, the chancery court begins to
work through those tests, generating at least an
understandable, coherent way to approach it.

Then we come to Time-Warner,6 and the quote there is
one of my favorites: "to the extent that the court of chancery

4 See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
In Unocal, minority shareholder Mesa made a two-tier, "front-loaded" cash
tender offer for 37% of Unocal's shares. Id. at 949. The Unocal board
believed that Mesa's offer significantly undervalued Unocal shares and
launched a self-tender offer at a higher price. (Mesa was excluded from
the tender offer.) Id. at 950-51. In vacating the Chancery Court's grant of
a preliminary injunction against the Unocal self-tender, the Delaware
Supreme Court famously announced a two-part test for determining
whether a board's defensive actions in the face of a hostile tender offer will
come within the ambit of the business judgment rule. First, the board,
must have "reasonable grounds for believing that a danger to corporate
policy and effectiveness exist[s]" if the hostile bid is successful. Id. at 955
(citing Cheff v. Mathes, 199 A.2d 548, 554-55 (Del. 1964). Second, the
defensive measure must be "reasonable in relation to the threat posed."
Id.

, See Paramount Commc'ns, Inc. v. Time, Inc. (Time-Warner), 571
A.2d 1140 (Del. 1989). The Time board adopted defensive measures to
block a hostile tender offer from Paramount so that Time could proceed
with its long-planned merger with Warner Communications, Inc.. Id. at
1146-49. Although the agreement with Warner valued Time's shares at
$175 while Paramount had offered $200 per share, the Time board's
"prevailing belief was that Paramount's bid posed a threat to Time's
control of its own destiny and retention of the 'Time Culture."' Id.
Paramount filed for a preliminary injunction, arguing that Time's board
had breached its obligations under Unocal. Id. at 1142. The Delaware

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COLUMBIA BUSINESS LAW REVIEW

has recently substituted its judgment for the Board, Interco
and its progeny are rejected."' Of course, Interco' did not do
anything like that; it was a fight between shareholders and
directors. The chancery was not doing much of anything.

We move ahead to Unitrin, and we begin to see a
preference toward elections, away from market control
transfers. Appeal is not preclusive if you can run an election.
And the Supreme Court reverses the chancery court on
whether the interference with the electoral process is
sufficient to warrant judicial intervention.

Supreme Court held that Time was reasonable in perceiving Paramount's
offer as a threat, rejecting Paramount's argument that a tender offer is
only a threat when the target's shares are inadequately valued. Id.

6 Id. at 1153.
See City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787

(Del. Ch. 1988), appeal dismissed as moot, 556 A.2d 1070 (Del. 1988).
Interco had implemented a shareholder rights plan, or "poison pill," to
block a tender offer from Cardinal Acquisition Corp. so that the Interco
board could continue its plan to restructure the company. Id. at 789-90.
The price of the tender offer was only slightly less than the estimated
value that shareholders would have received under the board's
restructuring plan. Id. at 799. The chancery court found that the tender
offer did not constitute a "threat," under the first prong of the Unocal test,
sufficient to justify the adoption of the poison pill. Id.

8 See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995).
American General announced a plan to merge with Unitrin by purchasing
$2.6 billion of Unitrin shares at $50 per share. Id. at 1370. Believing this
offer undervalued the company, the Unitrin board adopted a poison pill.
The board also announced a share repurchase program, which would have
reduced the company's outstanding shares and potentially increased the
percentage held by board members to a level that would allow them to
block any merger. Id. at 1370, 1378-79. The Delaware Supreme Court
held that in applying enhanced scrutiny under Unocal, the chancery court
was first required to determine whether the board's defensive measures
were "draconian" by being either "preclusive or coercive." The Supreme
Court found that the poison pill and the share repurchase were not
coercive and that repurchase program was not necessarily preclusive,
although each measure made a takeover more difficult. However, the
Supreme Court remanded the case to the court of chancery to determine
whether the Unitrin board's actions "individually and collectively" were
within the range of defensive measures that would be reasonable and
proportionate under the second Unocal prong. Id. at 1390.

604 [Vol. 2012



No. 2:602] PANEL: THE EVOLUTION OF M&A LITIGATION

I want to end this sequence with Airgas.' Chancellor
Chandler describes the chancery court's view, or at least the
view of a number of Vice Chancellors that he cites, that in
terms of chancery court's preference, it remains where it was
twenty years ago."o But the Supreme Court is still going the
direction it goes. Predictably then, after Time-Warner and
after Unitrin, the action moves into the proxy area. What we
are left with, as it is presented in Airgas, is the question of
whether success of a tender in the proxy contest is
"realistically attainable."n We are not at a point of
mathematical possibility or hypothetically conceivable, but
"realistically attainable," pulling language from the Supreme
Court.

Thinking of the trajectory, the sense of the area at that
point, reminds me very much of where we were immediately
after Unocal. "Realistically attainable" turns out to be, in
fact, a fairly accordion-like framework. A number of things
happened. One is the potential for rigging elections. What is
predictable that will happen is many of the practitioners in
the room, responding to the needs of their clients, will push

' See Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch.
2011). In Airgas, Air Products made several hostile offers for Airgas, the
last of which valued the company at $70 per share. Id. at 55. The Airgas
board maintained that the company was worth at least $78 per share and
kept in place a number of defensive measures, including both a staggered
board and a poison pill, during a year-long battle for control of the
company. Id. at 55-56. The chancery court upheld the Airgas defensive
measures based on Delaware Supreme Court precedent that the
combination of a staggered board and poison pill are note preclusive. See
id. at 181-82 (citing Versata Enters. v. Selectica, Inc., 5 A.3d 586, 604
(Del. 2010)).

10 See Airgas, 16 A.3d at 56-57 ("Although I have a hard time
believing that inadequate price alone (according to the target's board) in
the context of a nondiscriminatory, all-cash, all-shares, fully financed offer
poses any 'threat'-particularly given the wealth of information available
to Airgas's stockholders at this point in time-under existing Delaware
law, it apparently does.... Trial judges are not free to ignore or rewrite
appellate court decisions. Thus . . . I am constrained by Delaware

Supreme Court precedent to conclude that defendants have met their
burden. . . .").

" See id. at 114-16.

605



that envelope as far as they can in each case. Legitimacy, as
it was raised by then Chancellor Allen in Blasius,12 is
increasingly an issue-an interesting issue in our capital
markets.

Now frame a simple question: the target board decides to
take a set of actions. Our proxy experts decide these actions
increase the likelihood that the board will win by ten
percent, or fifteen percent, or twenty percent. What do you
make of that in the context of "realistically attainable?" It
may be a point estimate, but otherwise, what you are asking
is how much rigging do we allow the board to do in the
context of what in the end, as Chancellor Allen said, is the
"only legitimizing feature?"8  So the chancery court
inevitably is going to deal with the issue in a series of cases.
They are going to have to figure out a way to operationalize
the "realistically attainable" language because the cases
keep coming. And then the issue will go to the Supreme
Court.

What might account for the persistence of the tension
between law and equity? It is interesting that the Airgas

" See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988).
Blasius had a 9% stake in Atlas when it submitted a precatory resolution
calling for the board to raise debt in order to distribute cash to
shareholders and sought to add eight members to the board, which would
have provided Blasius with a majority. Id. at 653-54. The Atlas board
amended the company's bylaws to increase the size of the board by two
and filled the newly-created seats with Atlas-friendly directors to prevent
Blasius from obtaining a board majority. Id. at 654-55. The chancery
court held that defensive measures taken for the primary purpose of
interfering with the proxy process, even when made in good faith pursuit
of a corporation's best interests, so obstruct shareholder franchise as to
lose the protection of the business judgment rule. Id. at 659-60. The
court also held that a board bears the burden to present a "compelling
justification" for defensive measures that interfere with the shareholder
franchise. Id. at 661, 662-63.

1 See id. at 659 ("The shareholder franchise is the ideological
underpinning upon which the legitimacy of directorial power rests.").
Chancellor Allen's conclusion in Blasius was based on the notion that the
shareholder mandate is the source of a board's authority, and that
directors' interference with the shareholder vote thus violates their duty of
loyalty as the shareholders' agents. Id.

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PANEL: THE EVOLUTION OF M&A LITIGATION

opinion essentially echoes a position that the chancery court
had taken twenty years ago and was plainly rejected over
and over again by the Supreme Court."

Here is at least a thought about it. The traditional focus
of equity was resolving a dispute between the parties.
Historically, it was based equally on the facts and typically,
certainly in the English period, without any concern about
precedent at all. The law courts, in contrast, cared little
about the case in front of them. Their job was policing the
rules.

The style of an equity court is something that we have all
become fairly familiar with. A typical chancery court
decision begins with a very lengthy account of the facts:
twenty, thirty pages of detail-who talked to whom, who did
what? Often my students hate it, and I never edit the facts
because it is the best way to teach students about what is
actually going on in these transactions. So the result is the
issue of fairness, the application of a standard in a particular
case is resolved in a deeply contextual way. The judges know
the industry, and they know the case. From an academic's
point of view, the biggest danger of ex post litigation is that
the judge will make a mistake. The more facts the judge has
and the more experience the judge has, the less risk there is,
and hence, the less reason to bring the litigation in the first
place.

What follows from attention to the contextual background
is that, for a lawyer, the Delaware Chancery Court is a
remarkable resource. For those of you who remember
commercial law, Carl Llewellyn said that disputes between
merchants ought not to be resolved by juries or even by
general judges,'" they ought to be resolved by specialized
tribunals-in Llewellyn's term, "merchant juries."" This

1 See supra note 7.

1 See, e.g., Zipporah Batshaw Wiseman, The Limits of Vision: Karl
Llewellyn and the Merchant Rules, 100 HARv. L. REV. 465, 526-27 (1987)
(describing Llewellyn's attempts to provide for a system of merchant juries
in light of the concern on the part of the Merchants' Association that lay
jurors would be unable to represent their interests).

16 Id.

No. 2:602] 607



concept did not get into the Uniform Commercial Code, but it
got into Delaware. That is, major commercial disputes are
resolved in Delaware by expert judges who see transactions
over and over again, who understand the context and are
much less likely to make a mistake. The absence of
uncertainty is an enormous advantage.

There is a different characterization of the Supreme
Court. I mean this not as a criticism, but rather as a nod to
the different role it serves. You begin to see, not the
contextual inquiry that the chancery court makes, but rather
a concern with the shaping of the standard. Basically, you
end up with two competing systems with very different
functions. The Supreme Court announces rules and
standards, the chancery court operationalizes them. It has
been suggested that this operationalization provides the
attraction of the Delaware jurisdiction.

Why is this important? What you begin to see, at least
what I see after reading lots of cases-and I am waiting for
Marshall McLuhan to walk up behind me-is a pattern.
Within the chancery court, the facts are driving the outcome.
The standard may shape it-shape it roughly-but what is
going on in that case, a sense of fairness of the process in
that case, drives the outcome. So, from the Interco and
Airgas cases, I get a sense that the chancery court feels that
when the board has a chance to do everything it can, and
when the shareholders understand the argument, then the
shareholders get to decide." Now that is not always true.
There is a set, even within the chancery court, of
circumstances-I think of Apple Bancorp" as the best

" See City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787,
799-800 (Del. Ch. 1988), appeal dismissed as moot, 556 A.2d 1070 (Del.
1988); Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48, 106 (Del. Ch.
2011).

18 Stahl v. Apple Bancorp, Inc., 579 A.2d 1115 (Del. Ch. 1990). In
Apple Bancorp, Stahl, a majority shareholder, announced plans to wage a
proxy contest for the election of directors and made a public tender offer
for the remaining shares of Apple Bancorp stock. Id. at 1117. Before the
date was set for the election of directors or any proxies had been solicited,
the board responded by announcing that it was deferring the annual
meeting to explore alternative transactions, given its advisors' advice that

COL UMIA B USINESS LA W RE VIE W [Vol. 2012608



example-that nonetheless require and receive a different
outcome.

Think of the following example: there is a claim of
substantive coercion; that is, there is a claim that the
shareholders will be misled. I suggest to you that when you
read the cases, what you will see is not a fact to be found but
a rebuttable presumption to be applied. If one had the facts
that are described in Chancellor Chandler's opinion in
Airgas, you have testimony from both sides; there are no
more facts to tell anybody." These are sophisticated
shareholders. They can understand it. If there is
substantive coercion, it is simply a presumption of the
authority of the board rather than a fact to be found.

So what is going on? The one thing I want to be clear
about is we are not talking about a "race to the bottom, a
race to the top" notion. What I perceive flowing through the
Supreme Court's jurisdiction is a realistic concern about
what public policy ought to be in this area.

What is left of the takeover game, in my view, is largely a
battle over the "installed base" of the American economy; not
new companies, but the existing large companies for whom
the poison pill and pre-existing staggered boards are
essentially the only potentially effective defenses. Those who
come to our circumstances with a fundamentally Burkeian
approach, believing that change should come slowly, should
be concerned about uncertain consequences. The board plays
essentially the same role as Burke's celebrated monarchy,
aristocracy, and clergy. We embed in serious, responsible,

a higher value could be obtained. Id. The chancery court held that under
these circumstances, the board's response did not constitute the type of
obstruction of the shareholder franchise that it had found in Blasius, and
thus did not require the board to demonstrate a "compelling justification."
Id. at 1122-23. Instead, the court applied Unocal and determined that the
board reasonably found that the combination of the proxy contest and the
tender offer constituted a threat, and that the board's response was
reasonable and proportionate. Id. at 1124-25.

1 See Airgas, 16 A.3d at 106 ("Airgas's directors and Airgas's financial
advisors concede that the Airgas stockholder base is sophisticated and
well-informed, and that they have all the information necessary to decide
whether to tender into Air Products' offer.") .

PANEL: THE EVOLUTION OF M&A4 LITIGATION 609No. 2:602]



COLUMBIA BUSINESS LAW REVIEW

disciplined people the ability to slow things down. And for
people with Burke's view, slowing things down is a
fundamentally good thing. The other side of that, of course,
is Schumpeter. For Schumpeter, growth comes-innovation
comes-from creative destruction, from shaking up the base.
These are two different ways of viewing the world.2 0

The interesting thing for policy-I suppose for the courts,
but just as much for everyone else, and I will leave you with
this-is that this large public policy issue, which gets draped
in doctrinal rhetoric, becomes critical. Old jobs are not
coming back. Companies have learned to run things far
more leanly and more efficiently. So, if we are going to see
growth, if we are going to see employment growth, it is going
to come from innovation. And then the question becomes:
how do you energize the base? Do we observe innovation
coming from outside? How do we cause-the business term
is the "installed base"-to be "ambidextrous," so that they
can do their own business and also innovate, but in ways
that will not cannibalize the doing of their own business.

I do not think this is resolvable in corporate law terms.
The chancery court is addressing internal issues-that is
they are addressing individual cases in front of them,
resolving those cases deeply in context. For me, the best way
to make sense out of the Supreme Court is that, in the end, it
is addressing external issues. That is, the commitment to
board discretion, often without regard to the facts, is a
commitment to the way one governs, to whom we allocate
authority in this economy. And that is a perfectly defensible
position. But the difference between those thoughts is going
to create the tension and motivate their internal dialogue.

Where do we end up? The first prediction, with an awful
lot of variance, is that we are going to end up seeing, over
time, the same kind of tension over "realistically attainable"
and the extent to which the board can alter the balance
within proxy contests as we saw with Unocal's threat and

'0 See generally, Ronald J. Gilson & Reinier Kraakman, Takeovers in
the Boardroom: Burke versus Schumpeter (Columbia Law Sch. Ctr. for
Law and Econ. Research Paper Series, Working Paper No. 280, 2005),
available at http://papers.ssrn.com/ sol3/papers.cfm?abstractid=732783.

610 [Vol. 2012



proportional language. The second prediction is that over
time, the chancery court will treat "reasonably attainable" in
the context of particular cases, which will cause boards to get
slapped down. And in the end, the Supreme Court will come
back and narrow the scope.

WILLIAM SAVITT2 1: I would like to make a few
observations that I think are non-controversial, in regard to
present practice in the court of chancery as it relates to
shareholder litigation in mergers and acquisitions. And then
I would like to situate those observations in a broader
context, practical and theoretical, that points out the
significance-and, I think it can even be said, the genius-of
what the court of chancery has achieved, which is to ensure
that its teachings, that its doctrine, will be in the boardroom,
in every public company merger or acquisition that is
negotiated in the United States.

Here are a handful of simple observations, again, I think
non-controversial. The first is that the incidence of class
action shareholder litigation challenging public company
deals has sky-rocketed in the past ten years. Research,
going back to the 1999-2000 period says that about 12% of
announced deals drew litigation, challenging them on the
basis of fiduciary duties and related sorts of claims. By 2005,
39% of deals drew such litigation. By 2010, 84% drew such
litigation, and I should say that the most recent data is
drawn from a paper as yet unpublished by my colleague on
the panel, Professor Stephen Davidoff, that I think is going
to be a very important contribution to what is happening
empirically in M&A litigation.

I think it can be said that, even from an anecdotal
perspective, 84% seems a little low, and it shows no sign of
slowing. While I appreciate that not all of that litigation is
in Delaware, there is no doubting that there is a remarkable

2 Member, Wachtell, Lipton, Rosen & Katz. Lecturer-in-Law,
Columbia University School of Law.

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fraction of deals that find themselves litigated one way or
another in the court of chancery. So while ten years ago,
fifteen years ago, it was an outlier transaction that would
draw litigation; now it is an outlier deal that does not draw
litigation. And this is a point that really is worth lingering
over. If I had time, I would linger-I do not.

But I will say that it is really spectacular growth, to go
from a situation where one in ten deals draws litigation to
nine in ten deals drawing litigation. It reflects the
emergence of a new industry, of a new mindset, of a new
level of scrutiny that each transaction that is done is going to
be subject to litigation in the court of chancery. We have
gone from zero to ubiquity in the past ten years in terms of
litigation challenging public company deals. And by that I
do not mean that it was zero; I mean it was quite unusual in
third-party premium merger transactions-very, very tough
to find any litigation fifteen years ago challenging it. Now, it
follows as night from day.

Second fact: not only are a lot more deal cases being filed,
they are being litigated more intensively, more energetically,
more deeply, and almost certainly after much more
discovery. Among other things, this appears to be a function
of better capitalized, more aggressive, more professionalized
plaintiffs' attorneys, who are responding to legal rules and
fee incentives and have created a basis for deeper litigation
challenges in the many, many cases that are filed.

It needs to be conceded that many cases are settled.
There are many cases settled very early on in the process,
but the folks who settle cases and the plaintiffs who sponsor
such lawsuits are all on firm notice that settlements will be
scrutinized with care in the court of chancery. So, even in
that context, there is much more deep digging going on.
There is not so much just kicking the tires; there is opening
the hood, there is a lot of elbow grease. I could mix my
metaphors, but I will not. The point is there is a lot more
litigation, and it is happening more deeply.

The third piece of information that I think is not
controversial is that there is just-let me put it this way,
chancery court decisions are long. [Audience Laughter]

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They are-they are long. Really, it is a relative term. You
know, they are just long, they are long compared to
anything. They are long compared with other trial court
decisions. They are long compared with Supreme Court
decisions. They are long. They are long. Fifty, seventy,
eighty, a hundred, a hundred and twenty, a hundred and
fifty pages-they are long. And you see the pages flipping.
[Audience Laughter]

And that is not the only authority that is being generated
out of chancery. There are transcripts. And the transcripts
are a tremendous source of learning and knowledge about
what is going on in the chancery court, what is on the minds
of the Chancellor and Vice Chancellors. And while I
understand that fifteen years ago, these were largely private
transcript rulings-that the whole world did not have
them-now, to paraphrase Mark Twain, the transcripts are
around the blogosphere before the published opinion has put
on its shoes.

There is a vast amount of legal authority and I
understand from some of my senior partners that in the days
of Chancellor Brown, the decisions were two, three, four
pages long. You just do not see it anymore. There is much
more legal knowledge-legal authority-out there.

So, the next point I wanted to make, and here again I
think and hope not controversial, is that cases challenging
mergers are class actions-they are almost exclusively class
actions. One of the results of that is that we have had the
development of a very well-defined group of highly effective
class action merger lawyers. And because they operate in
the class context, their work is overseen in every case by the
court. In some cases, they are actually selected by the court.
Stepping back, what you really have is that there exists now
a group of people whose lives are dedicated to finding
fiduciary breaches and doing everything in their power to
show them up.

This is a new phenomenon, and there are experts in the
business of finding fiduciary breaches, and they are overseen
by a still more expert chancery bench that, of course, has to
resolve the claims that are made. This professionalized

613



cadre of fiduciary duty lawyers is bringing their cases to the
court, who sees each of them presented professionally. And
even when they are settled, there is no rubber stamp. The
point, here again, is that there is an enormous amount of law
and legal review that did not exist even ten years ago.

And that brings me to my final and I think least
controversial of non-controversial propositions, which is, you
have in Delaware a truly expert bench. The judges of the
chancery court are appointed by virtue of their expertise.
They become expert by virtue of the pitiless succession of
fiduciary duty cases that come before their docket. There is
a deep and continuous exposure to a very specific kind of
work, and the judges of the court are forced to-and do-
expound on and interpret, at length daily, the world of
fiduciary duties that is at issue in the cases that we have
been talking about. And I say that recognizing that the
chancery's portfolio is not limited to merger cases-the
equitable brief is larger than that. But I do not think there
would be any dispute to the proposition that you have a truly
expert group of judges.

Now, taken individually, none of these points really are
particularly controversial. But the point I wanted to make is
that they add up to something truly unique: that chancery
court is a common law court. In a sense, it is as old school a
common law court as there can be-it is a court of equity.
But, it is an exceptional court because it can also be
described this way: as a governmental entity that is staffed
by experts and assisted by a cadre of enforcement attorneys,
armed with substantial ruling and adjudicating authority
over the conduct and disclosure of transactions within its
substantial jurisdictional compass, charged with using that
authority to regulate a broad field of economic conduct.

Described that way, it represents a regulatory authority.
And in reaching that conclusion, I do want to emphasize that
chancery sees and has the power to regulate a vast amount
of M&A activity-and that is what it does. Its field of vision,
in this sense, is more like a regulator than a court. It is not
episodic. It is not random. It is constant. It is not complete,
but it is substantially representative. So you are dealing

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with a court that sees the entire field. The chancery court is
not prisoner to the arguments that are presented. It has,
and it uses, the power to frame the issues that are presented
to it for disposition. And accordingly, and in these ways, it
operates as a very special kind of common law court.

There are few conclusions that flow from this-a couple of
points that I put under the rubric and phrase of dictum. I
clerked for a couple of judges who had signs up saying, "No
dictum!" It was like the "No whining!" signs I have in my
kid's room. "No dictum!" "No dictum!" I think dictum has a
place, and I think it is used to enormously powerful effect by
the court of chancery. It is a court that has at its disposal a
choice of policymaking forms. It can make rules the old-
fashioned, common-law way, which is by narrowly deciding
the cases in front of it-and to be sure, it does that. It does
it often. But chancery is not shy about announcing new
rules in dictum, rules that are intended to, and plainly do,
lay down new rules of the road about how parties might
structure transactions. And for a very good example among
many, I would point to Chancellor Chandler's John Q.
Hammons2 2 decision, which set out some very helpful rules
for practitioners about how to deal with certain sorts of
controlling shareholder transactions. At the same time, it
was announcing a rule that really was not necessary for the
disposition of the case.

22 See In re John Q. Hammons Hotels Inc. S'holder Litig., C.A. No.
758-CC, 2009 WL 3165613 (Del. Ch. Oct. 2, 2009). In John Q. Hammons,
the company's board had approved a merger in which the controlling
shareholder and minority shareholders would receive different merger
consideration. The chancery court held that the "entire fairness" standard
of review applied to the board's actions because of procedural deficiencies
in the approval of the transaction. Id. at *13. However, the Court also
noted that the business judgment rule would normally apply if "there [are]
robust procedural protections in place to ensure that the minority
stockholders have sufficient bargaining power and the ability to make an
informed choice . . . ." Id. at *12. The desired procedural protections were
recommendation of the plan of merger by an independent special
committee and approval of the of the merger plan by a majority vote of
minority shareholders. Id.

615



It is in the sense that that dictum points the way forward
that I would say that it merits praise. And it is important
because it allows the rules of chancery to, in many cases, not
be applied retroactively, but to be applied prospectively,
avoiding the kinds of criticisms of the retroactive application
of new rules that have been leveled at the common law
system by Judge Friendly going back some number of years.

Look, people criticize dictum on the theory that the judge
does not really know what is going on, that the judge should
not speak about matters that are not clearly within the
Court's field of vision. I do want to emphasize that this is no
ordinary dictum. It is considered dictum, and it is dictum by
a court with, as I was saying, this very large field of vision in
front of it. And I think that is what makes chancery such an
extraordinary institution and the broad canvas so important
to the continuing function of this aspect of the court.

To expand the analogy a little bit farther, I think it can
even be said that the court has something like the benefit of
a "notice and comment" procedure, provided by its frequent
participation in programs like this and bigger ones and
smaller ones and classes and publications that happen
throughout the country, indeed, throughout the world, where
the judges of the court are in touch with practitioners, are in
touch with scholars, are acting in an interactive way with
the blogosphere and the academics.

Chancellor Chandler made very much the same point at
Penn Law School, not long ago, when he noted that the
chancery court acts in real time; it effectively engages in a
dialogue, not just with the litigants before it, but also with
academics, practitioners, and writers. And this adds further
ballast, further legitimacy to the expansive function of rule-
setting and adjudication that, I am arguing, marks the
genius of the "Chancery System."

So, there are three conclusions that I wanted to touch on
briefly that flow from the foregoing. The first is to point out
that chancery permits regulation of a broad field of conduct
and in general, often it permits regulation prospectively
rather than retroactively. And in that sense, it solves for one
of the principal arguments that have frequently, and I think

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No. 2:602] PANEL: THE EVOLUTION OF M&A LITIGATION

persuasively, been made against the common law as a
rule-making system.

A second area relates to what Frederick Schauer, in a
very influential 2006 article, called the "availability
heuristic."23 The article-and I recommend it to all of you-
really amounts to a critique of the common law system
simpliciter. And the idea is that in ideal circumstances, the
judge creating a rule would do so on the basis of an accurate,
or at least an expert, assessment of the full set of future
circumstances to which the rule would be applied. But in
fact, Schauer argues that decision makers generally-and
particularly common law judges, who by virtue of their job,
in most instances are generalists rather than specialists-
are confronted with an episodic example of a specific
problem, or in his words, "are mesmerized by the case in
front of them."2 4 And they too often announce a rule, he
argued, that works best, or works only at all, if the instant
case is representative of the broad range of cases, which of
course, it seldom is, statistics being what they are.

The chancery court largely solves for the availability
heuristic. Schauer has not yet said that they have solved for
it, but that is the argument here. I mean, here you have only
five judges on this court, who see a broad universe of cases.
The cases are nearly all presented professionally and, in
some sense, on the merits, in the full view of the court. The
court is not captive to a unique fact pattern. It is unusual
among common law courts-though, in some sense, it is like
a regulator-in having the entire industry, the entire
problem set, the broad perspective of that expertise in front

" See Frederick Schauer, Do Cases Make Bad Law?, 73 U. CHI. L. REV.

883 (2006). Schauer describes the "availability heuristic" as "[the]
phenomenon of being overinfluenced by proximate examples." Id. at 894-
95. Schauer uses the availability heuristic phenomenon to argue that
"ordinary cases impress their facts on the judges who have to decide them,
and scarcely less than great cases or hard cases appear to demand proper
resolution purely by virtue of their very presence in the foreground of
judicial phenomenology. To the extent that this is so, then it is not just
great cases and hard cases that make bad law, but simply the deciding of
cases that makes bad law." Id. at 885.

24 Id. at 894.

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618 COLUMBIA BUSINESS LAW RE VIE W [Vol. 2012

of it. So, Schauer's critique, I argue-and his critique of
common law judging, generally-just does not apply to this
court. And that is another aspect of the ingenuity of the
system.

And finally, the "Chancery System," as I am calling it for
just a shorthand this morning, cures for another important
bias that has been shown to infect conventional common law
systems. And that is the selection effect. The idea that once
a legal rule is established, people are not going to bring
lawsuits. Who sues on the basis of settled law? I will tell
you who sues on the basis of settled law, my very good
friends in the plaintiffs' bar. [Audience Laughter] Over and
over and over again! How many times must we litigate
whether 3.2% for a termination fee is going to-well,
apparently a lot more! [Audience Laughter] But here is the
point I want to make about this. I am not making light of it,
but the argument here-and it is one that is against interest,
and I will come back to that-is that there is actually some
virtue in this, because the court sees each case. It sees each
one of them. It sees the differences. It has the chance to
reevaluate its policies the next time and the next time and
the next time. It is not as though an issue is settled and
then goes away forever, never to be readdressed. The issues
keep coming back to the court. And it provides, in the court,
the opportunity to revisit its rules, to tweak them, to
improve them to the facts at hand, in an evolving and
dynamic environment.

So the conclusion I wanted to drive to is that the judges of
this court have evolved a system that remains true to a pure
common law adjudicatory model, but nevertheless captures
significant benefits that are attendant to a regulatory
regime. In all the ways that I have been discussing this
morning, the chancery M&A practice marries favorable
attributes of agency regulation with a pure common law
model, and in each instance for the better of the community
that is in front of it. And in this way, it solves for certain
systematic infirmities in the common law model.

It leaves for consideration a point I will not have time to
get to today, but will be considering subsequently, and that



No. 2:602] PANEL: THE EVOLUTION OF M&A LITIGATION

is what is the risk of over-regulation here? The burdens
involved in litigating deal cases have increased exponentially
over the past ten, fifteen years. But it has not happened
with the opportunity for the kind of rigorous cost-benefit
analysis that most regulators face by matter of statute. At
what point does the incidence of filings outweigh the
potential for any future benefits? What can be done to
selectively screen cases to cure for that? How much can
plaintiffs' lawyers be empowered as an enforcement crew
before the costs and risks of potential distortion outweigh the
benefits? How many times do we need to re-litigate the same
issue? These are matter that can be addressed, and I would
argue are being addressed, by the court, by levers of when to
expedite cases, how to think about awarding fees, selecting
as to who drives a case, even under what circumstances an
order of dismissal might be possible under a deal case-
which from the defense perspective is, unfortunately, seldom.

There is evidence this is already happening and I think it
will continue to happen, and it will be extremely interesting
to work though. Getting that right will be another example
of what makes the court such a remarkable place to litigate
and such a remarkable institution for effective judging in a
terrifically complex economic environment. Thank you.

MARK MORTON": First, I want to echo Bill's praise for
the chancery. It does a remarkable job with fast, thorough,
predictable results that help all of us in practice, and I want
to offer just a couple of comments from I think what would
be at least a different, and, perhaps today at least, a unique
perspective.

I am a sit-down lawyer, not a stand-up lawyer. I work on
deals. I work with boards of directors, counseling them in
deals. We take the guidance that Bill referred to in his
presentation in all forms-cases, dictum, transcripts,
articles, presentations, and programs-and we try and

" Partner, Potter Anderson & Corroon LLP.

619



implement that in our practice. It is a practice where, I
think, it is fair to say, there is a challenge to be current, to
absorb all of that information, and it is also an iterative
process, where each day there is something new.

As Bill said, if you are monitoring blogs, if you are on the
different corporate governance websites, it is almost every
day where you could read something that you can roll into
your practice that day. And so, while there is I think a great
deal of benefit from dictum, and I think it helps all of us to
get it right, I think at the same time, we probably should
acknowledge that it creates challenges for all of us.

And so, it is in that context that I wanted to respond to
the guidance aspect of Bill's comments, with a couple of
thoughts about, as a practitioner again, what we might be
sensitive to as we roll forward, how we can deal with the
challenges that that system creates, and potentially, at least,
guide it in another direction in some areas.

So, the first is whether or not it might not be, in a small
way, better to say, "less is more"-at least more helpful. We
probably cannot do anything to slow down the flood of
transcripts that we all read, but there are challenges that it
creates for us to practice.

Just to give sort of a concrete example: the way litigation
on deals that we announce gets settled now. We refer to this
in shorthand as either "disclosure settlement" or "disclosure
plus settlement." If you believe you have independent
directors, you have run a good process, but you have thirteen
cases that are filed, you need find a good way to get those
settled. And it is not uncommon, at least, for buyers to find a
way to help the target to get those cases settled by agreeing
to additional disclosures, agreeing to modifying terms in the
merger agreement and, frankly much less frequently,
agreeing to a process where there is more merger
consideration.

In a system where it is iterative like that, and where
there are transcript rulings that announce the results of
those settlements, the challenge for us all is to then turn
around and decide in the next deal, when you write the proxy
statement or the information statement, what to say. What

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do you disclose, in light of the six transcripts you read last
week saying that they settled each of them providing for
some additional level of disclosure? Do you treat that, in
fact, as the new law that guides your practice? If you do not,
what risk does that create?

One of the risks that you create is that if you either are
not on top of that law, or if you decide that you do not believe
those transcripts to be yet the law because they were merely
the context of a settlement hearing, and you do not include
in your disclosure documents some piece of information that
otherwise in prior settlements would have been included, you
may create an opportunity for-lack of a better word-
"sandbagging." A stockholder, who may not even yet be a
stockholder, may acquire shares after the announcement of
the deal and may sit by passively waiting to see whether or
not ultimately the disclosure "checks all the boxes" that they
are aware of from the prior settlements. And then you may
have a "quasi-appraisal" claim that occurs after close.

And that is one of the consequences, I would argue at
least, of this iterative approach of so much guidance coming
through secondary sources. I do not think that there is an
easy solution to it because at present, at least, as Bill pointed
out, we do have an extraordinary number of cases that get
filed. Almost every deal, certainly. I used to say that for
every deal over $100,000,000, there was a lawsuit. We are
seeing suits filed on deals that are $50,000,000, $25,000,000
as well. So it is a challenge. I think it is a challenge for the
practitioners. It is certainly a challenge for the court. They
need to settle these cases. They need to find a way to settle.
They need to evaluate carefully the appraisal claims that are
being made. But, I think, we need to think about whether
there is a way in which we can reconcile the remedies that
might be created in the back end from disclosure claims that
someone sat on and brought afterwards.

Secondly, I guess I would point out that with the benefit
of dictum and the kind of guidance we are talking about, and
the noble effort of courts to really synthesize the law, to
create the sort of analytical constructs that are coherent and
to offer that in the form of guidance in either dictum or

621



transcripts or articles-that it can create the law of
unintended consequences in terms of the dynamics it creates
in the deal settling. And so, one example, since Bill
mentioned the Hammons2 6 case, I think that is a good
example. In that case, and in cases that have come since
then, we have seen a suggestion that to the extent you can
couple various or multiple prophylactic measures-a special
committee, a majority and minority voting mechanism-that
that will both give the court more comfort about the integrity
of the process, and presumably, the stockholders as well
since they have the ability to vote down a deal.

But what comes with that is, I would argue, in some
circumstances, a loss in value. So, if you are on the target
side, and you are gearing a deal towards getting to a certain
type of standard of review, and as a result, working with a
committee or seeking and getting a majority-minority voting
mechanism, you may have a buyer who is willing to pay less
because they are looking at the deal and saying, "That's a
deal where I have less closing certainty. I am now
conditioning my deal, not merely on the negotiating strategy
that I have with you, the Special Committee, but upon the
vote of a minority block of stockholders, where otherwise I
would have at least a vote already in hand." Now, as a policy
matter, that may be a perfectly valid place to come out, and
we may all agree that that is the best way of replicating an
arms-length transaction where you would have both the
board and the stockholders voting on a transaction, and it
would not be done sort of unilaterally through the board.

But in the Hammons case I think there was a bidder, as I
recall, who put forth a conditional bid. The first price was
one that was higher and did not require a majority-minority
vote condition, and the second was a lower price. And so,
from the perspective of the stockholder, I think we have to
ask, "Is that a good or a bad consequence when it may result
in a lower deal value at the end of the day?" Now, I think we
at least have heard in one decision that ultimately, that is

26 See John Q. Hammons Hotels, 2009 WL 3165613. See also supra
note 22.

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probably a good balancing of all the policies to accept that
consequence. And I think that may well be the case. But
right now, that is one of the challenges of integrating the
guidance aspect of the law into practice and working with a
committee to help them to understand that is something that
you have to think through: Are you willing to trade things or
not willing to trade things where it may have an impact on
value?

The third comment I would make-and I do want to keep
my remarks short here since we have several more people to
speak-is that we should acknowledge that the guidance role
is critical, but at the same time we should acknowledge on
the deal side at least, that sometimes there is even greater
value in the in terrorem effect of the law. Having the ability
to point out to your client that, in fact, if they go in this
direction and go too far, the guidance feature of the law may
actually manifest itself in the form of injunctions-maybe
not damages, because I am not looking for my independent
directors to be held personally liable-has value. The risk of
injunctive relief, if the board goes too far, or, put another
way, if the board allows the buy side to push too hard and
push them too far, can lead to actual deal process changes.

In practice we have not seen many injunctions outside the
disclosure context and outside conflicted transactions. But I
do wonder whether or not we end up having more leverage,
ironically, on the target side if we are able to say, in a
negotiated setting, to one of Bill's partners: "Well, we can't
agree to x, y, z in the panoply of deal protections because we
just do not think we can go there. We are concerned about
injunctive risk." Even if that injunctive risk is not
permanent injunctive risk-it is not killing the deal-but is
delaying the deal as was done in the Del Monte27 case.

2 See In re Del Monte Foods Co. S'holders Litig., 25 A.3d 813 (Del. Ch.
2011). Del Monte concerned the acquisition of Del Monte Foods Co. by a
group of private equity funds. The court of chancery enjoined a vote on the
merger for twenty days, finding that collusion between the sell-side
advisor and the private equity funds led to a flawed process to seek other
potentially higher offers (a "go-shop") before the private equity transaction
was finalized. Id. at 840.

623



Having the ability to push back hard that way, through
that in terrorem effect, I think is ultimately beneficial
because if you cannot, the buy side has the leverage to say to
the target: "Look we're the only bidder in the room right
now. You are not running a process. We came to you. The
price of us staying and trying to present a really attractive
offer to you is you are going to agree to these types of deal
protections, at this level." And you cannot not tell your
board that you cannot agree because it is a breach of duty to
agree to do that. Because, absent the in terrorem effect or a
jumping bidder, your stockholders will decide, not a court.
There is a dynamic that that discussion creates that is
difficult in the target board room, as a practical matter.

I am encouraged by a case like, and I may be in the
majority or the minority in this audience, Loral28 in a conflict
context that comes up with very creative solutions as an
equitable matter to a conflict problem, and a case like Del
Monte outside the traditional conflict context,2 9 that comes
up with a creative solution that slows down the process, does
not kill the deal, gives the court more comfort about the
process, and sends a message to the market participants that
you need to slow down. You, on the target side, need to push
harder and have now the ammunition to do so. That in
terrorem effect, while it may be a sort of a counterintuitive
argument to ask for more decisions like those, as a deal
lawyer I think it helps, at least on the sell side.

28 See In re Loral Space & Commc'ns Inc., C.A. Nos. 2808-VCS, 3022-
VCS, 2008 WL 4293781 (Del. Ch. Sept. 19, 2008). In Loral, the chancery
court found that Loral's board did not follow a fair process (in failing to
make a "market check") when it entered into an agreement under which
the company's controlling shareholder purchased a substantial additional
equity interest in the company. Rather than invalidating the transaction,
the chancery court "reformed" the agreement to convert the preferred
stock that the shareholder would have received into non-voting common
stock on terms it deemed fair to Loral. Id. at *32.

" See Del Monte, 25 A.3d at 840 (temporarily enjoining a vote on a
merger to allow time for another potential bidder to emerge).

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STEVEN DAVIDOFF"o: What I want to do today for
about, well, a little less then fifteen minutes is talk about
Airgas and strategic decision making. I want to begin,
perhaps by making my own strategic error, which is to say
that I think Airgas is really a very unimportant case. It is a
very unimportant case.

And why do I think it is historically unimportant? Well, I
think there are two reasons. I think, first, the two opinions
in Airgas, the bylaw one" and poison pill one,82 would have
had little effect no matter how they were decided. If the
Delaware Supreme Court had upheld the chancery court
bylaw decision, it would have likely pushed Airgas into the
arms of Air Products or another third party. Make no
mistake, it would have ended the bidding contest, I think.
But frankly, who cares?

But I think a decision in favor of Air Products in the
bylaw case would have had little impact on Delaware
companies. Only fifty-eight Delaware companies in the
Fortune 500 would have been affected by this opinion, by my
count. Many have their annual meetings in the spring

'0 Associate Professor of Law and Finance, Michael E. Moritz College
of Law, Fisher College of Business (by courtesy), The Ohio State
University.

" See Airgas, Inc., v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.
2010) Directors nominated by Air Products, a hostile bidder, sponsored a
bylaw amendment that would have moved up the date of the annual
shareholders meeting (at which Air Products hoped to gain control of the
staggered Airgas board). The bylaw amendment also effectively shortened
the terms of incumbent directors to less than the term set forth in the
Airgas charter. The Delaware Supreme Court found that the charter
provision defining directors' terms was ambiguous. The supreme court
relied on extrinsic evidence to construe the charter provision and held that
the bylaw amendment was inconsistent with the charter, and therefore
invalid. The supreme court's decision reversed an earlier decision by the
court of chancery. See Airgas, Inc., v. Air Prods. & Chems., Inc., C.A. No.
5817-CC, 2010 WL 3960599 (Del. Ch. Oct. 8, 2010) (construing the charter
provision so that the bylaw amendment was not in conflict).

32 See In re Airgas, Inc. S'holder Litig., 16 A.3d 48 (Del. Ch. 2011)
(holding that the Airgas poison pill was neither coercive nor preclusive,
taken on its own or together with a share repurchase plan and other
defensive measures). See also supra notes 9 and 10.

625



anyway, so they would not have had this problem, and all
these companies could have opted out of the decision by
changing their charter provisions on the matter. It is really
hard to do, but it could have been done. They could have
simply moved their board meetings up in the spring. It
would have solved the problem and made it go away. So I
think the bylaw decision would not have had much effect.

As for the poison pill case, I think these issues were
decided twenty years ago, thirty years ago, and I think
perhaps on the poison pill, Revlon," we may want to ignore
history. It is a very different market, Revlon is very
different. But these decisions have been made, and we are
moving forward. If Chandler had ruled to revoke the poison
pill, and the Supreme Court, which no one thought they
would, would have upheld that decision, we really would be
talking about a small group of companies being affected-
companies with a staggered board where a hostile bidder had
won a short slate. How often does that happen? It is a
handful of companies, and frankly this is why it took over
twenty years for this issue to come to a head. So I do not
think Airgas is an important case, except for maybe Airgas
itself and the parties involved.

But I do think it is important because it really reveals a
lot about Delaware and how they strategically decide cases.
I am an academic. I moonlight as "the Deal Professor,"
which is how many of you know me, but we will throw some

" See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 501 A.2d
1239 (Del. Ch. 1985), aff'd, 506 A.2d 173 (Del. 1986). Revlon rebuffed a
series of hostile offers from a company controlled by Ron Perelman and
adopted a variety of defensive measures. At the same time, the Revlon
board entered into exclusive negotiations with a "white knight" acquirer,
private equity firm Forstmann Little & Co., and ultimately entered into an
agreement with Forstmann that prevented an active auction of the
company. The chancery court found that the board had breached its
fiduciary duty in foreclosing other potentially higher bids. The court noted
that, once the board decided to sell the company, even as a defensive
measure, "[the directors' role changed from that of a board fending off a
hostile acquiror bent on a breakup of the corporation to that of an
auctioneer attempting to secure the highest price for the pieces of the
Revlon enterprise." Id. at 1248.

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No. 2:602] PANEL: THE EVOLUTION OF M&A LITIGATION

theory in here, okay? I think we have jurisprudential theory.
Legal theory has several models about how judges decide
cases. There is the realist view, the formalistic one-we saw
that in the slavery cases we read way back when-and there
is a strategic mode of decision making that we often see.

In the strategic mode, judges decide their cases, based in
whole or in part, by catering to their wider interest-be it
political, reputation, or otherwise. I put forth that Delaware
is really ripe for examination for strategic decision making
due to its unique position. It is a jurisdiction where the
judges, legislature, and bar are very attuned to keeping
Delaware corporate law in line with expectations. I think
they do, frankly, an excellent job of that. As Bill Savitt said,
even these conferences can be seen as "notice and comment"
review of Delaware decisions. So, Delaware is out there.
Delaware is engaging. Delaware might have incentives to
strategically decide cases.

Let us do a thought experiment and perhaps examine this
in the context of the Airgas case. Here I have to iterate
professor Gilson's line a little differently. My wife would call
it chutzpah, which is to sit here and talk about judge's
decisions while they're actually looking at you. It is very
easy for an academic perhaps to say, "You should have done
x or y." I think we need to take it with a grain of salt. But
we are trying to put an archetype around these decisions,
and give it a thoughtful framework for analysis going
forward. So with that big caveat, I am going to go forward
and respectfully give my thoughts.

I think Chancellor Chandler, in his bylaw opinion,
applied what was thought to be well-established legal
principals to uphold the bylaw amendment. And I think
there are reasons to enforce the bylaw to allow it to be
amended in the manner Air Products proposed and the
Airgas shareholders approved. Legal principals from the
Centaur34 case-we want to encourage good drafting by

" See Centaur Partners, IV v. Nat'l Intergroup, Inc., C. A. No. 11354,
1990 Del. Ch. LEXIS 22 (Del. Ch. Mar. 7, 1990), affid, 582 A.2d 923 (Del.
1990). Hostile bidder Centaur Partners challenged a provision of the
charter of National Intergroup that required an 80% supermajority

627



lawyers-these militated in favor of Chancellor Chandler's
decision. There were also policy reasons to support
Chancellor Chandler's ruling.

If you did not like Chancellor Chandler's decision, we had
a private ordering solution. We also had an application of
what were thought to be well-established principals of law
about how to interpret bylaws in the face of ambiguity. The
Supreme Court just felt differently. I think Wachtell Lipton
did a fantastic job; I see Gary Bornstein in the audience,
Cravath did a fantastic job. We should frame those briefs
and they should still be on bed rest for the amount of time
and expenses put into them.

We could debate the strength of legal reasoning of
Chandler's opinion and the Supreme Court opinion. But I do
think, and I am going to put forth, that the Supreme Court
opinion was driven largely by strategic considerations. I
think it can be argued that there were a couple of things at
issue here. I think the Delaware Supreme Court acted to
preserve a full sale process. A Supreme Court verdict for Air
Products would have placed Airgas into a bind. Airgas
would have faced a January meeting and would likely have
lost. A verdict for Air Products would have forced Airgas to
the bidding table. Airgas would not have gotten seventy-
eight dollars a share. It would have gotten seventy dollars,
seventy-one dollars-which is about where it is right now.
The Supreme Court acted strategically to keep an open
playing field.

There is a second strategic reason for this decision. I do
not want to overstate it. I just want to put it out there for
people to consider. We mentioned the, frankly, legendary

shareholder vote before the board of directors could be enlarged. Centaur
argued that the charter provision was ambiguous when taken together
with provisions of the National Intergroup bylaws. The chancery court
found no ambiguity in the plain language of the charter. The supreme
court affirmed, noting that "[clorporate charters .. . are contracts among
the shareholders of a corporation" and that "courts must give effect to the
intent of the parties as revealed by the language of the certificate and the
circumstances surrounding its creation and adoption." Centaur Partners,
582 A.2d at 928 (quotation and citation omitted).

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Marty Lipton and his famous memo in the wake of Interco,"
arguing that Delaware risked the possibility of
reincorporation elsewhere."

While I think the implications of Airgas are little, this
was a high-profile case. Everyone was following it. The risk
of a decision that did not preserve the staggered board was
significant because it risked Delaware's corporate law case
law, or at least could have been perceived to do so.

I would like to take each of these comments in turn and
sort of examine them, and put them in a framework and
draw some conclusions in my remaining time.

Let us take the open playing field. I think this was a
risky endeavor, to the extent that this opinion was driven to
keep an open playing field for bidding. I think, first of all, it
substitutes the court's judgment for the proper price in place
of two constituencies that probably know it better. We can
order them how we want, but they are the shareholders and
directors. Second, I think it puts the court in a situation that
it wants to avoid: assessing information when there is
asymmetry. There's a third reason. It exposes the court to
the wrong decision. I mean, Airgas made the right decision
in retrospect. Its share price is seventy dollars a share.
Yahoo made the wrong decision." As a court, you are just

" See City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787
(Del. Ch. 1988), appeal dismissed as moot, 556 A.2d 1070 (Del. 1988)
(invalidating a poison pill); see also supra note 7.

6 Mark J. Roe, Delaware's Competition, 117 HARv. L. REV. 588, 625-
26 (2003) ("The Interco case and the failure of Delaware to enact an
effective takeover statute, raise a very serious question as to Delaware
incorporation. New Jersey, Ohio and Pennsylvania, among others, are far
more desirable states for incorporation than Delaware in this takeover
era. Perhaps it is time to migrate out of Delaware.") (quoting Letter from
M. Lipton, Wachtell, Lipton, Rosen & Katz, to Clients (Nov. 3, 1988)
(internal quotation marks omitted)).

" Between February and May of 2008, Yahoo!'s board of directors
rejected a series of takeover bids from Microsoft. In May, 2008, Microsoft
abandoned its pursuit of Yahoo!. See, e.g., Miguel Helft & Andrew Ross
Sorkin, Microsoft Withdraws Bid for Yahoo, N.Y. TIMES, May 4, 2008, at
Al.

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substituting your judgment in those circumstances. It really
puts you at risk in there.

And finally I think that the court acted to preserve the
notion of director primacy, which I think is an important
principle. I think there are real questions about empowering
shareholders in the corporate form. But I think that there
might have been a misapprehension here, which is that
when we are talking about the shareholder franchise rather
than the operation of the company, perhaps we should favor
shareholders. That was how we viewed the interpretation of
bylaws under the Centaur" opinion and previously. There
are real reasons for that.

I think there are real reasons why it was dangerous to
move forward on this basis. I think, as long as we are
talking here, there was an undertone to this opinion about
the conflicts between short-term and long-term shareholders,
and their interest in takeovers. I think this is a real debate
that needs to be had, but I think it needs to be had and
fleshed out. I mean, short-term shareholders may sell and
force the company to do short-term decisions, but they are
also, perhaps, more incentivized to say "no" and bear more
risk.

Compare this to the institutional shareholders who sold
to the short-term shareholders-which is a bit trite, but it is
true-or those who stay in and are unwilling to vote "no"
against a merger. You are an institutional shareholder. You
are faced with a premium. Are you really going to risk it out
and face a "Dynegy" situation,"3 or are you going to vote "no"?
There they voted "no," but in other circumstances they voted
"yes." I think there needs to be a fuller flesh-out, before we

" See Centaur Partners, 582 A.2d at 927; see also supra note 34.
'9 In late 2010, Dynegy Inc. shareholders rejected a proposed takeover

bid by The Blackstone Group. See Michael J. De La Merced, Ending
Blackstone Talks, Dynegy Seeks New Buyer, N.Y. TIMES DEALBOOK (Nov.
23, 2010, 7:09 PM), http://dealbook.nytimes.com/2010/11/23/dynegy-
cancels-blackstone-deal/. In 2011, Dynegy filed for Chapter 11 bankruptcy
protection. See Mike Spector, Dynegy Files for Unusual Bankruptcy, WALL
ST. J., Nov. 8, 2011, available at http://online.wsj.com/article/
SB10001424052970204554204577024311666924248.html#.

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drive decisions based upon short-term or long-term
shareholders, on what their interests are. I am not making
conclusions one way or the other, but I think we need to look
at that.

I think with respect to the wider strategic issues of
Delaware's prominence, I largely agree with the
commentators that perhaps the "race to the bottom, race to
the top" is over-emphasized. But, in this context, to the
extent that that was the motivation, it probably was the
wrong case. The risk of corporate flight in the bylaws case as
opposed to other cases was minimal. The case affected a
small number of companies, who even then could contract
around the decision's effects. And I think it may have
overestimated the problem with the wrong bylaws decision.

Against these small gains, the risk of a strategic decision
has to be weighed. A strategic decision perhaps erodes the
rule of law as litigants cater to wider interests rather than
the matter at hand. It creates subjectivity in the law, which
can come back to haunt the judiciary, as personnel changes
come and the law changes.

But I do not want to say strategic decision making is a
bad thing. I think it can be very prudently employed, and I
am going to hold up the second Airgas opinion as perhaps an
example of that circumstance, in two ways.

I am going to take the wider issue first. I think the issue
in the poison pill case was, one, how did Chandler write his
opinion? There are some interesting things to say there that
I am not going to have time for, about how the chancery
court speaks to the Supreme Court and yet preserves its own
autonomy. Chancellor Chandler could have written that
opinion in many ways. He could have decided for Air
Products and just put it to the Supreme Court. He could
have decided for Airgas and not written the dictum that he
did. But he did say that "I do not believe this should be the
law." And I view that-and again this is chutzpah because I
am putting words in Chancellor Chandler's mouth-this is a
way to both cater to wider constituencies, acknowledge the
problem, or perhaps damp out any protests, and let Air
Products decide if they wanted to raise the issue with the

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COLUMBIA BUSINESS LAW REVIEW

Supreme Court-which they did not. I think, second of all, it
allowed Chancellor Chandler to preserve the autonomy of
the chancery court, expressing that we have our own
opinions and we are going to register them.

One more point before I get to my final conclusions. If
this had gone up to the Supreme Court and they had ruled
for Airgas, the decision would have been, on the metrics I am
using, probably a sounder strategic decision. You cannot
contract around this poison pill case. You cannot do private
ordering in that circumstance. It, perhaps, could affect
wider constituencies because of the focus that goes on
strategic takeovers and takeover defenses in Delaware, and
how sensitive that all is.

And finally, in exercising strategic authority, we need to
make a distinction between overt strategic decisions, where
it appears to predominate, and long-term strategic decisions.
The poison pill case, as it was decided by Chandler-taking
out the dictum-and as it might have been decided by the
Supreme Court, upholding for Airgas, was implementing a
longer-term strategic decision, which I think is a better way
to steer how the courts go.

Just a few final points. I am not saying this is all
realpolitik and judges get up and say, "What's our best
strategic decision of the day?" I think Delaware judges are,
frankly, fantastic, extremely competent, and have created a
viable corporate ecosystem that works. Of course, the law
matters. But I am suggesting in certain circumstances
strategic decisions could come into play and need to come
into play. Professors Rock and Kahan have talked about this
in Bear Stearns.40 This was really not a decision that you

40 See Marcel Kahan & Edward Rock, How to Prevent Hard Cases
from Making Bad Law: Bear Stearns, Delaware, and the Strategic Use of
Comity, 58 EMORY L.J. 713 (2009). Professors Kahan and Rock note:

The Bear Stearns-J.P. Morgan Chase merger placed
Delaware between a rock and a hard place. On the one
hand, the deal's unprecedented deal protection measures-
especially the 39.5% share exchange agreement-were
probably invalid under current Delaware doctrine because
the measures rendered the Bear Stearns shareholders'

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wanted to make, challenging the Federal government. Vice
Chancellor Parsons artfully dodged that issue on strategic
considerations.41

But what I do want to say is, while my conjecture can be
debated, I think one of the things we have to do is analyze.
We can use the Airgas case to see how strategic decision
making can work to further the long-term interests of the
court, by avoiding cases-bad facts make bad law-by
looking out for the longer-term interests, by steering the
court in a strategic direction. But it needs to be careful.
When the decisions do not appear to be based upon the law,
when it appears to be based upon those wider considerations,
it might impugn the authority of the court. I think as the
court goes forward, it needs to be careful of these
considerations. Thank you.

MARTIN LESSNER4 2 : Thank you. The professor made
some good points on Airgas-how Delaware decides cases
and what drove the Supreme Court. It is interesting to me
that there are so many people here involved in Airgas.
There was a movement last night to take a group picture.

My role as a practitioner was in the background. I
represented a bunch of arbitrageurs and kind of provided a
"play-by-play" as the case unfolded so that the "arbs" could

approval rights entirely illusory. On the other hand, were
a Delaware court to enjoin a deal brokered by the Federal
Reserve and the Treasury Department, and arguably
necessary to prevent a collapse of the international
financial system, it would invite just the sort of federal
intervention that would undermine Delaware's role as the
de facto provider of U.S. corporate law.

Id. Faced with this choice, the chancery court took advantage of a pending
New York action to stay the case and avoid making a decision. Id.

4 See In re Bear Stearns Cos., Inc. S'holder Litig., C.A. No. 3643-VCP,
2008 WL 959992 (Del. Ch. Apr. 19, 2008) (granting a stay in the case
challenging the Bear Stearns merger with J.P. Morgan); see also supra
note 40.

42 Partner, Young Conaway Stargatt & Taylor, LLP.

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COLUMBIA BUSINESS LAW REVIEW

decide where to place their money. So, I was kind of the
Howard Cosell of Airgas. Now in Chancellor Chandler's
Airgas decision, he notes that the debate about who
ultimately decides whether a tender offer is adequate and
should be accepted, the shareholders or the board, has long
engaged practitioners, academics, and members of the
judiciary. As a practitioner, it would be terrific to find some
sort of "unified field theory," a way to safely predict the
judicial outcomes based on a set of facts, or maybe better yet,
a set of facts that can be unearthed and discovered. But I
have yet to find it.

However, I think the Airgas opinion sheds a little light on
the interaction of our M&A law and its influence on our
corporate governance law.

Now as far as mergers and tender offers, I think it is safe
to say that our law is board-centric. That is, Delaware law
recognizes the primacy of board decision making. In the
merger context, the decision not to pursue a merger, or even
a decision not to engage in negotiations at all, is viewed
under a deferential business judgment standard. A board
can just say "no." In a tender offer context, I think it is
getting pretty close. A decision not to redeem a pill in the
face of a hostile tender offer is viewed under intermediate
scrutiny, and it must be reasonable in relation to the threat
posed by such an offer. However, as in Airgas, for an
independent, well-advised board acting in good faith, a
decision to keep a pill in place in the face of an inadequate
tender offer is almost certainly going to be upheld. The
outcome is going to be very similar to the merger context,
almost a business judgment standard.

However, Airgas was an easy case in this regard, because
the Chancellor held that the Supreme Court equated
inadequate with, quote, "a lowball bid." The Chancellor
found that the Airgas board could properly conclude that Air
Products' offer clearly undervalued Airgas and that the
board, in good faith, believed that the offer was inadequate
"by no small margin."

The harder case, I think, is yet to come. That is, what if a
board and its investment bankers conclude that an offer

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between, say, eighteen dollars and twenty-two dollars, was
fair from a financial point of view? And what if an acquirer
made a tender offer right in the middle at twenty dollars?
Twenty dollars clearly would not be inadequate. So how
could that be a threat that would justify the pill? However,
suppose the board wanted not just a fair price, but the board
wanted a top price. Can a good, but not best, price be
considered a threat, such that the directors, and not the
stockholders, continue to make the ultimate decision
regarding the tender offer? Or does this scenario take our
board-centric review too far?

Now it is my observation that the board-centric review
used in mergers and tender offers started to spill over to the
corporate governance area, with its traditionally stockholder-
centric review Now it would not be, I guess, a forum
honoring Vice Chancellor Strine without reference to an
obscure 1980's song. [Audience Laughter]

So, I was thinking of the 1980's song by the group They
Might Be Giants, who wonders what happens in a fight
between "Universe Man" and "Triangle Man."" Triangle
Man wins, by the way. But this clash can be seen when you
look at the bylaw opinion the Chancellor wrote in the
chancery court, and the Supreme Court's opinion. In the
first paragraph of his opinion, the Chancellor frames the
issue as whether the bylaw would cause Airgas' annual
meeting to be held in January as opposed to August. It
focuses on whether the term "annual" means "separated by
twelve months" or "occurring once a year." Having framed
the issue in a corporate governance way, the Chancellor
noted a couple of fundamental principles: for corporate
charters, bylaws, or contracts, the rules of contract
interpretation will apply. Presented with ambiguity in
interpreting bylaws, doubt is resolved in favor of the
stockholders electoral rights.

4 See They Might Be Giants, Particle Man, on Severe Tire Damage
(Rounder Select Records 1998).

635



The policy of this construction is based on the belief,
articulated in Blasius," that the stockholder franchise is the
underpinning of the legitimacy of director powers, and that
the Delaware General Corporate Law is an enabling statue.
It gives the parties great deference in what they want to do.
The Chancellor also noted a well-established law that
directors, we presume, comply with their fiduciary duties
unless proven otherwise. Once in office, if insurgents engage
in improper purposes, equity will then stand guard and be
ready to provide a remedy if there's any abuse. Using this
stockholder-centric view, the Chancellor held that the bylaw
was valid, and that, in the absence of a specific date or time
the directors already set, the directors and stockholders of
the corporation are free to choose such a date.

Now in reversing, the Supreme Court viewed the bylaws
through a different lens. That was the lens of a threat to
Airgas, in which a director-centric standard would apply.
Right from the start-very first paragraph, very first
sentence-the Supreme Court starts up by saying Airgas and
Air Products are competitors. No mention of bylaws or
annual meetings-they are competitors. There is a tender
offer launched, and the Airgas board rejected several of the
bids as undervaluing the company and inadequate-this is a
takeover attempt.

Now the focus of the Supreme Court was that the bylaws
were just part of a takeover bid, an attempt to get around
the Airgas staggered board, which the Supreme Court
viewed as an important takeover defense. The Supreme
Court noted that the defense has been around since 1899,
and that this was a kind of precursor to the poison pill. It
enhanced the bargaining power of a target board. The proxy
fight and the bylaw setting the meeting date, the original
issue in front of the chancery court-a traditional area of
stockholder-centric decision making-in the Supreme Court's
view was subsumed to the directors' duties in fighting an
inadequate tender offer. As the Supreme Court noted, Air

" See Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988)
(requiring a "compelling justification" for board actions the primary
purpose of which is to prevent a shareholder vote); see also supra note 12.

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Products could have negotiated with the board to agree on a
mutually beneficial price. Instead, Air Products chose to
wage a proxy contest to facilitate its tender offer. The proxy
contest and the bylaws were simply part of its takeover
strategy. Viewing them in this lens, the Court held the
bylaws were invalid.

I think this view was echoed by the Supreme Court a
couple of years before in the Computer Associates decision, in
which it invalidated bylaws which provided for election
expense reimbursement for successful insurgent
candidates."5 I believe the court viewed insurgent directors
as a threat when the proxy contest was motivated by petty
personal interests or interests that would promote interests
adverse to the corporation's.

Again, it is a different view. Instead of viewing that we
presume directors comply with their fiduciary duties and if
there is a breach we will provide a remedy afterward, the
Supreme Court, I believe, is now saying that directors have a
duty within their business judgment to evaluate incoming
directors and insurgent directors. I think under Blasius the
courts had not previously assumed that to be an area for
incumbent directors. It is interesting to note that the
Supreme Court, in its example, again used the word
"competitor" much like they did in Airgas, in saying that one
of the problems or circumstances that could arise was that
an insurgent slate could be affiliated with a competitor. If
they got on the board, they might communicate valuable and
proprietary strategic information to the competitor.

" See CA, Inc. v. AFSCME Emps. Pension Plan (Computer
Associates), 953 A.2d 227 (Del. 2008). In Computer Associates, shareholder
AFSCME proposed a bylaw that would have required the company to
reimburse shareholders for reasonable expenses incurred in conducting
successful proxy contests. Id. at 230. The Delaware Supreme Court held
the bylaw invalid because "the [blylaw mandates reimbursement of
election expenses in circumstances that a proper application of fiduciary
principles could preclude." Id. at 240.

637



Finally, the recent case of Yucaipa v. Barnes & Noble,4 6

was another pill case, but a pill case not in the context of
tender offer, but in the context of what, we argue, was a
corporate governance issue. The court found that electing
three out of nine board seats was a significant event. Once
the insurgents had won the election, they had an ability to
influence the rest of the board. There was a possible threat
that these new directors could influence company business
strategy, including proposing a possible M&A transaction.
Now the interesting part, at least to me, about Yucaipa was
that the pill in that case locked in an electoral advantage by
the thirty-plus-percent stockholder, such that in any proxy
contest-the ultimate relief valve to get rid of the pill-the
insurgents in that case would need about seventy-five
percent of the unaffiliated vote expected to vote at a meeting.
The court held that this was not preclusive; it said it was
obviously a lift, not a Herculean lift.

But I contrast this with Chancellor Chandler's opinion in
Airgas, in which he found that if you need eight-five percent
of the vote that would be preclusive. So you have a range
where eight-five percent is preclusive, not reasonably
attainable, seventy-five percent a Herculean lift, but still
attainable. No decisions in between, anything less than
eighty-five percent. I guess, in sum, it seems to me that the
Airgas decision by the Supreme Court, in the bylaws case,
and by the Chancellor, in the pill case, illustrate our
director-centric preference to decision-making by directors,
and that this view will be applied in cases touching on

46 See Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310 (Del.
Ch. 2010). In Yucaipa, the board of directors of Barnes & Noble adopted a
poison pill that would be triggered by the purchase of 20% of the
company's outstanding stock shortly after the Yucaipa Fund had acquired
an 18% interest. Yucaipa challenged the poison pill, in part on the
grounds that the trigger was set at a level lower than the 30% stake
already owned by the family of the company's founder. Id. at 312-13. The
chancery court upheld the poison pill, as a reasonable and proportionate
response to the Yucaipa takeover threat. See id. at 313 (noting that the
poison pill was to be subject to a shareholder vote within a year, "a feature
that further limits its inhibiting potency").

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corporate governance, even in some cases which formally we
may have viewed as being an area of stockholder primacy.