Claire A. Hill (University of Minnesota, Twin Cities – School of Law) has posted Netsmart, Topps and Lear: Delaware Corporate Law’s Optimal Penumbra on SSRN. Here is the abstract:
Delaware corporate law is, by all accounts, the best developed corporate law in the U.S. The judges are expert, and understand the intricacies of corporations and corporate transactions better than any other state court judges, and all but the most sophisticated Federal judges. But is Delaware law as clear as it could be? Some critics think the answer is no: that Delaware judges, perhaps to keep their position as premier interpreters of their law, deliberately leave a bit of mystery. They don`t clarify as well as they could – or should. We disagree.
One of law`s most important aims is to influence behavior. Corporate actors are keenly sensitive not only to legal dictates, but also to the dictates of norms. They also can afford to be risk averse at somebody else`s expense: advisers who detail what corporate actors ought to do will be paid by the corporations rather than the individuals.
Judges are well situated to influence the development of norms and to cater to corporate actors` risk aversion. Through dicta in opinions and through their other pronouncements, including those articulating best practices, they can create a penumbra extending beyond the law; the penumbra strongly shapes how corporate actors behave. Fact-sensitive decisions accompanied by articulations of principles more broadly -the locus of the supposed indeterminacy, are the best way to achieve the optimal penumbra. We use three recent cases – Netsmart, Topps and Lear-to demonstrate our point.
Of course, all lawmaking also affects norms, and creates penumbras in this way. But here, there is both a difference in degree and in kind from many other types of lawmaking. Corporate actors plan their behavior carefully and with advice from smart, careful advisors. On account of concern for both legal liability and reputational costs, they want to be squarely within the envelope — not pushing it. In sum, corporate actors are particularly receptive, and have fewer countervailing pressures.