Protection of Minority Shareholder Rights under Delaware Law: Reinforcing Shareholders as Residual Claimants and Maximizing Long-Term Share Value By Restricting Directorial Discretion

Sunday, January 1st, 1995 at 12:00 am by Kimble C. Cannon and Patrick J. Tangney
Kimble C. Cannon and Patrick J. Tangney, Protection of Minority Shareholder Rights under Delaware Law: Reinforcing Shareholders as Residual Claimants and Maximizing Long-Term Share Value By Restricting Directorial Discretion, 1995 Colum. Bus. L. Rev. 725

This Article argues that a conscious recognition of the goals underlying these three areas reveals an overriding concern with the rights of minority shareholders, which may be categorized as a nascent theory of minority rights. Conscious recognition of this theory will allow the Delaware judiciary to make the continuum of common law tests, judicial interpretation of the Code and the equitable supplements logically consistent as a group and sufficiently broad to achieve the underlying goal of protecting minority shareholder rights. Protecting minority rights accords further with the Delaware courts’ concern of maximizing long-term share value, which in turn informs the level of directorial discretion granted by Delaware law and informs the raging debate on directorial discretion seen both in the literature on corporate governance and the increasing activism of institutional investors. Conscious protection of minority rights will better serve this goal than the Court’s current strategy of resorting to equitable remedies.

The three sections of Part II of this Article review the continuum of tests developed under the common law, Code provisions relevant to minority shareholder rights in the merger context and the equitable remedies created as supplements to the Code. Part III examines how Technicolor, Tri-Star, Nixon and QVC affect these areas. This analysis covers the expansion of the procedural prong of the entire fairness test, the expansion of the substantive prong of the entire fairness test, further development of Revlon and the expansion of equitable supplements to the Code. It will become clear based on this discussion that Revlon and the entire fairness test should seek the same result: protection of minority shareholders. The lack of teleological reflection on the part of the Court, as seen in the discrepancies between the Bench Order in QVC and the final Order, [FN13] however, has caused the Court to fail to achieve the immediate, instrumentalist goal of protecting minority shareholders. Consequently, the Court has also failed to achieve the ultimate goal of maximizing long-term firm values, achieved by restricting directorial discretion when directors face conflicting incentives. [FN14] By restricting directorial discretion to protect minority shareholders, the continuum of tests under Delaware law, including such devices as Revlon and the entire fairness test, maximizes long-term firm value by shoring up all shareholders as residual claimants on the firm.

This Article, in addition to elucidating a teleology underlying the continuum of tests, will outline the implications for the structure of the continuum. While this Article does not attempt to resolve the ultimate structure, it does discuss some potential changes. A changed Revlon test, for instance, could contribute to achieving the underlying goal of maximizing long-term firm value by functioning as an ex ante version of the entire fairness test, acting as a prophylactic rule to protect constructive minorities and thereby maximizing firm value (and social wealth) by reaffirming that shareholders are residual claimants on firms.

The discussion in Part III will make evident that the current structure for the protection of minority shareholders is incomplete, and therefore, inadequate as a vehicle for achieving effective protection of minority shareholder rights while preserving the integrity of directorial decision-making. Accordingly, Part IV will outline the possible solutions to this inadequacy: further development of judicial doctrines and Code revision. The judicial doctrine that is the most obvious candidate for further development is the Revlon doctrine. This Article argues that both the effective scope and judicial administration of Revlon can be augmented without damage to directorial discretion by adopting per se triggers in appropriate circumstances. This Article proposes such a trigger for significant issuance of shares by a corporation subject to a bid. While the authors support both the development of judicial doctrine and Code revision, this Article recognizes that Code revision may function more effectively as a means to complete the structure protecting minority shareholders because it achieves automatically what otherwise would require extensive development of judicial doctrine. Consequently, the Article suggests some possible avenues for Code revision. However, given the practical difficulties attached to achieving Code revision, this Article focuses on the structural dynamic of minority protection and directorial discretion, attempting to bring the outlines of that fundamentally philosophical structure to light, rather than concentrating on possible Code revisions. The authors hope that the recognition of the underlying efficiency goals of Delaware law highlighted through the present discussion of minority rights will serve as a starting point for later projects seeking to mold the structure of Delaware jurisprudence to match those goals whether through development of judicial doctrine or through legislative action.

Author Information

Cannon (Law Clerk to the Honorable Norman C. Roettger, Chief Judge, United States District Court for the Southern District of Florida); Tangney (Fellow, Max-Planck-Institut fur Auslandisches und Internationales Privatrecht, Hamburg, Germany)