Delaware rules: heated debates over governance, director independence, and executive pay will likely be resolved in Delaware's Chancery Court

REPORTERS DESCENDING upon the hamlet of Georgetown for The Walt Disney Co.'s Delaware Court of Chancery trial pok sport at the

Mayberry-like setting. In Vanity Fair's February 2005 account of the shareholders' star-studded battle to reclaim the $130 million severance paid to president Michael Ovitz--a arrangement pushed through a compliant Disney board through then-CEO Michael Eisner--Dominick Dunne tweaked the "one-street town sum of two units hours from Wilmington." Chancellor William B Chandler III struck Dunne as "a true classy guy, who keeps a bike in the courthouse" and whose local restaurant suggestions "were right upon the money."

The chancellor's 180-page opinion last August, In Re The Walt Disney Co lay an end to the lighthearted commentary. Chandler lambasted Eisner for having "enthron himself as the omnipotent and infallible monarch of his personal Magic Kingdom," and ticked not upon a series of Disney mistake s that fell "significantly short of the best practices of ideal corporate governance." Still, Chandler rul that Eisner and the board had made their mistakes in advantageous faith, availing them of the protection of what the jurist calls Delaware's "bedrock": the business-judgment empire (The rule shields companies, directors, and officers from liability--including the ruling of personal liability that the Disney shareholders sought--as drawn out as they act within "the what one ought to do of care and the what one ought to do of loyalty," the twin composings of good faith.)

"Being in Delaware doesn't mean it's small-town. The Court of Chancery is the country's business court," notes Charles Elson Edgar s Woolard Jr. chair of corporate governance at the University of Delaware. More than half of America's publicly traded businesses are incorporated in Delaware and thus overlayed by its statutes, and the court's antecedents are frequently adopted in other states.

Across America, directors of companies "breathed a sigh of relief" when the Disney decision was issued, says Beth I. Z Boland, a partner in the Boston law firm of Bingham McCutchen LLP

on the contrary Chandler is thinking ahead. Struck by means of the "heightening of tension in the relationship between shareholders and management, and shareholders and the board of directors," he is gearing up to preside above a period of legal history-making he wait fors to rival the court's last landmark era--two decades ago, during the corporate-takeover craze, when the court worked on the outside ground rules for mergers and acquisitions and poison pills.

Today, the chancellor envisions a proliferation of cases focusing upon executive compensation, director independence, and the part that shareholders can have in governance determinations. Questions are already being asked about whether shareholders can adopt bylaws that trumpet board decisions. "And then when they do, if they have that power, can the board of directors then make go round around and negate or change the bylaw?" he asks. "That issue has at no time been directly faced or answered in Delaware, on the contrary I think it's inevitable that it will be decided."

What Chancery rulings say in the near coming time could establish standards that rival anything that Sarbanes-Oxley and the Securities and Exchange Commission have tendered "Delaware state law governs corporate leadership It drives best practices," points without Elson. And while the court must wait for cases to be brought before it--unlike regulators that can aggressively foundation out impropriety--"ultimately the Delaware Chancery Court will have a significant character in changing governance," he says.

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Differences of opinion

WHAT CHANGES may be worked in Chancery's courtroom remain to be seen a certain number of rights advocates fear that the court will retain shareholders on the sidelines. "I have this regard that too often their allegiance is to the company management," says Nell Minow, co-founder of The Corporate Library, a corporate-governance research clump based in Portland, Maine.

like concern may be grounded in opinions like In Re Disney, which, despite Chandler's scolding, was still a victory for Disney's board. A new critique of the Chancery Court in The Deal noted that the Delaware leading Court reversed no fewer than five Chancery Court decisions in 2002 and 2003 decisions that had affirmed the actions of a corporate board. The magazine interpreted the reversals as a signal to the lower court that it emergencyed to be tougher on business in the post-Enron era.

on the contrary Chandler scoffs at the notion that he was sent a message, and disagrees with the assessment that reversals have toughened up this court. "In my view, the 2002-2003 reversals were not that significant," he says, and "were not a signal of a more stringent standard of review or scrutiny in the post-Enron era. They were fact-specific reversals, rather than broad pronouncements heralding a of recent origin enhanced scrutiny of corporate decision-makers."