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Amicus Interruptus

The usually business-friendly Delaware Chancery Court may be fed up with corporate games, so directors beware.
Roy Harris, CFO Magazine
October 15, 2007

If boards are in bed with management, recent Delaware Chancery Court rulings may go some way toward pulling back the sheets. Recent decisions suggest that the judges' patience has worn thin when it comes to stockoption dating games, executive perks, director conflicts of interest, and self-serving negotiations with private-equity acquirers. The end result could well be increased liability for directors at companies where abuses are found.

It's not so much the abuses themselves that disturb the nation's premier business court, which is traditionally friendly to companies; it's the failure of boards to level with shareholders about what companies are doing.

Take August's In Re: Tyson Foods ruling by chancellor William B. Chandler III, in which he denied the company's motion to throw out shareholder claims regarding spring-loaded options. Tyson argued that directors and managers are protected by the business-judgment rule, intended to give companies latitude to make mistakes without exposing directors and managers to liability.

The rule applies as long as they act in good faith and in the interest of shareholders. But Chandler wrote in Tyson that the board-approved proxy statement displayed such an "uncanny parsimony with the truth" as to suggest directors were "dissembling to hide earlier subterfuge." The judge added that "the deceit involved suggests a scheme inherently beyond the bounds of business judgment."

Other cases involving infoUSA Inc. and the baseball- card company Topps also drew fire from the court regarding board/management relations. There was a time, says University of Delaware legal expert Charles Elson, when the judges "might have dismissed such cases out of hand," but now they are demonstrating "a greater suspicion of management than before."