In the latest of our conversations with leading thinkers in compliance and governance, we talk to William Chandler, recently retired chancellor of the Delaware Court of Chancery. Widely respected as one of the nation's most influential judicial voices on corporate law and governance, Chandler stepped down from the bench in June to join the law firm of Wilson Sonsini.
During his time on the bench, Chandler issued more than a 1,000 opinions and has presided over some of the most contentious and high-profile corporate law disputes in the country, including the Walt Disney case over Michael Ovitz's $140 million severance package and the Citigroup case in which the court dismissed fiduciary duty claims against the company's board arising from sub-prime losses. The Air Product vs. Airgas disputes also got a lot of recognition when the court reaffirmed the vitality of poison pills as a defense against hostile takeovers.
Compliance Week caught up with Chandler to discuss his time on the bench, the inner workings of the Chancery Court, and some of the recent developments in corporate governance.
What was the most significant case you handled during your time on the Chancery Court?
All of the cases were important to me, and all of them were significant. Academics and some practitioners point to the Disney case as the most significant. I agree that it was an important case, but there have been many others.
Cases such as the Hewlett-Packard-Compaq merger, and the Dow Chemical-Rohm and Haas merger case, were also very important. Many also thought that Airgas-Air Products was one of the most defining cases during my tenure.
You can pick based on your own subjective views about what's important. But all of them to me were significant and important, and I worked on every one of them as if they were the most important case.
How have the types of business cases presented before the Court changed during your time on the bench? What changes do you foresee in the next few years?
When I first came on the court in 1989, the cases were at the edge of the takeover era. There were lots of cases and lots of preliminary injunction hearings involving proposed takeovers, some of them hostile and some of them friendly. That was the bread and butter of the Court of Chancery in the late 1980s and early 1990s. Those cases tapered off because, frankly, economic conditions changed and the era of junk bonds died out. You do still see some takeover cases—Airgas/Air Products, for example.
We increasingly are involved in resolving disputes between companies involving contractual agreements. For example, the United Reynolds case involved a contract dispute between United Reynolds and Cerberus Capital Management, who wanted to get out of the deal that they had entered into to purchase United Reynolds.
It was very important to those companies to get that case resolved and have it resolved quickly. And I think they find the Court of Chancery to be a forum where they can get a very speedy and prompt decision in a matter of days, even weeks.
ABOUT WILLIAM CHANDLER
William Chandler,Partner, William Sonsini Goodrich & Rosati
Chancellor William B. Chandler III is a partner at Wilson Sonsini Goodrich & Rosati, where he advises both public and private clients in connection with corporate governance matters, special committee assignments, internal investigations, and merger and acquisition transactions. He currently serves on the firm's Policy Committee.
Chancellor Chandler joined the firm from the Delaware Court of Chancery, the nation's leading court for corporate law cases, particularly those relating to change of control and other corporate law issues. He was appointed Chancellor in 1997, after serving as Vice Chancellor since 1989. Widely regarded as one of the country's most influential judges on issues of corporate law and governance, he issued more than a thousand opinions and presided over some of the most contentious and high-profile corporate law disputes in the country, including those involving The Walt Disney Company, Yahoo, Microsoft, Hewlett-Packard, eBay, Citigroup, Dow Chemical, and, most recently, the Air Products/Airgas dispute. Many of his rulings have become required reading for M&A and business law practitioners, and he has written and lectured widely on numerous critical corporate law issues.
Prior to his appointment to the Court of Chancery, Chancellor Chandler served as resident judge of the Delaware Superior Court from 1985 to 1989. He previously was an associate with Morris, Nichols, Arsht & Tunnell and served as legal counsel to Pete duPont, the former governor of Delaware.
Earlier in his career, Chancellor Chandler taught commercial law, legislative process, and remedies at the University of Alabama School of Law. He also has taught law courses at the Delaware Law School of Widener University, Washington University School of Law, Seattle University School of Law, Ohio State University, University of Georgia, Vanderbilt University, and the University of Nevada, Las Vegas.
Chancellor Chandler is a member of the American Law Institute and a trustee of the Yale Center for Corporate Governance, the University of Delaware, and the Weinberg Center for Corporate Governance.
So those are the kinds of transactions I think increasingly that the courts are being called on to decide. They have complex contractual language that they need to have interpreted in a reasonable but yet sophisticated way. There is going to be complete objectivity.
I think those are the three reasons companies increasingly look to the Court of Chancery to resolve these disputes: speed, reasonability, and fairness.
To that point, critics say the Delaware Court system is too business friendly at times, at the expense of shareholders. What do you make of that characterization?
I always find such claims very frustrating. I'm frustrated by them because they just aren't accurate. I've served on the Chancery Court for more than 22 years, and I never went into a case thinking I had to rule for management. I went into every case trying to figure out the right answer that was fair, equitable, and just.
So when people would say the Court of Chancery is management friendly and rules in favor of management too much, I just don't understand what they're talking about. I've ruled for shareholders, too. Of course, when I did, I got criticized by the management side. No matter what I do, I'm going to end up getting criticized.
That's the life of a judge. No matter how you rule, somebody is losing, and they're going to be upset, and they're going to accuse you of having favored the other side. I've grown to be more thick-skinned about it, but it's still just frustrating.
What do you think of other states following Delaware's lead in establishing courts specifically to adjudicate business disputes?
It's very difficult to replicate what Delaware does and what we have in the way of this specialized court. Bear in mind, the Court of Chancery was not created especially to handle business disputes. It's been in existence for 217 years. In 1792 it was created not as a business court, but as a separate court of equity.
States that are contemplating creating specialized business courts, frankly, have inherent difficulties because they're going to be taking resources away from already overburdened court systems to create a specialized court, and some people reasonably wonder why those cases should get better or faster treatment than other pending cases. So there is a lot of political and policy disputes about the wisdom of creating specialized business courts, when you're taking resources away from existing courts by doing that. The Chancery Court doesn't have that problem because it's been in existence for more than 200 years and has always been funded separately.
Some states already have created special business courts, such as North Carolina, New York, California, Florida, Maryland, and a few others. What they are really designed to do is not compete with the Court of Chancery and Delaware, but to provide businesses in those states with a fast-track litigation process for ordinary commercial disputes and contract disputes. If they're designed for that purpose, I don't think there's anything wrong with that, and I would support them.
Are there any corporate governance reforms that you think go too far? Are there any you would like to see adopted, either through rulemaking or just through broad adoption by corporate boards?
I would say, generally, that the impetus for many of the reforms is understandable, but it would be far preferable to avoid one-size-fits-all prescriptions and universal mandates when it comes to corporate governance practices. As a general proposition, it would be more effective, in my view, for boards and stockholders of particular companies to decide which governance practices are best suited for their particular firm. And the genius of our state corporate chartering system is that state's like Delaware both allow firms to adopt those reforms—such as proxy access, majority voting, split Chairman/CEO—that fit the needs of the firm through private ordering and encourage directors to follow best practices in corporate governance.
Delaware law is flexible and nuanced regarding the nature of particular reforms, seeking to encourage good governance practices without imposing ill-suited reforms as a legal requirement on every firm notwithstanding the firm's particular circumstances. Imposing too many ill-fitting and inflexible requirements as a legal mandate on every firm threatens, in my opinion, to reduce board effectiveness as well as degrade our competitiveness in a global market, where firms often compete on an unlevel playing field. If stockholders in a particular firm believe it is wise to adopt a particular reform—for example, say-on-pay, or no staggered board, or splitting the role of Chairman of the Board and CEO—they should have the power to adopt the reform of their liking, and tailor it to the circumstances of their firm.
This is the essence of the flexible private ordering system of Delaware's corporate law, which emphasizes the unique needs or conditions of each firm and recognizes the competitive environment and pressures in which each firm operates. The federalist system in which U.S. firms operate works well so long as neither of the sovereigns—state government or national government—over-reaches or intrudes on the other's legitimate prerogatives.
What was most rewarding about serving on the Chancery Court?
There are so many things about that experience that I look back on with warm memories. If I had to identify one thing it was the relationships that I formed while on the court, not only with other judges, but also with my staff. They were just really wonderful people, from the staff in the clerical office to the law clerks to the judicial secretaries.
What was most challenging about serving on the Chancery Court?
The challenge and the excitement of confronting very sophisticated and intellectual issues all at the same time; it was a job where every day you woke up and you knew you'd have to think very deeply about very complex issues, and they never ran out.
I was always amazed by the lawyers that appeared in front of us, who made the arguments and wrote the briefs day in and day out and often over a very short timeframe. They are what made the court such an interesting and exciting place to work. Frankly, I'm amazed at how practitioners do this day in and day out, and it's just a credit to their tremendous skill and talent and intellect.
Thank you, Chancellor.
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