Delaware - Law Firms A Corporate Governance Practitioner On The Delaware Courts

Monday, November 1, 2004 - 01:00
Stephen A. Radin

Editor: Mr. Radin, can you tell our readers something about your education and professional background?

Radin: I attended Cornell University and Columbia Law School, and I came to Weil Gotshal straight from Columbia. I've been with the firm for 21 years. Most of my practice involves litigating and counseling on corporate governance and shareholder and securities litigation. I also teach at continuing legal education programs and chair an American Bar Association committee on corporate governance.

Editor: In 1998 you co-authored a massive treatise entitled The Business Judgment Rule: Fiduciary Duties of Corporate Directors, and an only slightly less massive supplement in 2002. The text and supplement fill 3,500 pages. Tell us about developments since the last edition of your book.

Radin: The Sarbanes-Oxley Act of 2002 has given a federal overlay to this area of the law that did not exist previously. There are new SEC and securities exchange rules. In the state law arena, the traditional source of corporate governance law, it is not so much that the rules have changed. Rather, the traditional rules are being applied with a rigor that reflects the current expectations of directors - which are different from the expectations of directors five or ten years ago. Five years ago, many directors would not have thought twice about serving on an audit committee that met four times a year for two hours per meeting. That is not the case today.

Editor: Much of your practice has been before the courts of Delaware and, specifically, the Delaware Court of Chancery. Can you provide us with a practitioner's view of that court?

Radin: It is a great court. There is a Chancellor and four Vice Chancellors. Each is expert in corporate law.

I wish more of my practice was in Delaware. More cases involving Delaware law are litigated outside Delaware than in Delaware. There is, unfortunately, a perception among some plaintiffs' lawyers that they are better off outside Delaware. The truth is that shareholders with strong cases are better off in Delaware because Delaware judges have an excellent grasp of the fiduciary responsibilities of directors and are willing to make examples of directors who do not meet those responsibilities. That was true before Enron, WorldCom and Sarbanes-Oxley, and it is true today. A plaintiff with a good case should be happy to be in Delaware. It is the plaintiff with a weak case who needs to go elsewhere.

Weil Gotshal typically represents the defendant. When our client has a strong case, I like being in Delaware. When our client has a weak case, I am not disappointed if the plaintiff makes a mistake and sues outside Delaware.

Editor: How does the Delaware Court of Chancery compare to the specialized business courts of other jurisdictions?

Radin: Other jurisdictions have tried to create specialized business courts, but their expertise is not yet at the Delaware Court of Chancery's level. It obviously is difficult to replicate the decades of case law in Delaware, to say nothing of the expertise and experience of judges in Delaware who have been hearing corporate law cases for many years.

Editor: How about the federal courts?

Radin: Federal judges, unlike judges on the Delaware Court of Chancery, need to hear cases involving many areas of law. Corporate governance, in addition, is for the most part governed by state law, so only a relatively small number of corporate governance cases are heard in federal court.

Editor: Does appearing before the Court of Chancery require a special level of preparation?

Radin: Yes. The judges are on top of the issues. They are familiar with the cases being cited. They have written many of them. Their questions are precise and penetrating. Appearing before them requires a lot of preparation.

Editor: Delaware corporate law, both case law and statutory, is often the model for other jurisdictions. How universal is that?

Radin: Many state statutes and many courts outside of Delaware follow Delaware law closely. It is not universal, however. There are states where statutes and court decisions are more favorable to directors than Delaware, and there are states where the law is less favorable to directors than in Delaware. Some states vary by issue.

Editor: Is there an underlying philosophy to Delaware law?

Radin: Delaware corporate law adheres to the basic principle that directors run corporations, and that rational business judgements by directors who are disinterested, independent and informed and who act in good faith are not second-guessed by judges. The battleground in litigation typically is whether the directors who have made a challenged decision were disinterested, independent, informed and acting in good faith. Delaware law presumes so, and requires a shareholder challenging a board decision to overcome that presumption.

Editor: You have written extensively on the Walt Disney case and the conclusions drawn by the Delaware courts on the deliberations - or lack thereof - of the company's governing board concerning Michael Ovitz's huge severance package. Would you give us a summary of the case?

Radin: In the Disney case, Disney shareholders allege that the company's board approved an employment agreement with Michael Ovitz which called for $140 million in severance payments in the event of a non-fault termination. On a motion to dismiss, the court found that if the allegations were true, then the board's approval of this agreement would constitute a failure to exercise any business judgment whatsoever and a failure to make a good faith effort to fulfill board's fiduciary duties. According to the complaint, the board's compensation committee had the briefest of discussions on the general terms of the contract, without the benefit of a compensation expert, and material terms were negotiated and changed after the meeting ended.

Also according to the complaint, Michael Eisner granted Mr. Ovitz a no-fault termination one year after the contract was entered into, without board consultation, and the board never challenged this decision. Again, the court found that if the allegations were true, then the directors had breached their fiduciary duties by not acting in good faith.

The good faith point is crucial. Most certificates of incorporation, including Disney's, bar duty of care claims but not duty of loyalty or bad faith claims against directors. If the conduct of the Disney directors is viewed as a lack of due care, they are not liable. If it is determined to constitute a lack of good faith going beyond a breach of the duty of care, they face liability.

The court ruled on a motion to dismiss and was required to assume that plaintiffs' allegations were true. The case is now being tried. Plaintiffs now must prove their allegations.

Editor: What are the ramifications? Have the Delaware courts - and specifically the Court of Chancery - raised the bar?

Radin: There certainly is a perception that the bar has been raised and that personal liability is now a real risk. To say it is a particularly substantial risk is something of an exaggeration, however, assuming that directors do what they are supposed to do.

In the famous Caremark decision of the mid-1990s, which is often cited for a director's duty to monitor and exercise oversight responsibility, then-Chancellor Allen stated that proving a failure to monitor claim is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment. That statement in Caremark has been recited in several decisions since, both in and out of Delaware, including two Delaware cases granting motions to dismiss in 2003. The statement is probably as true today as it was when it was made almost ten years ago.

Editor: Are there any other recent decisions that people should be aware of?

Radin: An important recent decision is the Emerging Communications case decided in May of this year. The case involved a director who was a former investment banker with years of experience in the telecommunications industry, in which Emerging Communications operated. Following a trial, the court held that this particular director, because of his significant experience in finance and telecommunications, could not have reasonably relied upon a fairness opinion signed by the special committee's investment banking firm and should have known a $10 per share transaction price was not fair despite an investment banking firm opinion that the price was fair. The court found that a fair price was $38. That holding has generated considerable attention.

The facts found in this case by the court can be distinguished from the facts in most cases, so the decision may not have great precedential effect. The case involved a transaction with a controlling shareholder, which triggered heightened judicial scrutiny that does not apply in most cases. The court stated that the director in question lacked independence from the controlling shareholder because, the court found, he had a $200,000 retainer with the controlling shareholder and viewed the controlling shareholder as a source of additional future lucrative consulting fees. And the members of a special committee appointed to protect the interests of minority shareholders in that case communicated with each other through notes faxed by the controlling shareholders' secretary - a fact that obviously troubled the court.

Editor: What about the future? Corporate governance law has undergone very significant changes in recent years. Will things settle down for a time?

Radin: Barring new revelations of massive fraud, further changes will be incremental and evolutionary rather than revolutionary. There will be a lot of court rulings construing particular fact patterns that counselors will have to keep up with, and the provisions of Sarbanes-Oxley - many of which, such as the rules governing internal controls, are first going into effect now - will be the subject of litigation.

Editor: So you expect to remain quite busy?

Radin: Yes.

Editor: Are you able to make time for public service in your busy professional life?

Radin: I am a member of the board of directors of the New York Legal Assistance Group (called NYLAG, for short). NYLAG is a privately funded not-for-profit organization that provides civil litigation assistance in more than 35,000 cases a year to almost 50,000 people who need legal help but cannot afford it. I also have served on the board of trustees and the executive committee of the Stephen Wise Free Synagogue on the Upper West Side.

Editor: Is Weil Gotshal supportive of the time required by pro bono and public service projects such as these?

Radin: Extraordinarily supportive. Many of us are engaged in pro bono and public service efforts of this type. Every so often a list of organizations we serve is circulated, and it is incredible how many organizations we help.

Please email the interviewee at with questions about this interview.

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