The 2015 Delaware Supreme Court decision in Corwin expanded the cleansing effect of a shareholder vote, thereby endowing shareholder votes with greater normative weight than at any time in the modern period. Outside the context of a conflicted transaction involving a controlling shareholder, a fully informed uncoerced disinterested shareholder vote on a transaction is treated as a full defense against any claim for breach of fiduciary duty.  With the benefit of a distance of ten years, was Corwin’s interpretation of the cleansing effect of a shareholder vote on a merger justified?

We argue that this weight is misplaced from an internal corporate law perspective and represents a departure from the traditional treatment of shareholder ratification. A vote by a majority of target shareholders in favor of a transaction can be seen at most as evidence that shareholders believe that the value of their shares will be higher if the transaction takes place than if it does not take place as of the time of the vote—but such a vote does not indicate fairness and should not substitute for a fairness analysis.

As a more rational regime, we suggest holding separate votes on the transaction and cleansing.  This explicit private ordering bundling has several advantages over the present approach, which implicitly bundles the consummation of the transaction with the cleansing of fiduciary duty breaches by judicial fiat.

In particular, in a private ordering world, it is the board that must decide what questions to present for a shareholder vote.  This requires the board to decide whether to ask shareholders to ratify/cleanse any conduct and, if so, to delineate the scope of the conduct that is to be ratified/cleansed. In such a regime, we do not think that boards would always seek to accord the maximal scope to any vote on ratification/cleansing.  In other contexts, for example, liability waivers often exclude intentional misconduct or actions taken in bad faith and generally do not extend to third parties.

In a private ordering regime, the board must also decide how to structure those decisions: whether to have separate, uncoupled votes on cleansing or whether to have coupled votes where approval of ratification/cleansing is a condition for consummation of the transaction.  While two separate, uncoupled votes would represent the gold standard, a decision by the board to couple votes would raise the issue of whether the coupling constitutes coercion.  Coercion in a shareholder vote is generally present when a fiduciary creates undue pressure that distracts shareholders from the merits of the decision under consideration, induces stockholders to vote in favor for some reason other than the merits of that transaction, or conditions consummation of a beneficial transaction on shareholder approval of matters unrelated to the transaction.

Under these principles, target board members should generally not be permitted to condition a transaction on a vote cleansing themselves from damage claims for their own misconduct.  If the target board believes that the transaction is in the best interest of the company and its shareholders, it is its duty to present it to the shareholders. Making a beneficial transaction contingent on receiving a personal benefit in the form of avoidance of potential liability would be coercive and violate the board’s fiduciary duties.

For similar reasons, it should generally not be permitted to condition a transaction on ratification/cleansing of misconduct by aiders and abettors unaffiliated with the acquirer. The acquirer has no legitimate interest on conditioning the transaction on such ratification/cleansing. Rather, seeking such ratification/cleansing may reflect an attempt by the acquirer to reward the board’s advisors for betraying the target’s shareholders for the benefit of the acquirer.  And it would be unlikely for a board acting in good faith to condition a transaction on ratification/cleaning of misconduct committed by the company’s own advisors on its own accord.

By contrast, a board should generally be free to condition a transaction on exculpation of the acquirer and its affiliates as long as the misconduct at issue has been disclosed to the board. An acquirer may reasonably demand such an exculpatory vote as a pre-requisite for going forward with the deal.

Given the conceptual problems with imputing a cleansing effect to a vote on the transaction, what then explains the judicial confidence in the normative significance of shareholder votes? We suggest that judges decided Corwin in response to what was perceived to be excessive deal litigation.  Starting in 1985, deal process claims against target managers and directors, acquirers, and advisers became increasingly common; by 2013, 96% of completed deals were attacked. The overwhelming majority of these cases settled, often for additional “corrective” disclosures, a global release of all merger related claims, and the acquirer’s agreement not to challenge a “mootness” fee for the plaintiffs’ lawyers.  These settlements were beneficial to plaintiffs’ law firms, which received a fee for little work, and perhaps also to defendants, who could resolve all conceivable disputes by paying off these law firms, but not for shareholders.

Eventually, there was a multi-part backlash.  Trulia limited attorney to settlements that provided substantial benefit to shareholders—a benefit that disclosure-only settlements lacked; the Delaware legislature adopted a new statutory provision on forum selection bylaws; and Corwin changed the substantive law governing deal process claims.

From this perspective, Corwin’s reliance on stockholder “ratification” can be understood as a legal fiction invoked in order to make it easier to dismiss claims that were viewed, at the time, as having no legitimate value.  If that is the case, the question becomes whether it has been a useful legal fiction.

While it is impossible to resolve this question with confidence, we want to point out two sets of considerations that bear on it.  On the one hand, to result in cleansing, Corwin requires that the shareholder vote be fully informed and uncoerced.  In the hands of Delaware’s expert judiciary, these requirements can be employed to allow claims against target management and directors for directly or indirectly diverting merger proceeds to their own benefit or against unfaithful investment bankers for aiding and abetting.

On the other hand, whether Corwin cleansing was needed to stop the avalanche of lawsuits depends on the other ways to do so. In this regard, the most important doctrinal move against low-merit lawsuits was the elimination of disclosure-only settlements. Even before Corwin, Revlon “deal process” damage claims against target fiduciaries were very weak because Section 102(b)(7) exculpated gross negligence. The problem was that briefing and arguing a motion to dismiss was substantially more expensive than a disclosure-only settlement. Once, however, disclosure-only settlements were no longer an option, the cost of briefing and arguing a motion to dismiss a Revlon claim under Section 102(b)(7) or under Corwin became similar. Any overall analysis of the utility of the Corwin fiction requires a judgment on the benefits of Corwin, on the margin and taking into account these other measures, exceed its costs.