William B. Chandler III

The process of choosing Chandler’s successor got underway in May when the Delaware Judicial Nominating Commission, chaired by Andre G. Bouchard, managing partner at Bouchard Margules & Friedlander, issued a public notice soliciting candidates. The court is required by the state constitution to be bipartisan, and all candidates must be Delaware residents. Following interviews, the JNC would refer any finalists to Gov. Jack Markell, who would then recommend one candidate to the state Senate for approval.

The 60-year-old Chandler, the subject of a cover story in NACD Directorship (December 2010/January 2011), notified the Delaware governor in April he planned to resign to seek opportunities in the private sector. His last day on the court was expected to be June 17.

Franklin, Hockaday to Co-Chair BRC on Lead Directors
A group of more than 20 corporate directors and governance thought leaders convened this spring to initiate the 2011 Report of the NACD Blue Ribbon Commission on the Lead Director. Hosted by the NACD, the commissioners will leverage their years of experience to develop recommendations that will define and clarify the role of the lead director in the boardroom. The commission is co-chaired by Barbara Hackman Franklin, former U.S. Secretary of Commerce, and currently a director for Aetna and the Dow Chemical Company and chairman of the board for NACD; and Irvine Hockaday, director for Ford Motor Company, Estée Lauder and Crown Media Holdings. Holly Gregory, corporate partner at Weil, Gotshal & Manges, will serve as governance counsel to the commission.

“As boards rise in accountability and visibility, the role of the lead director has become increasingly important. Lead directors play a critical role in ensuring independence of thought and oversight, and help build consensus in the decision-making process,” said Ken Daly, president and CEO of NACD. “The diversity and depth of experience represented on this year’s commission provide a unique opportunity to study leading practices for the lead director position.”

The new commissioners will meet once more in June as they continue to collaborate on their recommendations. The report is scheduled for release at the NACD Annual Board Leadership Conference on October 2-4 in Washington, D.C.

Delaware VC Cuts Plaintiff Lawyer Fee
What did shareholder plaintiffs lawyers achieve in their litigation over an abandoned tender offer for shares of Sauer-Danfoss? Not much, according to a recent decision by Delaware Vice Chancellor J. Travis Laster. In fact, Laster found that the plaintiffs lawyers did so little of value that he slashed their fee request by 95 percent and awarded them just $75,000 of the $790,000 they asked for, according to Morris James’ Delaware Business Litigation Report. Wrote Laster: “Plaintiffs never engaged in meaningful litigation activity.”

Heidrick Study Finds Number of Directorships in Decline
New director appointments decreased 22 percent from 2009 to 2010, according to the new Heidrick & Struggles Board Monitor Fortune 500 quarterly trend report, with 279 new directors at the studied companies in 2010, down from 356 in 2009. In addition, only one-third of these appointees had non-CEO or –CFO backgrounds, reflecting the growing post-Dodd-Frank disclosure requirements. “The ongoing economic uncertainty is causing companies to lean towards those with top-job experience when they do make an appointment,” said Bonnie Gwin, the leadership advisory firm’s vice chairman and head of the North American Board Practice. Average director age remained at 57, and female placements increased slightly from 17.9 percent to 19.3 percent.

Outside CEOs Cost More, Perform Worse
CEOs promoted from within are more cost-effective and outperform their external counterparts, according to a study conducted by The Kelley School of Business at Indiana University in conjunction with A.T. Kearney, that examined 36 companies that had promoted internally between 1988 and 2007. It compared their performance with other S&P 500 companies that had chosen external candidates. The study found that none of the external CEOs’ companies performed better than the 36 identified companies, and the external CEOs commanded salaries that were 65 percent higher than those of CEOs recruited from within.

Transocean Execs Donate Safety Bonuses to Victims’ Families
After sparking public ire by rewarding executives with safety bonuses, five Transocean senior executives will donate $250,000 collectively to a fund for the families of victims of last year’s Deepwater Horizon explosion in the Gulf of Mexico. Transocean had given safety bonuses because the company had reached two-thirds of its safety target, despite the deaths of 11 workers in the explosion and the subsequent massive oil spill. Overall, the five executives received about $900,000 in incentive bonuses; 25 percent of the bonus equation is determined by safety performance. Transocean reported that 2010 was its “best year in safety performance.”

Judge Orders Borders Bonus Plan Changes
Bankrupt bookseller Borders Group was ordered by U.S. Bankruptcy Judge Martin Glenn to revise its executive bonus plan after the lawyer representing unsecured creditors, Bruce Buechler, notified the judge that the plan rewarded executives for staying with the company though its bankruptcy. The plan had proposed giving the top five executives $4.9 million if unsecured creditors were paid at least $95 million, and a $1.8 million bonus if creditors received $73 million. Glenn instructed the retailer to include a provision that would apply if less than $73 million were returned to creditors.

Basel Establishes Criteria for Globally Essential Banks
The Basel Committee on Banking has established criteria designating banks that must maintain extra capital reserves because they are essential to global financial stability. The international regulatory committee did not compile a list of firms that these rules would affect. Banks will be evaluated based on “size, interconnectedness, substitutability, global activity and complexity,” said the committee’s secretary general, Stefan Walter, who noted that the Basel committee would monitor hedge funds, money market mutual funds and other securitization structures to help prevent another financial crisis.

Class Actions Lose, Arbitrators Win in Supreme Court Ruling
In a ruling expected to provide businesses with significant protections against class-action lawsuits, the Supreme Court ruled that state laws couldn’t override contract clauses that require customers to present complaints to private arbitrators individually. The case in question, AT&T Mobility v. Concepcion, fought over a $30.22 sales tax charge on phones that AT&T had advertised as “free.” The ruling makes arbitration clauses more attractive to companies in consumer contracts, and is expected to apply to employers in employee contracts under the Federal Arbitration Act of 2001.

Geronzi Resigns, Faces Ruling
Cesare Geronzi resigned as chairman of Italian insurer Assicurazioni Generali after the board threatened a vote of no confidence. He was awarded a payoff of 16.6 million euros ($24.3 million) upon leaving Europe’s No.3 insurer, according to Reuters. The controversial Italian financier has in succession chaired three of the country’s most important financial institutions: Capitalia; Mediobanca, which is Generali’s top shareholder; and Generali itself. Separately, a Rome court is due to rule on whether Geronzi contributed to the 2003 bankruptcy of Italian food group Cirio. Prosecutors are seeking an eight-year sentence for Geronzi, who has denied any wrongdoing.

Wall Street Banker Pay Falling
An unnamed Wall Street paymaster told The Wall Street Journal recently that the median banker pretax salary is currently $1.6 million, down from $2.2 million before the financial crisis hit. The pre-crisis pay was approximately 60 percent cash payments, with bankers taking home about $700,000 a year after taxes. Now, however, more bankers receive deferred compensation rewards, which brings their median aftertax take-home pay to about $380,000.

Director Shortage
Despite median director compensation increasing from $45,000 in 2001 to $119,500 in 2010, Canadian companies are having increasing difficulty finding directors to fill their boards. Spencer Stuart found “a definite increase in the number of first-timers joining boards,” said Andrew MacDougall, president of Spencer Stuart Canada. Over the past three years, almost 25 percent of all directors appointed were joining their first board. One-third of the newly appointed directors in 2010 were from the United States—the highest proportion since Spencer Stuart began tracking Canadian directorship trends. In addition, female board members increased to 20 percent in 2010, from 13 percent in 2009.

Top Paid CEOs in 2010
1. Philippe P. Dauman – Viacom
2. Lawrence J. Ellison – Oracle
3. Leslie Moonves – CBS
4. Martin E. Franklin – Jarden
5. Michael White – DirecTV
6. John F. Lundgren – Stanley Black & Decker
7. Richard C. Adkerson – Freeport-McMoRan Copper & Gold
8. Robert A. Iger – Disney
9. Donald J. Stebbins – Visteon
10. Jeffrey L. Bewkes – Time Warner
11. Alan Mulally – Ford Motor
12. Brian L. Roberts – Comcast
13. John H. Hammergren – McKesson
14. Samuel J. Palmisano – IBM
15. David M. Cote – Honeywell
16. Laurence D. Fink – BlackRock
17. James Dimon – JPMorgan Chase
18. David N. Farr – Emerson Electric
19. Thomas M. Ryan – CVS Caremark
20. Rex W. Tillerson – ExxonMobil
Source: The Wall Street Journal Survey of CEO Compensation

Corporate Reputations
Best:
1. Google
2. Johnson & Johnson
3. 3M Company
4. Berkshire Hathaway
5. Apple
6. Intel Corporation
7. Kraft Foods
8. Amazon.com
9. General Mills
10. The Walt Disney Company

Worst:
11. AIG
12. BP
13. Goldman Sachs
14. Citigroup
15. Chrysler
16. Bank of America
17. General Motors
18. ExxonMobil
19. JPMorgan Chase
20. Delta Airlines
Source: 2011 Harris Interactive

Leading the list of contenders identified by Delaware insiders to succeed Chandler is Vice Chancellor Leo E. Strine Jr., the court’s most senior judge. Prior to being appointed to the court in 1998, Strine served as counsel to former Delaware Gov. Thomas R. Carper, now one of Delaware’s two senators, and prior to that as a litigator for Skadden Arps.

Other possible candidates identified in media reports this week include Sam Glasscock III, chancery court master; Delaware Superior Court Judge Mary M. Johnston; and Kevin F. Brady, partner at Connolly Bove Lodge & Hutz in Wilmington, Del.

The process of choosing Chandler’s successor got underway on Tuesday when the Delaware Judicial Nominating Commission (JNC), chaired by Andre G. Bouchard, managing partner at Bouchard Margules & Friedlander, issued a public notice soliciting candidates. The court is required by the state constitution to be bipartisan and all candidates must be Delaware residents. Candidates must submit a completed questionnaire no later than noon, May 13. They would be interviewed by the JNC which refers all finalists to Gov. Markell who then recommends one candidate to the state Senate for approval.

Writing on his blog, Delaware Corporate and Commercial Litigation Blog, Francis X. Pileggi notes that “the history of judicial selection supports the conventional wisdom that any vacancy (or vacancies) on the Delaware Court of Chancery will be filled promptly by some person who will be selected by the JNC, appointed by the Governor, confirmed by the Delaware Senate and installed on the court by the end of the regular legislative session on June 30.”

The 60-year-old Chandler notified the Delaware governor he plans to retire to seek opportunities in the private sector.  His last day on the court will be June 17.

Chancellor William B. Chandler III

“I want to pursue new and exciting opportunities and challenges that are available to me,” said Chandler. “I also believe now is the time for me to seek greater financial rewards in the interest of my family.”

In the cover story in the December/January issue of NACD Directorship, Chandler spoke of his legacy as chancellor. “To me, the most important case I have worked on is the one I’m working on right now. Whether it’s Disney or the dissolution of a failed start-up company—all of my cases are equally important. Some of the smaller disputes involving micro-cap companies frequently generate some of the most important principles and ideas in our jurisprudence. I will have to leave it to others to assess which cases define my legacy.”

Chandler’s resignation—described as a surprise by the Delaware News-Journal, which broke the story—creates a vacancy that will be filled.

According to the Delaware News-Journal, Chandler is being aggressively wooed by several top-tier international law firms. Among the contenders to succeed Chandler is Vice Chancellor Leo W.  Strine Jr., according to Charles Elson. The director of the University of Delaware’s Weinberg Center for Corporate Governance told Bloomberg that Strine, appointed in 1998, is now the court’s most senior judge. Any successor must be nominated by Markell, a Democrat, and approved by state legislators. Strine served as counsel to former Delaware Gov. Thomas R. Carper, who is now one of Delaware’s two senators.

Stephen P. Lamb was vice chancellor in the Delaware Court of Chancery from 1997 to 2009 and is now a partner in the corporate and litigation departments at Paul Weiss.

Chancellor Chandler is also a careful jurist and a vigilant guardian of Delaware’s worldwide renown as the leading jurisdiction for the resolution of corporate and commercial disputes. Chancellor Chandler has consistently exercised his judicial powers to maintain Delaware corporation law as the nation’s most important source of law for investors and businesspeople alike. He has done this by having a clear vision of the proper scope of Delaware law and by reacting intelligently and forcefully to the growing demands in some quarters for a broader application of national rules to govern U.S. public corporations. Chancellor Chandler (acting with other members of the Court and the bar) has led the way in explaining the proper relationship between federal laws and federal regulatory jurisdiction and in resisting further unwarranted incursions by federal lawmakers or regulators into the province of state law.

Scrupulously enforcing fundamental values derived from the twin fiduciary duties of care and loyalty, Delaware corporation law favors private ordering over mandatory regulation of internal corporate affairs. Chancellor Chandler and the other members of the Court of Chancery recognize the vital part played by the Delaware corporation law—with its focus on fundamental principles of good corporate governance rather than prescriptive rules and regulations—in the economic success of the United States. There is nowhere better to see this principle at work than in Chancellor Chandler’s opinions emphasizing the importance of the business judgment rule and the crucial role it plays in encouraging risk taking in the management of for- profit corporations. In the wake of the recent financial crisis, it would have been an easy matter to lay the blame for the enormous losses suffered by major financial institutions at the feet of boards of directors. After all, those directors clearly did not adequately foresee or appreciate the risks inherent in the corporation’s operations. Instead, Chancellor Chandler has taken pains—and no doubt flak from some quarters—to remind us all that the decisions taken by boards of directors to engage in lines of business, especially those that result in large losses, remain business judgments even when they turn out badly. Courts applying Delaware law will never examine those decisions with hindsight bias or second-guess them. The business judgment rule, including its fundamental presumption that directors act in good faith and after adequate investigation, remains precisely to promote the risk taking that is necessary to the success of all for-profit enterprises.

As I know better than most, Chancellor Chandler works tirelessly to meet the many demands of his judicial and administrative responsibilities. All of us in Delaware and in the broader community of investors and business leaders across the nation owe him a substantial debt of gratitude for his service.

William M. Lafferty, a practicing defense attorney in Delaware, stressed the importance of Delaware courts, despite the increase of lawsuits in other jurisdictions. Lafferty said that in Delaware, “you will get a fair opportunity to be heard” in a “non-jury trial” and in a “prompt and timely manner.” He also pointed out that boards can ensure that shareholder lawsuits be filed in Delaware with the adoption of a charter or bylaw provision. However, he said he feared that with a notable increase in adoption of such provisions, the federal government might come in and interject itself into state law matters.

From the perspective of a shareholders’ attorney and a Delaware lawyer, Jessica Zeldin countered that the use of a charter provision for this purpose may result in an unintended backlash from shareholders, as a charter provision requires a shareholder vote in addition to a board vote. Zeldin also highlighted M&A cases and situations where the board and management have divergent interests from shareholders. This led to a discussion about Revlon duties and disclosure and ensuring that the proxy statement includes all required metrics. Otherwise, companies will be “on the hook” for the missing metrics and this is where litigation centered on disclosure violations will be triggered.

In the course of the question and answer period, the question of mediation and arbitration was brought up. Justice Chandler pointed out that the Delaware Court of Chancery is the only trial court in America where the judges themselves do the mediating and arbitrating.

In a wide-ranging interview with NACD Directorship’s Jeff Cunningham, America’s leading corporate jurist, Delaware Chancellor William B. Chandler III, explains his legal philosophy, concerns about liability, where he sees the line drawn between the federal branch and the Delaware Court, the impact of the Disney case on director behavior, the powerful new mediation alternative and more. Loosely translated from Old French, “chandler” refers to “one who lights the way” and he does so here for both the role his Court plays on behalf of directors and investors and how it is enhancing the enviable and unique 200-year-old tradition of Delaware corporate law.

Directors get sued. Why does the venue matter?
Well, of course no one wants to be sued, but unfortunately those are facts of business life. But if directors find themselves in the Court of Chancery, at least they are assured they will get a judge who specializes in corporate law and who will give a reasoned decision in a timely way, and the director will know exactly the basis for the decision. Parties to litigation in Delaware are assured of totally impartial judges who have no reason to favor one side or the other. Delaware judges are strongly incentivized not to give home field advantage to any party, and instead to assure all litigants not only an expert’s perspective but complete objectivity and impartiality—that should make a director or any litigant feel a little better about going into this environment.

Is this unique among American courts?
The reason Delaware is viewed as the center of the universe for corporate law is that a defendant (or a plaintiff) can be guaranteed—no matter which judge you get—to have a jurist acutely familiar with this body of law; a judge who works with corporate law issues day in and day out, seven days a week. That’s the uniqueness of the Court of Chancery. Of course, litigants also have an automatic right of appeal to an equally expert Supreme Court, with jurists equally versed in our corporate law and equally poised to offer prompt decisions.

Are there practical reasons as well?
Many, but perhaps most importantly, the Delaware Court of Chancery’s culture ensures that we are sensitive to the speed of business in terms of timely judicial procedures designed to assure decisions in real time. My Court is very sensitive to the importance of deciding matters in an expedited manner to assure the business world that litigation will not cause business decisions to become moot due to delay.

Is precedent under Delaware law applicable in other venues?
Yes it is. If you are a Delaware company, no matter where you are sued, whether Texas, California, New York or Virginia, and the case involves an issue that we call the internal affairs of the corporation—the relationship between directors, management and stockholders—the Delaware corporate law will apply. The courts in all American jurisdictions follow and apply what is known as the internal affairs doctrine, which means that the law of the state of incorporation applies to internal corporate governance disputes, no matter the venue.

ADDITIONAL STORIES ABOUT WILLIAM B. CHANDLER III AND THE DELAWARE COURT OF CHANCERY
A Tribute to Chancellor Chandler by Stephen P. Lamb
Why Directors Need Delaware by Charles Elson

For example, I recently spoke by telephone with a judge in Virginia who has a case involving a Delaware corporation and a former chief executive officer of the company who lives in Virginia; and there’s a parallel case here in Delaware involving the same parties. It’s a fight about compensation. In the interest of judicial economy and to save the parties’ costs, we agreed that the judge in Virginia would go forward with the case because his case was more advanced, but also because the Virginia judge is very familiar with Delaware law. Interestingly, he told me that he was familiar with my Disney decision and he will be applying that decision to this case. So, whether you are sued in Delaware or some other venue, the likelihood is that the Delaware corporation law will be applied to the dispute.

What cases will define your legacy as Chancellor?
To me, the most important case I have worked on is the one I’m working on right now. Whether it’s Disney or the dissolution of a failed start-up company—all of my cases are equally important. Some of the smaller disputes involving micro-cap companies frequently generate some of the most important principles and ideas in our jurisprudence. I will have to leave it to others to assess which cases define my legacy.

Delaware Chancery Court is a uniquely American court. How global is your reach?
My colleagues and I travel abroad occasionally to give lectures to law classes and to conferences. The work of my Court is known and admired around the globe. Indeed, many times my colleagues and I are asked to speak to judges in other countries about the procedures and substance of our corporate law. There is keen international interest in the work of my Court and our state’s judicial system in general.

Let’s get into specifics. What makes litigation different in Delaware?
I think some of the important factors include the specialist approach, the specialized court with a limited jurisdiction and the historical tradition of deciding disputes, one at a time, with a judge writing an opinion that explains in detail the rationale for the decision. As a consequence, the judge feels a special responsibility or obligation to apply venerable equitable principles, and especially fiduciary duty concepts, to often-complex factual scenarios in a way that results in a fair and just solution to the problem. In this manner, an equity judge “owns” the decision because he is personally responsible for the result, rather than a jury, for example, which is not accountable and not really personally responsible for the decision in the same way a judge in a court of equity is.

In today’s second plenary session, the Honorable William B. Chandler III from the Delaware Court of Chancery “held court” with William M. Lafferty, defense attorney with Morris, Nichols, Arsht & Tunnell LLP; Honorable Norman Veasey, senior partner with Weil, Gotshal & Manges LLP; and Jessica Zeldin, shareholder attorney, with Rosenthal, Monhait & Goddess, PA on “Emerging Legal Trends.”

The general consensus among panelists is that the Delaware Law remains unchanged by the Dodd-Frank Act. Yes, there are now more compliance and disclosure regulations, but the judicial standards will not be affected. That said, directors should expect an increase in derivative litigation.

Lafferty, a practicing defense attorney in Delaware, stressed the importance of Delaware courts, despite the increase of lawsuits in other jurisdictions. Lafferty said that in Delaware, “you will get a fair opportunity to be heard” in a “non-jury trial” and in a “prompt and timely manner.”

Lafferty also pointed out that boards can ensure that shareholder lawsuits be filed in Delaware with the adoption of a charter or bylaw provision. Jessica Zeldin, who jestingly said she was “the enemy in the room” as a shareholders’ attorney, countered that the use of a charter provision for this purpose may have an unintended backlash from shareholders.

Zeldin offered what she labeled the “special sauce” of how plaintiff attorneys go after boards.  She highlighted M&A cases and situations where board and management have divergent interests from shareholders.

This led to a discussion about disclosure and ensuring that the proxy statement includes all required metrics. Otherwise, companies will be “on the hook” for the missing metrics thus triggering Revlon and other disclosure violations.

The panelists provided a wealth of information that all directors should hear.  For those unable to attend the conference, all plenary sessions are available for viewing in our Conference-to-Go.