If boards are in bed with management, recent
Delaware Chancery Court rulings may go some way toward
pulling back the sheets. Recent decisions suggest that the
judges' patience has worn thin when it comes to stockoption
dating games, executive perks, director conflicts of
interest, and self-serving negotiations with private-equity
acquirers. The end result could well be increased liability for
directors at companies where abuses are found.
It's not so much the abuses themselves that disturb
the nation's premier business court, which is traditionally
friendly to companies; it's the failure of boards to level
with shareholders about what companies are doing.
Take August's In Re: Tyson Foods ruling by chancellor
William B. Chandler III, in which he denied the company's
motion to throw out shareholder claims regarding
spring-loaded options. Tyson argued that directors and
managers are protected by the business-judgment rule,
intended to give companies latitude to make mistakes
without exposing directors and managers to liability.
The rule applies as long as they act in good faith
and in the interest of shareholders. But Chandler wrote in
Tyson that the board-approved proxy statement displayed
such an "uncanny parsimony with the truth" as to
suggest directors were "dissembling to hide earlier subterfuge."
The judge added that "the deceit involved suggests
a scheme inherently beyond the bounds of business
Other cases involving infoUSA Inc. and the baseball-
card company Topps also drew fire from the court
regarding board/management relations. There was a
time, says University of Delaware legal expert Charles
Elson, when the judges "might have dismissed such cases
out of hand," but now they are demonstrating "a greater
suspicion of management than before."