Professor Kershaw's work on the business judgment rule discussed by the Delaware Chancery Court


29 August 2023

david-kershaw-sq-2022

IBEW Local Union DPCT v Godaddy, Inc (24 August, 2023)

In IBEW Local Union DPCT v Godaddy, Inc, the Delaware Chancery Court recently discussed and relied upon Professor Kershaw’s The Foundations of Anglo-American Corporate Fiduciary Law (CUP, 2018).

In Part I of the book Professor Kershaw shows how Delaware’s famous “business judgment rule” is rooted in the idea that delegated power must be exercised honestly to further the purposes for which it was delegated; an idea forged in 18th and 19th Century English and American private and public law. In applying this subjective standard courts looked to the availability of rational or plausible reasons why a decision could further the corporate interest—as a proxy for good faith—and developed a range of labels for decisions that were so egregious—so devoid of reason—that they could not be made sense of as good faith action furthering the corporate interest and were, therefore, in “bad faith”. This conceptual entourage developed in applying the good faith standard evolved into the business judgment rule, which by the 1970s provided simply that courts would only apply rationality review to the quality of the decision. However, as this part of the book argues, the re-presentation of the good faith standard in the leading case of Aronson v Lewis (473 A.2d 805) in 1984 separated the good faith standard from the rational reasons and the egregious markers for bad faith which served its application, leaving good faith detached from its roots and “de-historized and empty” (at 100). It thereby became something that was either (and commonly) ignored altogether or treated as a “new and unexplored” concept—a “legal receptacle that commentators and judges could fill to address the governance concerns of modern corporations” (at 100).

In IBEW Local Union DPCT v Godaddy, Vice Chancellor Laster considered an application to dismiss a derivative action claim because there had been no demand and, it was argued, demand was not futile because a majority of Godaddy’s board, and the committee of directors it established, was capable of exercising independent judgment on whether the litigation against the directors should go ahead.  The alleged breach of duty related to the purchase by Godaddy of a potential revenue stream for shareholders in the company arising from the probable use by the company (at some point in the future) of tax assets. The company purchased this revenue stream from the shareholders for $850 million whilst at the same time only provisioning for future payments in its accounts for an amount of $175 million. The litigants alleged that, given the significant value discrepancy between price and provision, entering into this transaction was in bad faith and in breach of duty.

In a detailed consideration of the good faith standard and the business judgment rule, in IBEW Vice Chancellor Laster affirms Professor Kershaw’s position that good faith in corporate law is rooted in the regulation of business judgment (IBEW at 41-43) and that “good faith is not simply an aspect of the business judgment rule, it was the whole of the rule” (IBEW at 43—quoting Kershaw that “traditionally a rational business purpose was a proxy for demonstrating good faith, and the good faith requirement was the business judgement rule” (at 97)).  VC Laster’s judgment then proceeds to consider how Aronson’s widely adopted presentation of the rule disconnects good faith from rationality review (or, the flip side of the coin, abuse of discretion):

As Professor Kershaw explains, that phrasing could be read to suggest that “good faith” means something separate and distinct from “acting on an informed basis”, “having an honest belief that the action was taken in the best interests of the corporation”, or “taking action that was not “an abuse of discretion” (IBEW at 43).

He observes that the effect of this presentation renders good faith “a mystery” (IBEW, at 44) and merely a “residual category, devoid of content and with no work to do” (IBEW, at 44).

This understanding opens a door to a new understanding of Aronson, not as a rigid structure whose boxes can be ticked to avoid judicial oversight, but as a case which merely provides clear and obvious examples of circumstances where deference is not possible (such as where the directors are directly conflicted). In doing so VC Laster offers the possibility of re-placing good faith back into the heart of the business judgment enquiry, along with the flexibility this offers the judiciary to be more or less demanding of reasons for action where the shadow of indirect conflict lengthens or shortens.  

After IBEW the structure of Aronson remains in place; too much of modern Delaware Law has been built upon it for one judgment to do otherwise.  But in reconnecting the business judgment rule to its historical precursors Vice Chanceller Laster has allowed us to see that Aronson led Delaware law astray.   

The judgment in IBEW Local Union DPCT v Godaddy, Inc (August 24, 2023) is available here.

Information about David Kershaw, The Foundations of Anglo-American Corporate Fiduciary Law (CUP, 2018) is available here.