Burdens of Proof in Corporate Law

I’m generally a big fan of Delaware corporate law, but something is unclear to me: Why do Delaware judges talk so much about burdens of proof and burden-shifting schemes in their opinions? When I teach cases involving burden shifts to my corporations class, I find that (with few exceptions) we spend little or no time on burdens and far more time on the applicable standard of review – e.g., business judgment rule vs. entire fairness. Students have asked me what to make of all the burdens talk, and I in turn have asked other corporate law professors, who have confessed to wondering the same thing.

Burdens are a complicated topic on which I am no expert. But it seems that in other civil litigation, burdens of persuasion matter because there are “arguments/decisions from ignorance” due to a lack of evidence, non-expert juries, and so forth. So we need to know who wins when it’s unclear whether the standard of persuasion (e.g. preponderance of the evidence) has been met. But in Delaware corporate law, expert judges replace juries, so there should be less uncertainty. Further, because burdens in corporate law bounce around based on the judge’s view of the facts, it is not known who has the burden until a decision is actually rendered. Therefore, both sides must put forth their evidence. Which leaves me curious, what purposes are burdens serving in corporate law? Some thoughts after the jump…


If I’m being provocative, I’d ask Delaware judges if burdens are really doing much at all, or whether burden-shifting schemes serve other purposes such as making Delaware law more difficult for other states to copy (see Ehud Kamar etc. on Delaware’s indeterminacy). In actuality it’s the standard of review that does the heavy lifting in corporate law. While a burden shift appears to give one side an advantage, the real question is whether the standard of review also shifts. For example, if a self-dealing director removes the taint of disloyalty through disclosure plus disinterested director approval, the burden shifts to the plaintiff, but more importantly, the standard of review shifts from fairness to business judgment. It’s business judgment rule protection, not the burden shift, that explains why the directors win. On the other hand, maybe this is no different than other areas – e.g. isn’t reasonable doubt as a standard for guilt more important than who must (dis)prove it?

Interesting cases lie where the burden shifts but the standard of review does not. E.g. in cash-out mergers, special committee or majority-of-the-minority shareholder approval shifts the burden of proving fair price to plaintiffs, but the standard of review remains fairness. So what good does the burden shift really do directors? If the standard remains fairness, the outcome will still come down to a battle of the experts over price. There are two possible reasons the burden assignment still matters. First, perhaps fair price isn’t a fixed number but a range, and not having the burden buys directors some leeway within that range. Charles Yablon has made this argument in one of the few scholarly discussions on this topic. Charles M. Yablon, On the Allocation of Burdens of Proof in Corporate Law: An Essay on Fairness and Fuzzy Sets, 13 Cardozo L. Rev. 497 (1991) (no SSRN link). Second, it could be that burdens matter a lot in the pre-trial stages. Maybe plaintiff shareholders don’t have or take advantage of discovery options under DGCL § 220 and production really is a problem?

I’m interested in your views on whether Delaware corporate law is disproportionately burden-heavy in its rhetoric compared to other areas of law, and whether burdens in this context are mostly rhetoric or meaningful to litigation outcomes.

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3 Responses

  1. Andrew Lund says:

    Darian,

    I completely agree with you re: burdens. When I teach interested controlling shareholder transactions, I ask why boards go through the hassle of getting a disinterested shareholder vote if fairness is still the test. It’s not because doing so shifts the burden of proof back to the plaintiffs, but rather because doing so matters for the substance of the fairness analysis itself.

    I think you’re right to be skeptical that there are many fiduciary duty cases where the evidence is in equipoise, but I’m not sure it has anything to do with the expert judge/inexpert jury distinction. I wonder if much of it turns on the heightened incentives for defendants to produce evidence at early stages of the proceedings to win a demand motion or another species of the motion to dismiss. I suspect that there’s simply a fuller record at an earlier point in shareholder litigation than in other civil litigation, lessening the chance of any question really being a flip of the coin.

    As to why the courts talk about burdens so much … maybe we’re all just trained to think burdens matter?

    Andrew

  2. Darian Ibrahim says:

    Thanks Andrew. Glad to hear I’m not imagining things. Am enjoying your blogging on Delaware law over at the Glom!

  3. 1L says:

    With all the expertise of my first few weeks of corporations, Andrew’s explanation seems pretty plausible.

    A case from N.Y.–Lewis v. S.L.&E–is an exception, it seems, that illustrates the general point. The defendants, directors of corporation A and and corporation B (and B’s sole shareholders), had directed corporation A to lease its sole asset, some real estate in upstate New York, to corporation B for use in its tire sales business. It was a small family affair, where the other shareholders of A initiated a derivative suit, alleging that the directors had lowered A’s value by leasing at below market rates for a decade. At trial, the judge held that the burden of proof was on the plaintiffs and found that they hadn’t shown that A could have obtained a higher lease price. The appellate court overturned based on burden shifting and violation of the duty of loyalty. So, the burden was a big deal.

    But Lewis is about a family tire business. Multiply the amounts in play by 100 or 1000, and it seems pretty likely that one side would have established what the fair market rental value of the property had been.