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Abstract

Three landmark decisions of the Delaware Supreme Court exhibit unintentional irony: Beam v. Stewart, Smith v. Van Gorkom, and Paramount Communications Inc. v. Time Inc. In Beam, the court concluded that, regarding the decision of whether to seek remedy against Martha Stewart, her fellow directors would not have jeopardized their reputations for the minimal gain of continuing their business and personal relationships with her. Ironically, the court failed to acknowledge that Martha Stewart—in trading on material nonpublic information, which gave rise to the corporate claim against her—jeopardized her reputation (ultimately losing hundreds of millions of dollars and her freedom) for minimal gain (less than $50,000). Having failed to acknowledge that internal inconsistency and unintentional irony, the court offered no explanation why some directors would jeopardize their reputations for minimal gain, but others would not do so. Part I attempts to fill the void and suggests that Stewart suffered from cognitive biases, which would not have affected her fellow directors.

In Van Gorkom, the court famously concluded that the plaintiff carried his burden of proving that the board was grossly negligent in informing itself when selling the corporation, although, during a multi-month period, no bidder stepped forward with a superior proposal. The irony of the court’s conclusion is virtually self-evident. Part II further discusses subsequent precedent, which suggests that, viewed in retrospect, the board could have carried its burden that it reasonably informed itself, turning the conclusion of Van Gorkom on its head, and furthering the irony.

In Time, the court held that Time’s board did not preclude Paramount from hostilely acquiring Time when it affected an acquisition of Warner. According to the consensus, Time’s board in fact precluded Paramount, so the Time court could not have meant what it wrote. As described in Part III, examining for the presence of preclusive action sometimes may enlighten the ultimate inquiry of reasonableness, but other times, an examination into preclusion proves misleading. In dicta, the Delaware Supreme Court has acknowledged that preclusive conduct may be reasonable. As the inquiry into preclusion has yielded misleading, if not ironic, results, and as the Delaware Supreme Court has indicated that preclusive action may be reasonable, the court should re-examine the utility of the preclusion inquiry as an outcome-determinative filtering device regarding the ultimate inquiry of reasonableness.

In these foundational decisions of corporate law, the Delaware Supreme Court could not have meant what it wrote. Each section incorporates clarifying concepts for consideration, and Part IV briefly concludes.

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