Delaware The Hon. Myron T. Steele: Delaware Courts, Corporate Governance And Corporate Counsel

Monday, November 1, 2004 - 01:00

The Editor interviews The Hon. Myron T. Steele, Chief Justice of the Supreme Court of Delaware.

Editor: What are some aspects of your background that have contributed to your appointment to lead a court that shapes corporate law in this country?

Steele: After having been admitted to practice in 1970, I spent eighteen years as a general litigator. During the latter ten of those years, I specialized in insurance defense and hospital law. So, my background as a lawyer was as a litigator. After that, I served as judge in our Superior Court, a court of general jurisdiction where I presided over cases of all kinds, ranging from commercial and general civil litigation to criminal cases, everything from routine burglary to first degree murder. After six years in the Superior Court, I went on the Court of Chancery. There, I developed the kind of fascination with corporate law that characterizes anyone who sits on that court. It is the only court in the land where judges are exposed on a continuing basis to so many leading corporate litigators from across the nation addressing major issues of corporate governance.

Editor: What accounts for the preeminence of Delaware courts in corporate law?

Steele: It all starts with the quality of members of the bar. Our judges are carefully selected from that group. We do not elect our judges. First, there is a rigorous self-selection process. Candidates don't frivolously apply. They recognize that they must undergo a thorough vetting, including an extensive background check. The self-selection aspect invites the most highly qualified lawyers in our State to translate their love of the law into a valued public service.

The candidates are subjected to a true merit selection process by a commission made up of people from all walks of life, from all political parties and from all parts of the State. The governor picks the final candidate from the three names to five names submitted to her by that commission after extensive interviews with those candidates. The Senate then holds an executive committee hearing that explores the background and qualifications of the candidate. The candidate is then exposed to an open public hearing before the full Senate. By that time, and before a final decision is made by the Senate, the press has gotten fully involved in the process. This in my judgement is one of the best systems you could possibly have for selecting people to sit on the bench.

The self-selection process that I described earlier is very important in attracting to our Court of Chancery the very finest corporate lawyers in our State. They see service on that court as a way they can contribute their expertise to best serve our corporate citizens, their shareholders and the public - they are the real aficionados of corporate law. Being on that court allows them to be innovative and to "show their stuff" to an extent and with an intensity of involvement in major issues that is not available in private practice. Of the five members of the Supreme Court three are former members of the Court of Chancery, one is a veteran of the Superior Court with an LLM in corporate law and one is a very distinguished former commercial lawyer.

Second, our General Assembly and our Governor recognize how important the court system is to the welfare of the State of Delaware. Our General Assembly is not about to let us fail by underfunding us. It recognizes that we must have the ability to attract and retain the best judges, that we must have the best physical facilities and use leading-edge technology and that our judges need exposure to the intellectual ferment that attending important law meetings around the country provides.

Not only do we strive to attract the finest judges to our trial and Supreme Courts, but we want corporate cases to be handled with utmost efficiency. Time is of the essence with all corporate matters considered by our Court of Chancery. Businesses need quick answers so they can move to the next step in their transactions. We understand that and try to meet their needs on both the Court of Chancery and our Superior Court, which handle major commercial litigation. That is one of the reasons the United States National Chamber of Commerce has rated our court system number one in every category for the last two years.

Editor: Delaware appears to be particularly attractive right now because it is looked upon as an enlightened court in its approach to significant matters like corporate governance and takeovers.

Steele: "Enlightened" means different things to different people. Some people would say a court is enlightened if it decides their way. This court has a reputation for being evenly balanced in its approach to the parties. It is not a captive of management, of institutional investors or the plaintiffs' bar that takes up the cause of shareholders. There is a reason for that, based in large part on history. The Court of Chancery traces its origins to the High Court of Chancery in England. It survived the Revolution intact as a court of equity. It is firmly rooted in the tradition of equitable relief. So, despite the fact it works from the General Corporation Law, a statutory code, it is infused with the idea that the court was born to do equity. So the reason why parties bring their cases to the Court of Chancery is that it is a court that approaches everything with a view toward a fair outcome. Although it is flexible in its approach, it follows some established doctrinal principles that it applies uniformly and consistently. Legal outcomes in our Court of Chancery are reasonably predictable within defined doctrines.

The Chancellor and Vice Chancellors strive to balance the interest of the parties, keeping some principal tenets in mind. The first of those is that the shareholder franchise must be protected. Shareholders must have all the information that a reasonably prudent shareholder would want to have before they cast their vote. We absolutely do not tolerate efforts by management and the board to undermine the free and fully informed exercise of the shareholder franchise. However, after directors have been fairly elected, the second tenet of Delaware law is that it is the board that runs the corporation and not the shareholders. The board should be free to exercise their reasonable business judgment about how best to enhance shareholder value. So long as the board has carried out its fiduciary duties and is disinterested and independent, Delaware may be less likely than other jurisdictions to overturn the Board's decisions. We apply the same principle in the governance of our State. Unlike many other states, the citizens of Delaware do not have recourse to the referendum or initiative. Once we elect the members of the General Assembly, their decisions cannot be reversed by our citizen initiatives, but their shortcomings will be addressed at the next election.

Editor: In the wake of widely reported corporate scandals, there has been renewed public focus on the role of directors. Do you see Delaware evolving in a way that takes account of the tremendous public concern about the standards used to judge the performance of directors?

Steele: It may be fair to say that there is now a higher level of scrutiny in areas such as executive compensation and a more demanding standard of what needs to be disclosed both before the shareholders vote on a particular issue and disclosed generally to the investing public. Whether general doctrinal principles will change is debatable because it generally takes case law to change the law here. Of course, the General Assembly can and will act quickly if the need arises. It should also be borne in mind that our enabling statutes give Delaware corporations great flexibility in shaping the way they will be governed.

It is also fair to say that none of the five judges on our Court of Chancery or the five judges on our Supreme Court ignores the newspapers and what is going on in the world. We certainly would not sit back and tolerate inappropriate conduct in a context brought to us in a given case where a stricter view of the actions of the officers or the board was required. The fact that the General Assembly has acted to give us personal jurisdiction over officers confirms that message.

Editor: What role do you see for in-house corporate counsel in the corporate governance process?

Steele: I think it is an even greater role than it has been in the past. This is a result of a combination of Sarbanes-Oxley and the reality that the courts will in a given case subject the actions of management and the board to greater scrutiny ex post . This places a heavier burden on corporate counsel to familiarize themselves with the duties of management, the fiduciary duties of the directors and the requirements of Sarbanes-Oxley. They should be sure that the decisions of the board are well documented, based upon all the pertinent facts reasonably available at the time and reflect thoughtful deliberation. Corporate counsel need to be alert to the fact that there are certain areas of the law that we are being urged to expand, such as "good faith," the alleged third leg of directors' fiduciary duty. Corporate counsel should be certain that the management and the board understand that their oversight responsibilities include taking a close look at the internal workings of the corporation to assure that all employees know what they should be doing to protect the shareholders' interest and are provided with the means to bring their concerns to the attention of the management and the board. The particulars will come on a case by case basis, but there is considerable concern now about the extent to which in oversight cases flesh is going to be put on the bones of the good faith doctrine, if there is such a thing. That puts a burden on corporate counsel to be up to date on the case law as well as to be current with what is going on at the SEC.

Editor: What are corporate counsel's obligations to the corporation and its board and shareholders?

Steele: There is no independent duty created under Delaware law governing the role of corporate counsel. However, our case law and the number of cases being brought reflect that the governance environment in which corporations operate is getting more complex every day. We try to be consistent, predictable and clear in our case law so corporate counsel can advise the board. Therefore, by virtue of his or her role, there is a greater learning burden on corporate counsel then there ever has been before. Corporate counsel has an obligation to understand our case law and its implications and be sure that the management and the board are aware of what needs to be done to protect the corporation, themselves and the shareholders.

Editor: Should the board be concerned if the general counsel lacks the staff and other tools required to do his or her job?

Steele: The board's duty of care requires that before making a decision they should have all the information reasonably required and then deliberate sufficiently to convince people that they not only have been objective, but also that they have taken the time to analyze all that information. It seems to me that it is part and parcel of the directors' responsibility to see that the general counsel is adequately staffed and has the tools required to do his or her job, including developing information about the corporations' compliance with law as well as other matters with respect to which the board needs legal advice.

I have not seen any cases in which a general counsel has been held personally liable for failing to alert the board to his or her need to have adequate staff or tools or where directors have been held liable for failure to provide such support. I would hope that the message to management and directors is that in the absence of case law in point, it is not possible to exclude the possibility that a board might in some future case be denied the protection of the business judgment rule if it had not provided in-house counsel with the staff and other tools necessary to uncover and address compliance failures or to give reasonable advice. It seems self-defeating for a board to deny in-house counsel the tools they need to uncover non-compliance or to give the board correct advice.

Editor: Are any major initiatives of particular interest to corporate counsel?

Steele: There are three major initiatives. One is the availability of mediation in the Court of Chancery. This meets the need of those who feel that a dispute can be resolved without a full scale legal assault. It represents another effort on our part to offer business an alternative way of resolving a legal hurdle to their desire to complete a transaction and to move their money as quickly as they can. Another initiative is the expansion of the jurisdiction of the Court of Chancery to include technology disputes as well as the mediation of those disputes. We are fortunate that Vice Chancellor Parsons was able to draw upon his background as one of Delaware's leading intellectual property lawyers to assist the Court of Chancery in providing this new service. In his interview on page 44 of this issue he describes the expanded jurisdiction of the Court of Chancery in more detail.

We are implementing a multi-million dollar case management system. It is a truly integrated system that gathers information from a multitude of sources and makes it available on each judge's computer. This will streamline the courts' access to information and allow judges instant access right at their desks or on the bench. For example, a judge sentencing a criminal defendant can call up on a computer screen the criminal defendant's record before determining the appropriate sentence.

Editor: What steps are being taken to maintain Delaware's preeminence?

Steele: To maintain our position, we must continue to meet the needs of a constituency that reads our opinions and uses them as guides to future actions. We must be sure that our opinions continue to be characterized by three words that are the hallmark of Delaware courts: predictability, consistency and clarity. Therefore, in this year's budget process, we identified our core functions and the essential tools required to carry out those functions. Like a business, we are trying to concentrate in all our trial courts on those functions we do best and to divest ourselves of any activities that could be better performed by others. We want to create circumstances where we can devote ourselves to our key functions and not waste time elsewhere. Once we identify what we are supposed to do and get the resources to get the job done, we need to have quality control to make sure the product we put out not only meets the highest standards with respect to consistency, predictability and clarity, but also is provided in a timely fashion - major business transactions require fast resolution of legal issues. Another component that we emphasized in the budget process was to make sure we carry out our key functions efficiently and effectively. Because we interface so frequently with business, we, like corporate law departments, do our best to operate in a businesslike fashion and our budget process reflects that.