2000 THE NEXT CENTURY OF CORPORATE LAW programs, no sale of assets, no leveraged special dividends unless approved y stockholders. Nor, on the other hand, can bidders create certain techniques that, at least in part, are so much of the takeover seen here Now, one could well complain that the British have taken all the fun out of it, and it's certainly no coincidence that where in this country lawyers play such an important part in the M&A process, in Britain, the investment bankers are clearly playing the predominant role. When you have to run a business, whether deciding to make an acquisition or defending against one don't you think it would be nice to know quite clearly what the rules are head of time? Is a director really asking too much if he wants to know whether a particular action is or is not valid rather than if properly presented with the facts, a Delaware court or a Nevada court applying Delaware law, which it might or might not do depending on its interpretation of Nevada choice of law, at any rate, whether some court should uphold the action in question? But only if its own interpretation, for example, of footnote 63 of the Paramount case, is consistent with that of your outside counsel giving you advice. And, by the way, even if Vice-Chancellor Jacobs agrees with you, will Justice Veasey agree with you? MR GOLDMAN: Can we look at this a little bit here? First of all you're saying two things. You're saying today as a CEO, you know what the people in this room, we lawyers, are doing because you used to do it and you used to like it and now you're CEO and you don't like it. So that's one thing But the second thing is you're saying you like this English system because it's so clear and essentially the board of directors has no power to do much on behalf of the stockholders. I mean, I think the system that was put into place by our courts here is superior because it allows the directors to negotiate on behalf of the stockholders, rather than getting stampeded into a cash offer which is coercive MR GOLDSTONE: Mike, I'm not going to argue. It's not my point to argue whether the entire comprehensive system works better for shareholders here or in England. Although I will tell you that chief executives of English companies I have talked to do not complain that their shareholders are not well-served and that they're unable to negotiate higher What they do say is that their directors know clearly what they can do n't do. Let another example, then we'll back to it. Because what I'm getting at is, and I recognize in this group in particular, this would be controversial. But what I'm trying to get at is as you go and look at the Delaware law as it's going to develop over the next hundred years, and I make no predictions, but my own feeling is a need for more predictability, a need for more clarity among people who are engaging in business transactions is going to be paramount in their choice of law. And
2000] THE NEXT CENTURY OF CORPORATE LAW 11 programs, no sale of assets, no leveraged special dividends unless approved by stockholders. Nor, on the other hand, can bidders create certain techniques that, at least in part, are so much of the takeover seen here. Now, one could well complain that the British have taken all the fun out of it, and it's certainly no coincidence that where in this country lawyers play such an important part in the M&A process, in Britain, the investment bankers are clearly playing the predominant role. When you have to run a business, whether deciding to make an acquisition or defending against one, don't you think it would be nice to know quite clearly what the rules are ahead of time? Is a director really asking too much if he wants to know whether a particular action is or is not valid rather than if properly presented with the facts, a Delaware court or a Nevada court applying Delaware law, which it might or might not do depending on its interpretation of Nevada choice of law, at any rate, whether some court should uphold the action in question? But only if its own interpretation, for example, of footnote 63 of the Paramount case, is consistent with that of your outside counsel giving you advice. And, by the way, even if Vice-Chancellor Jacobs agrees with you, will Justice Veasey agree with you? MR. GOLDMAN: Can we look at this a little bit here? First of all, you're saying two things. You're saying today as a CEO, you know what the people in this room, we lawyers, are doing because you used to do it and you used to like it and now you're CEO and you don't like it. So that's one thing. But the second thing is you're saying you like this English system because it's so clear and essentially the board of directors has no power to do much on behalf of the stockholders. I mean, I think the system that was put into place by our courts here is superior because it allows the directors to negotiate on behalf of the stockholders, rather than getting stampeded into a cash offer which is coercive. MR. GOLDSTONE: Mike, I'm not going to argue. It's not my point to argue whether the entire comprehensive system works better for shareholders here or in England. Although I will tell you that chief executives of English companies I have talked to do not complain that their shareholders are not well-served and that they're unable to negotiate higher prices. What they do say is that their directors know clearly what they can do and what they can't do. Let me give you another example, then we'll come back to it. Because what I'm getting at is, and I recognize in this group in particular, this would be controversial. But what I'm trying to get at is as you go and look at the Delaware law as it's going to develop over the next hundred years, and I make no predictions, but my own feeling is a need for more predictability, a need for more clarity among people who are engaging in business transactions is going to be paramount in their choice of law. And
DELAWARE JOURNAL OF CORPORATE LAW ToL. 25 ou just suggested it before I got on when you talked about the new form of corporate transaction Let me go on and give you an example with RR Nabisco. Now,we didn 't have to worry about takeovers at RR Nabisco after the lbo because Sll billion, although it was 30 billion at one time of debt on our balance sheet is its own poison pill. So we didn't have that kind of problem But i want to talk about another issue. because in the takeover context, while the questions may not always be free from doubt and will likely depend on a myriad of facts, at least you know what the question is But in my own experience at RJR Nabisco, I found that there are times where directors of a Delaware company cannot even be sure what the question is much less the answer. And it,'s not clear sometimes whether a particular decision complies with one's fiduciary duties to stockholders or that a court will conclude it will And the one that I'm thinking about now is, that we had to deal with, is whether a fiduciary duty, a boards fiduciary duties, shift or may shift from ockholders to the corporation as a whole and its creditors if the company in the vicinity or the zone of insolvency MR. GOLDMAN: You're talking about MGM MR GOLDSTONE: Yes MR. GOLDMAN: Credit lyonnaise. MR GOLDSTONE: Yes. And what I'm talking about is, I'm thinking back and harkening to our own colloquy at our board, and as business people are listening to lawyers struggle through these concepts and in the end shaking their heads and going now, what was all this about and where was it supposed to take us? Because I guess at some times there are corporations who know when they're insolvent. But what is the zone of MR. GOLDMAN: It's when you're in the neighborhood MR GOLDSTONE: If you happen to be in the zone, do your duties shift or do you expect it to balance? And if you're in the zone, how do you know it? And is it a big zone or is it a little zone or is it like the strike zone? I mean, does it depend on who's calling balls and strikes? These are questions we had to struggle with for a long time. And I can tell you that our lawyers, as they discuss these matters, were as perplexed as our directors in listening to this, really, I don't think it was a very, in the end, very enlightening and clear process MR. GOLDMAN: Let me just respond to that, if I may, because I think that it is somewhat clear because what you're talking about is a footnote in this opinion where a remark was made about considering the total nterprise including creditors. And the idea was that you are to consider the total enterprise and not just the stockholders, and that's what the Chancellor
12 DELAWARE JOURNAL OF CORPORATE LAW [Vol. 25 you just suggested it before I got on when you talked about the new form of corporate transaction. Let me go on and give you an example with RJR Nabisco. Now, we didn't have to worry about takeovers at RJR Nabisco after the LBO because $11 billion, although it was 30 billion at one time, of debt on our balance sheet is its own poison pill. So we didn't have that kind of problem. But I want to talk about another issue, because in the takeover context, while the questions may not always be free from doubt and will likely depend on a myriad of facts, at least you know what the question is. But in my own experience at RJR Nabisco, I found that there are times where directors of a Delaware company cannot even be sure what the question is much less the answer. And it's not clear sometimes whether a particular decision complies with one's fiduciary duties to stockholders or that a court will conclude it will. And the one that I'm thinking about now is, that we had to deal with, is whether a fiduciary duty, a board's fiduciary duties, shift or may shift from stockholders to the corporation as a whole and its creditors if the company is in the vicinity or the zone of insolvency. MR. GOLDMAN: You're talking about MGM. MR. GOLDSTONE: Yes. MR. GOLDMAN: Credit Lyonnaise. MR. GOLDSTONE: Yes. And what I'm talking about is, I'm thinking back and harkening to our own colloquy at our board, and as business people are listening to lawyers struggle through these concepts and in the end shaking their heads and going now, what was all this about and where was it supposed to take us? Because I guess at some times there are corporations who know when they're insolvent. But what is the zone of insolvency? MR. GOLDMAN: It's when you're in the neighborhood. MR. GOLDSTONE: If you happen to be in the zone, do your duties shift or do you expect it to balance? And if you're in the zone, how do you know it? And is it a big zone or is it a little zone or is it like the strike zone? I mean, does it depend on who's calling balls and strikes? These are questions we had to struggle with for a long time. And I can tell you that our lawyers, as they discuss these matters, were as perplexed as our directors in listening to this, really, I don't think it was a very, in the end, very enlightening and clear process. MR. GOLDMAN: Let me just respond to that, if I may, because I think that it is somewhat clear because what you're talking about is a footnote in this opinion where a remark was made about considering the total enterprise including creditors. And the idea was that you are to consider the total enterprise and not just the stockholders, and that's what the Chancellor held
2000 THE NEXT CENTURY OF CORPORATE LAW But even in a regular case. in Paramount v. Time. when the Delaware Supreme Court was not talking about insolvency or the vicinity of insolvency, it ruled that the board is generally obligated to chart a course in the best interests of the corporate enterprise So I suggest to you the tests are quite the same and it's not so difficult And that it's only when you actually go into insolvency, and that's not like being in the neighborhood or the ballpark or the strike zone or anything else when you're insolvent, you're insolvent--then you've got some duty to the creditors. There is nothing in the MGM case that says that there is a duty to creditors or that creditors could enforce such a duty. MR. GOLDSTONE: Mike, I'm talking to you about my experience as a director of RJR Nabisco with some very fine Delaware and New York lawyers giving us advice on the subject again,just when I mentioned the footnote in Paramount, they sure focused on that footnote in that case and we had ages of discussions on these matters and what are contingent liabilities and our lawsuits against the tobacco company, how are they valued and does that put you in the zone, on and on and on and on and on And I guess where I come out on those things-and, again, this is not a black-and-white issue for me - but I just suggest to you that without any solutions, but that if predictability and clarity is going to be the goal of a globalizing business world in the twentieth century, I think that your corporate lawyers are going to have to consider whether to sacrifice some of the flexibility inherent in the legal system that you otherwise so cherish. MR. GOLDMAN: Well, you should have called me. I could have helped you. It would have been over by now. Jack. VICE-CHANCELLOR JACOBS: I would like briefly to respond to Steve's"big picture"because I think the point is valid. I doubt that anybody in this room would question the premise that we need predictability -clarity in our rules, so that business transactions may be conducted without significant fear that persons who decide to go forward with a transaction will become subject to the risk of liability The problem is that in the system that we, and when I say " we, "I mean we in the United States and in the common law world we cannot attain that level of perfection in all areas at all times. One reality of our judge-made common law system is that the law develops incrementally Your example, Chancellor Allens footnote in Credit Lyonnais regarding the zone of insolvency is a new development in the law, at least for us. New Paramount Communications, Inc v. Time Inc, 571 A 2d 1140(Del. 1989) 7Jedwab v MGM Grand Hotels, Inc, 509 A 2d 584(Del. Ch. 1986) Credit Lyonnais Bank Nederland, N.V. V. Pathe Communications Corp., No. 12, 150 (Del. Ch. Dec. 30, 1991), reprinted in 17 DEL. J CORP. L. 1099(1992)
2000] THE NEXT CENTURY OF CORPORATE LAW 13 6Paramount Communications, Inc. v. Time Inc., 571 A.2d 1140 (Del. 1989). 7 Jedwab v. MGM Grand Hotels, Inc., 509 A.2d 584 (Del. Ch. 1986). 8Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., No. 12,150 (Del. Ch. Dec. 30, 1991), reprinted in 17 DEL. J. CORP. L. 1099 (1992). But even in a regular case, in Paramount v. Time, 6 when the Delaware Supreme Court was not talking about insolvency or the vicinity of insolvency, it ruled that the board is generally obligated to chart a course in the best interests of the corporate enterprise. So I suggest to you the tests are quite the same and it's not so difficult. And that it's only when you actually go into insolvency, and that's not like being in the neighborhood or the ballpark or the strike zone or anything else -- when you're insolvent, you're insolvent -- then you've got some duty to the creditors. There is nothing in the MGM case7 that says that there is a duty to creditors or that creditors could enforce such a duty. MR. GOLDSTONE: Mike, I'm talking to you about my experience as a director of RJR Nabisco with some very fine Delaware and New York lawyers giving us advice on the subject. And, again, just when I mentioned the footnote in Paramount, they sure focused on that footnote in that case and we had ages of discussions on these matters and what are contingent liabilities and our lawsuits against the tobacco company, how are they valued and does that put you in the zone, on and on and on and on and on. And I guess where I come out on those things -- and, again, this is not a black-and-white issue for me -- but I just suggest to you that without any solutions, but that if predictability and clarity is going to be the goal of a globalizing business world in the twentieth century, I think that your corporate lawyers are going to have to consider whether to sacrifice some of the flexibility inherent in the legal system that you otherwise so cherish. MR. GOLDMAN: Well, you should have called me. I could have helped you. It would have been over by now. Jack. VICE-CHANCELLOR JACOBS: I would like briefly to respond to Steve's "big picture" because I think the point is valid. I doubt that anybody in this room would question the premise that we need predictability —clarity — in our rules, so that business transactions may be conducted without significant fear that persons who decide to go forward with a transaction will become subject to the risk of liability. The problem is that in the system that we, and when I say "we," I mean we in the United States and in the common law world, we cannot attain that level of perfection in all areas at all times. One reality of our judge-made common law system is that the law develops incrementally. Your example, Chancellor Allen's footnote in Credit Lyonnais8 regarding the zone of insolvency is a new development in the law, at least for us. New