Bon Chance, Justice Chandler!

Craig Mellow, in this quarter's Board Member, has written a thoughtful piece on the retirement of Chief Judge William Chandler of the Delaware Court of Chancery. When I was an equity securities analyst, I read many of the cases coming out of the Delaware Court, since most of the companies I followed were Delaware corporations. Subsequently, as a public company Director, I read some of the rulings like the Disney case on the Michael Ovitz severance package, through a different lens.

I have to admit that I bristled at the Disney opinion, in which the board was adjudged to have followed a reasonable process, been given sufficient information, and to have exercised reasonable business judgment in awarding Ovitz a totally outlandish severance which raided the corporate coffers and diminished the corporation's reputation. However, reading through the decision, it followed the standards of the business judgment rule as I understood it. As much as I viscerally disagreed with the equity of the ruling, it wasn't at all unreasonable.

Some of the madcap polemics now about shareholder rights does strike me as unreasonable, though. In our fractious and uninformed style of public debate, these issues are being framed as either "anti" or "pro" something. Shareholders cannot and should not be protected from bad business decisions by judicial fiat. They are at the bottom of the capital structure by design, and they accept this arrangement by choosing to buy common shares. If things go well, they can enjoy outsize rewards. Should bondholders sue in the name of fairness? "What about us?" could they say? No, they chose an instrument that put their claims at the top, and for this seniorty of claim, our system measures out for them a fixed return.

If shareholders aren't paying attention, or have misjudged the risks or misjudged the character of management, well, that's why capital losses can be offset against capital gains.

Chancellor Chandler has the qualities one would hope to find were we to appear in front of a jurist: intellectual acuity, technical knowledge, an ability to listen, thoughtfulness, a sober demeanor, the ability to integrate information from a variety of sources into a logical framework, respect for legal continuity and tradition, and abiding humility in the face of the jurist's own power over those appearing at the bench. I haven't come across this combination often, but U.S. corporations and their shareholders should be grateful.