The Most Important Principles of Delaware Corporate Law Can't Be Found In the DGCL

I have often observed that you can read every section of the Delaware General Corporation Law and learn almost nothing about Delaware corporate law.  Here are three of the most fundamental principles of Delaware corporate law that you won't find in the DGCL:

The business judgment rule.  This venerable presumption is derived from, but not stated in, Section 141(a) of the Delaware General Corporation Law ("The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.").  See Zapata Corp. v. Maldonado, 430 A.2d 779 (1981); Kaplan v. Centex Corp., 284 A.2d 119 (Del. Ch. 1971); and Robinson v. Pittsburgh Oil Refinery Corp., 126 A. 46 (Del. Ch. 1924).  Nevada, in contrast, has statutorily mandated the business judgment rule in NRS 78.138(3) ("Directors and officers, in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the interests of the corporation.").  It is sometimes said that California has codified the business judgment rule as well in Corporations Code Section 309 as well.  Gaillard v. Natomas Co., 208 Cal. App. 3d 1250, 1257 (1989).

Derivative suit pleading requirements.  Stockholders desiring to maintain a derivative suit won't find the pleading requirements in the DGCL.  Rather, stockholders should look to Court of Chancery Rule 23.1.  That rule requires a plaintiff to allege with particularity its efforts, if any, to obtain the desired action from the directors and the reasons for the failure to obtain the action or for not making the effort.  A plaintiff reading the rule, however, won't learn that more is required than simply alleging the reasons for not trying.  In Aronson v. Lewis, 473 A.2d 805 (Del. 1984) and Rales v. Blasband, 634 A.2d 927 (Del. 1991), the Delaware Supreme Court established two different tests for s0-called demand futility cases.   These cases have in turn spawned scores of cases interpreting and applying these standards.  California isn't much different than Delaware in this respect.  Although the California legislature has codified the requirements for maintaining a derivative suit in Corporations Code Section 800, California courts have applied the Aronson test (Bader v. Anderson, 179 Cal. App. 4th 775 (2009)) and Rales (Leyte-Vidal v. Semel, 220 Cal. App. 4th 1001 (2013) (outcome the same under either test)).  Nevada has also adopted Aronson and Rales.  In re Amerco Derivative Litigation, 252 P. 3d 681 (Nev. 2011).

The "intermediate standard" of review.  The Delaware General Corporation Law is also silent on whether the business judgment rule is to be applied to all board decisions.  It turns out that it isn't.  In the 1980s, the Delaware courts conjured up a different set of rules that it applies to some of the most fundamental corporate transactions.  See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (responses to unsolicited takeovers); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (sale of control), and Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988) (impeding stockholder voting).  Each of these cases has in turn birthed scores of cases interpreting and applying the standard.  However, the Delaware General Corporation Law does not even hint at the possibility of such a standard.

Proponents of the Delaware General Corporation Law view Delaware's large body of judicially created law as a positive factor.  In Why Corporations Choose Delaware, Delaware lawyer Lewis S. Black, Jr. wrote:

The case law, created over the years by the Court of Chancery and the Delaware Supreme Court, is the tangible evidence of Delaware’s corporation law expertise. It is this highly developed body of case law, more than the statute, which is “the Delaware corporation law".

Nonetheless, there are significant downsides to Delaware's approach.  It leads to a great deal of uncertainty.  Uncertainty is adds costs and encourages litigation.  First, the parties can never be certain when the courts will announce a new rule.  Even after a new rule is pronounced, it is often inchoate and hence subject to further delineation in subsequent cases.  Over time, the law assumes a near Talmudic complexity.  This also adds costs as the law becomes increasingly inaccessible to all but a few corporate law specialists.