Prof. Bainbridge on Hess: Critics Still Not There Yet

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4 Responses

  1. 1. You say that “Illustration 5 is more akin to the Elliott-Hess situation.” I disagree. Electing directors is NOT an adequate ratification of this conflict of interest transaction. You would need specific approval by the holders of a majority of the disinterested shares of the specific gratuity for the reasons set forth in my first post.

    2. I don’t think the Restatement (Third) changes the law on gratuities.

    3. Hess is a Delaware corporation. The ALI Principles thus are not relevant. Delaware law is. As you know, there is no Delaware case on point. Otherwise, we would not be having this discussion.

    4. Delaware law is clear that “Classic examples of director self-interest in a business transaction involve either a director appearing on both sides of a transaction or a director receiving a personal benefit from a transaction not received by the shareholders generally.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993). And, under Delaware law, “Under the duty of loyalty, the burden of proof lies initially with the interested party to demonstrate the entire fairness of the transaction.” MacLane Gas Co. Ltd., Partnership v. Enserch Corp., 1992 WL 368614 at *7 (Del.Ch.,1992). Ergo, all “those challenging the Elliott-Hess arrangements” have to do is show that the directors are getting a gratuity not shared with the shareholders and the burden of proof is on the directors to show that what they did was fair (or properly ratified by the holders of a majority of the disinterested shares).

  2. Lawrence Cunningham says:


    Your point 1. is part of the reason why the Restatement of Agency doesn’t work (whether Second or Third). Illus. 5 lets agents keep gratutities merely by principals witnessing the taking and not saying anything. That doesn’t seem like the right approach for directors. Any kind of shareholder vote is certainly much more than merely witnessing something and staying silent.

    And suppose you are right that any shareholder vote should be up or down on the specific payment rather than merely the election of directors known to be given such a promise. If so, that just proves the point that the law of agency is the wrong place to be looking.

    But while I’m sure that agency law is the wrong place to look, I’m not sure Delaware corporate law requires anything more to validate the contracts than the coming proxy vote in the contested election. Every shareholder is fully informed and, so long as a majority of disinterested shares vote for this slate, they are implicitly approving the package.

    Yet nor is it obvious that this arrangement constitutes the kind of interested director transaction supposed. This is not a director on both sides of a transaction with the corporation and any benefit that might be received is a form of compensation tied to gains shareholders receive (i.e., a stock price performance that exceeds a group of peers over three years).

    Finally, another curiosity not yet mentioned is that the people in question are not currently directors of Hess and have no other relationship to it. They have no duties to Hess or its shareholders whatsoever at the time that these arrangements are made. Reminds me a bit of Michael Ovitz in Disney.

  3. Nicholas Georgakopoulos says:

    The wrinkle here is that Elliott is not merely giving the director a gift but is providing the director an incentive to better promote the interests of the shareholders. Essentially, although I agree with Steve that illustration 4 would apply to a simple gift, the incentive effects make it entirely novel, distinguishable, and favor upholding it. Why? Because shareholders would have approved ahead of time. Compare to the board adopting a poison pill with no shareholder vote. A sharper conflict exists, since the directors may use the pill for entrenchment, not even tacit shareholder approval exists, and DE law requires that the pill ONLY be used for entrenchment to invalidate it. As the BJR is interpreted to validate the pill, a fortiori it should validate the incentive scheme on which shareholders have indirectly voted by electing the director with the Elliott incentive. Again by analogy to the treatment of the pill by the courts, if the director makes a decision contrary to the shareholder interests because of the incentive (hard to imagine), then the courts can come upon the challenge of the decision and invalidate it the way that the courts invalidate the inappropriate use of the pill.

  4. Lawrence Cunningham says:


    Excellent contribution, especially on the analogy to the poison pill.