Governance Drafting

Practical Provisions for the Boardroom and Beyond

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In an exception to the “American Rule”—under which which each litigant, whether successful or not, pays only her own legal fees—courts have developed the long-standing “common corporate benefit” (or, “corporate benefit”) doctrine, to order corporations to reimburse the attorneys’ fees and expenses of shareholder plaintiffs whose litigation benefited at least one class of shareholders. 

      As the United States Supreme Court explained in the context of a securities action, although the statute at issue did not explicitly provide for such fee-shifting, “private stockholders’ actions of this sort ‘involve corporate therapeutics,’ and furnish a benefit to all shareholders by providing an important means of enforcement of the proxy statute. To award attorneys’ fees in such a suit to a plaintiff who has succeeded in establishing a cause of action is not to saddle the unsuccessful party with the expenses but to impose them on the class that has benefited from them and that would have had to pay them had it brought the suit.”  Mills v. Electro Auto-Lite Company, 90 S.Ct. 616, 628 (1970).

     The Delaware Court of Chancery has indicated that such reimbursement is justified in the event of “(1) the presentation of a meritorious corporate claim by a shareholder, (2) the expenditure of funds or credit by the shareholder in investigating such claim, (3) action by the board that confers a quantifiable financial benefit on the corporation, (4) which action is ‘causally related to the making of the shareholder demand.’” Bird v. Lida, Inc., 681 A.2d 399, 405 (Del. Ch. 1996).

     Yet until recent years, the reverse of this proposition has been much less clear: if a shareholder’s action against the corporation and/or one or more of its agents is not substantially successful, can the defendants recover their legal fees and expenses from the shareholder? 

     Allowing this form of fee-shifting might reduce unjustified litigation, but it could also discourage shareholders from asserting legitimate claims that could benefit the corporation and its other shareholders, if potential plaintiffs fear personal liability for the charges of a company’s and/or its executives’ top-flight (and top-billing) counsel. 

     In ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 556 (Del. 2014), the Delaware Supreme Court confronted such a policy in the bylaws of a membership corporation, under which any player or owner whose action against the sports league or any of its constituents (including any claim purportedly filed on behalf of the league or any of its constituents) “does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought” would be required to reimburse the defendants’ responsive “fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses).”

     The Court observed that fee-shifting bylaws (or such provisions in a certificate of incorporation) did not violate any section of the Delaware General Corporation Law (DGCL) or any other Delaware statute, and that “no principle of common law prohibits directors from enacting” such policies unilaterally, without a shareholder vote.  Id. at 558.  In fact, as an attempt to “allocate[ ] risk among parties in intra-corporate litigation” such provisions fall within DGCL Section 109(b)’s broad requirement that bylaws “relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.”  Id. at 558.

    The following year, the Delaware Legislature effectively overruled the ATP Tour decision by adding to the DGCL’s Section 109(b)—and creating as Section 102(f), part of the Section concerning the content of certificates of incorporation—a sentence prohibiting either of these documents from including “any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, as defined in §115 of this title.” 

    Section 115, added to the DGCL that same year to authorize forum selection bylaws, defined “internal corporate claims” as those, “including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

     In Solak v. Sarowitz, 153 A.3d 729 (Del. Ch. 2016), the Court of Chancery addressed the validity of a fee-shifting provision that directors of the Paylocity Holding Corporation had added to the company’s bylaws at the same time as they had inserted an exclusive forum bylaw requiring internal corporate claims to be brought in a state or federal court in Delaware. 

     In the Court’s summary, the provision “shifts the company’s litigation expenses (including attorneys’ fees) to any stockholder who brings, substantially assists, or has a direct financial interest in any ‘Action’ in a forum not located in Delaware, unless the stockholder obtains a judgment on the merits that substantially achieves the full remedy sought.” Id. at 735.

     Despite the bylaw’s applicability only to internal corporate claims filed in a non-Delaware forum, the Court agreed with the shareholder plaintiff that it violated the newly-revised Section 109(b), which “unambigously prohibits the inclusion of ‘any provision’ in a corporation’s bylaws that would shift to a stockholder the attorneys’ fees or expenses incurred by the corporation ‘in connection with an internal corporate claim,’ irrespective of where such a claim is filed.”  Id. at 741.

     However in Manti Holdings, LLC v. Authentix Acquisition Co., Inc., 2020 WL 4596838 (Del. Ch.) at *2, the Court upheld the following “loser-pays” provision, which appeared not in  bylaws but in a stockholder agreement: “In the event of any litigation or other legal proceeding involving the interpretation of this [Stockholders] Agreement or enforcement of the rights or obligations of the Parties, the prevailing Party or Parties shall be entitled to recover reasonable attorneys’ fees and expenses in addition to any other available remedy.” 

     “Here, the fee shifting mechanism was adopted by sophisticated parties—including the Petitioners—in a negotiated transaction.  Because. . . . stockholder agreements are of a different character than charters and bylaws, the prohibition is inapplicable, and there is no subversion of the hierarchy,” id. at *8, in which, as Delaware caselaw has recognized, “the DGCL comes first, then the charter, then the bylaws, then contracts [, and p]rovisions in lower-order documents cannot trump those in higher-order documents.”  Id. at *7.

     Parties considering installing fee-shifting arrangements in documents related to a corporation could consider:

     First, if the company is not incorporated in Delaware, does its state have statutory provisions and/or caselaw that follow those of Delaware in this context?

    Second, if the company is not incorporated in Delaware, does a choice of law provision in a contract, license, or other arrangement invoke the Delaware rules discussed above?

     Third, could a fee-shifting arrangement be enforceable if it is included in a shareholder agreement that does not apply the same way to all of the agreeing shareholders?

     Fourth, in a situation governed by Delaware law, could a fee-shifting arrangement be included in the terms of specific classes of stock, or would the required discussion of those terms in the company’s certificate of incorporation, under DCGL Section 102(a)(4), thereby violate Section 102(f)?

     Fifth, under Delaware statutory provisions and caselaw, in what documents besides shareholder agreements, as in the Manti Holdings decision, could enforceable fee-shifting provisions (even if they govern “internal corporate claims”) be included?

     Sixth, is there any ambiguity in DCGL Section 115’s definition of “internal corporate claims”?  If so, how could it be clarified by a bylaw or certificate provision, or in a corporate agreement?

     Seventh, could the bylaws or certificate of incorporation provision validly recharacterize as “internal corporate claims,” and thus as not subject to fee-shifting, specific types of claims that do not fall within Section 115’s definition, thereby effectively protecting potential plaintiffs to a greater degree than Sections 109(b) and 102(f) already do?  If so, what types of claims should be considered for such treatment?

     Eighth, if an otherwise enforceable fee-shifting provision is triggered only, as in the provision at issue in the Solak decision, upon a party’s obtaining “a judgment on the merits that substantially achieves the full remedy sought,” is there any way to clarify, in the bylaws and/or the certificate of incorporation, the level of “substantially achievement” necessary?

     Ninth, would there be any reason for a corporation to install in its bylaws or certificate of incorporation a provision reflecting any existing caselaw and procedural rules that entitle a corporate and/or executive defendant to reimbursement of its legal fees and expenses if a shareholder’s complaint is found by a court to be frivolous?

     Tenth, although this situation is not directly addressed by the amendments to the DGCL, would there be any reason for a board to attempt to clarify in the company’s bylaws and/or certificate of incorporation the application of the “corporate benefit rule” to reimburse a shareholder’s legal fees and expenses?  Would such a provision be enforceable, particularly if it attempted to restrict the circumstances under which relevant caselaw would support such reimbursement?


At or near the end of many corporations’ bylaws is a forum selection provision, requiring certain types of actions against the company to be brought in the courts of a designated state (often, Delaware).  These provisions reflect three Delaware court decisions and one addition to the Delaware General Corporation Law (DGCL), all within the last eight years.

      First, in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), the Delaware Court of Chancery upheld the validity of such provisions in the bylaws of Chevron and of Exxon, even though the boards of those companies had thereby unilaterally (without involving the shareholders) restricted to Delaware shareholders’ direct or derivative suits—and any shareholder suits involving claims under the Delaware General Corporation Law or other “internal affairs claims.”

     The Court observed that because the certificates of incorporation of each company authorized the board itself to amend the bylaws, “stockholders who invest in such corporations assent to be bound by board-adopted bylaws when they buy stock in those corporations.”  Id. at 939.

     It also acknowledged the boards’ arguments that “multiforum litigation, when it is brought by dispersed stockholders in different forums, directly or derivatively, to challenge a single corporate action, imposes high costs on the corporations and hurts investors by causing needless costs that are ultimately born by stockholders, and that these costs are not justified by rational benefits for stockholders from multiforum filings”; and noted that “in the last three years, over 250 publicly traded corporations have adopted such provisions.”  Id. at 944.

     The Court found forum selection provisions permissible under Delaware General Corporation Law (DGCL) Section 109(b), under which bylaws can concern any issue “not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” Id. at 952.

     Moreover, “precisely because forum selection bylaws are part of a larger contract between the corporation and its stockholders, and because bylaws are interpreted using contractual principles, the bylaws will also be subject to scrutiny under the principles for evaluating contractual forum selection clauses established by the Supreme Court of the United States in The Bremen v. Zapata Off–Shore Co., [92 S.Ct. 1907 (1972),] and adopted by our Supreme Court.

      “In Bremen, the Court held that forum selection clauses are valid provided that they are ‘unaffected by fraud, undue influence, or overweening bargaining power,’ and that the provisions ‘should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable.’

      “In [Ingres Corp. v. CA, Inc., 8 A.3d 1143 (Del. 2010)], our Supreme Court explicitly adopted this ruling, and held not only that forum selection clauses are presumptively enforceable, but also that such clauses are subject to as-applied review under Bremen in real-world situations to ensure that they are not used ‘unreasonabl[y] and unjust[ly].’ The forum selection bylaws will therefore be construed like any other contractual forum selection clause and are considered presumptively, but not necessarily, situationally enforceable.”  Id. at 957.

     Second, fifteen months later, the Chancery Court approved a bylaw provision very similar to Chevron’s and Exxon’s, which selected North Carolina’s courts instead of Delaware’s, and which added that the forum selection would apply “to the fullest extent permitted by law.” City of Providence v. First Citizens Bancshares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014):

     “[N]othing in the text or reasoning of Chevroncan be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws. Thus, the fact that the Board selected the federal and state courts of North Carolina—the second most obviously reasonable forum given that FC North is headquartered and has most of its operations there—rather than those of Delaware as the exclusive forums for intra-corporate disputes does not, in my view, call into question the facial validity of the Forum Selection Bylaw.”  Id. at 235.

     Third, the following year, the Delaware Legislature added to the DGCL a new Section 115, which authorized companies to include in their articles of incorporation or bylaws, “consistent with applicable jurisdictional requirements, [a requirement] that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.”

     For these purposes, the section defined “internal corporate claims” as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”

      Fourth, In 2020, the Delaware Supreme Court, overruling the Chancery Court, held that companies could include in their articles/certificates of incorporation provisions requiring claims for alleged violations of the federal Securities Act of 1933 to be filed in federal courts. Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020). 

      Such Federal Forum Provisions (FFPs) fell within the scope of the DGCL’s Section 102(b)(1), which allows certificates of incorporation to include “any provision for the management of the business and for the conduct of the affairs of the corporation,” and “any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.”  Id. at 113-114.

     Moreover, they did not violate Section 115, which “merely confirms affirmatively. . . that a charter may specify that internal corporate claims must be brought in ‘the courts in this State’ (presumably, including the federal court) [and], read fairly, does not address the propriety of forum-selection provisions applicable to other types of claims.”  Id. at 119.

      The Sciabacucchi Court concluded that

      “FFPs are a relatively recent phenomenon designed to address. . . difficulties presented by multi-forum litigation of Securities Act claims.  The policies underlying the DGCL include certainty and predictability, uniformity, and prompt judicial resolution to corporate disputes.  Our law strives to enhance flexibility in order to engage in private ordering, and to defer to case-by-case law development.  Delaware courts attempt ‘to achieve judicial economy and avoid duplicative efforts among courts in resolving disputes.’  FFPs advance these goals.”  Id. at 137.

See also Sylebra Capital Partners Master Fund, Limited v. Perelman, 2020 WL 5989473 (Del. Ch.) (upholding the Nevada-centric forum selection provision of a Nevada corporation formerly incorporated in Delaware, and noting, at *11, that “a stockholder in a Delaware corporation gives consent to be bound by current and future bylaws when it buys stock.  Whether or not the alleged wrongdoing comes before or after the adoption of a forum selection bylaw is irrelevant in determining the reasonableness or overall enforceability of the bylaw.”)

    However, in Seafarers Pension Plan v. Bradway, 2020 WL 3246326 (N.D. Ill.), at *1, the shareholder plaintiff targeted Boeing (a Delaware-incorporated company) “pursuant to Section 14(a) of the Securities and Exchange Act of 1934, alleging the dissemination of materially false and misleading proxy statements.” 

    The District Court observed that “The 1934 Act gives federal courts exclusive jurisdiction over derivative suits filed under the Act. The bylaw in question adopted by Boeing prohibits the filing of derivative suits in any court other than a Delaware state court.”  Id.

     Nonetheless, it granted Boeing’s motion to dismiss for forum non conveniens, apparently accepting the company’s arguments that “because Delaware securities law provides for a derivative cause of action similar to that provided by the 1934 Act, the bylaw does not deprive Plaintiff of a remedy and Plaintiff is not harmed substantively,” id. at *2; and noting, at *3, the benefits to the corporation of avoiding “multi-forum litigation.”

    Drafters, reviewers, and/or revisers of forum selection provisions appearing in bylaws or articles/certificate of incorporation might consider the following items (which are not provided or offered as legal advice):

     First, if the company is not incorporated in Delaware, does the corporate statute of the state of incorporation contain any parallel to DGCL Section 115?  Does that statute at include provisions similar to DCGL Sections 109(b) and 102(b)(1), allowing a broad range of issues to be addressed by (respectively) bylaws and the articles/certificate of incorporation”

      Second, allow the company the option of waiving the selection of forum.  Many provisions begin, “Unless the Corporation consents in writing to the selection of an alternative forum, . . . “

     Third, carefully specify the courts selected, and their alternatives: for instance, “the Court of Chancery of the State of Delaware (or, in the event that that Court does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware)” might be preferable to “a state or federal court located within the state of Delaware.”  But would it be better than referring to “a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware)”?

     Another example of a sequential selection appears in Sylebra Capital Partners, supra, at *10: “In the event that the Eighth Judicial District Court of Clark County, Nevada does not have jurisdiction over any such action, suit or proceeding, then any other state district court located in the State of Nevada shall be the sole and exclusive forum therefor and in the event that no state district court in the State of Nevada has jurisdiction over any such action, suit or proceeding, then a federal court located within the State of Nevada shall be the sole and exclusive forum therefor.”

      Fourth, categorize the actions affected by this forum restriction. Provisions requiring actions to be brought in Delaware state courts generally expand on and/or refer to the language of DGCL Section 115, in asserting their applicability to, for example,:

     “(i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim for or based on a breach of a fiduciary duty owed by any current or former director or officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, including a claim alleging the aiding and abetting of such a breach of fiduciary duty, (iii) any action asserting a claim against the Corporation or any current or former director or officer or other employee of the Corporation arising pursuant to any provision of the DGCL [Delaware General Corporation Law] or the Certificate of Incorporation or these By-Laws (as either may be amended from time to time), (iv) any action asserting a claim related to or involving the Corporation that is governed by the internal affairs doctrine, or (v) any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. . . .”

Green v. Paz, 2020 WL 555052 (E.D. Mo.), at *2.

     Fifth, indicate that the forum for federal securities law claims under the Securities Act of 1933 will be federal district courts, as did the provision in Sciabacucchi: “[T]he federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933.”  227 A.3d at 111-112.

     Sixth, in light of the Seafarers Pension Plan decision discussed above, clarify that the forum restriction provisions will not apply to actions brought under the Securities Exchange Act of 1934.

     Seventh, add that the forum restrictions are to operate “to the fullest extent permitted by law,” especially if the selected forum(s) is/are in a different state than the company’s state of incorporation.  In First Citizens Bankshares, the Delaware Chancery Court noted that “[t]his qualification appears to carve out from the ambit of the Forum Selection Bylaw [requiring certain actions to be brought in North Carolina’s courts] a claim for relief, if any, that may be asserted only in the Court of Chancery” itself.  99 A.3d at 236.

      Eighth, characterize the restrictions, as DGCL Section 115 already indicates, as “subject to applicable jurisdictional requirements”; and/or as “subject to the [designated court’s or courts’] having personal jurisdiction over the indispensable parties named as defendants.”

     Ninth, because the Chancery Court has identified the latter language above as “a factor counseling against implicit consent, ” In re Pilgrim’s Pride Corp. Derivative Litigation, 2019 WL 1224556 (Del. Ch.), at *14, indicate that a stockholder who files a relevant action in any forum other than the one(s) specified will be considered to have consented to personal jurisdiction in any of the designated forums (and to service on her counsel, wherever that counsel is located) should the corporation bring an action in one of the designated forums to enforce the selection provision.  (In Pilgrim’s Pride, at *15, the Chancery Court cautioned that “This decision does not address whether a Delaware court could assert jurisdiction over a stockholder based solely on a board-adopted forum-selection provision if the stockholder had no other ties to this state”).

     Tenth, indicate that anyone who buying or otherwise acquiring or holding any interest in shares of the corporation will be deemed to have notice of and consented to the forum selection provision of the bylaws.  Some provisions specifically include “any beneficial owner” among those so affected.  See Maloney v. Forterra, 2019 WL 3429046 (N.D. Tex.), at *3 (reproducing such a provision).

     Eleventh, include a severability statement, indicating that if any element of the forum selection provision “shall be held to be invalid, illegal or unenforceable. . . then, to the fullest extent permitted by law, the validity, legality and enforceability of such provision(s) in any other circumstance and of the remaining [elements]. . . shall not in any way be affected or impaired thereby.” Drulias v. 1st Century Bancshares, Inc., 241 Cal. Rptr. 3d 843, 847 n.2 (Ct. App. 2018) (reproducing the provision).

     Twelfth, take into account the expressed positions of institutional shareholders and proxy advisors on forum selection provisions. 

     For instance, the Institutional Shareholder Services (ISS) United States Proxy Voting Guidelines: Benchmark Policy Recommendations (Nov. 19, 202, pp. 25-26) generally support provisions “that specify ‘the district courts of the United States’ as the exclusive forum for federal securities law matters,” as well as those that “specify courts located wihin the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations,” in both cases “in the absence of serious concerns about corporate governance or board responsiveness to shareholders.”  Similarly, the State Street Global Advisors Proxy Voting and Engagement Guidelines (March 2021, p.14) list exclusive forum provisions among the initiatives that State Street will “generally support.”

     However, the CalPERS Proxy Voting Guidelines (April 2021, p.9) indicate that “We vote against proposals seeking to establish an exclusive forum provisions [sic] since we oppose restrictions on shareowners to pursue derivative claims and participate in the selection of appropriate venue.”  The Council of Institutional Investors’ Corporate Governance Policies (Sept. 22, 2020, p.5) state that “Companies should not attempt to restrict the venue for shareowner claims by adopting charter or bylaw provisions that seek to establish an exclusive forum.” 

     By contrast, Vanguard Funds’ Summary of its proxy voting policies for U.S. portfolio companies (2020, p.19) notes that each “fund will vote case-by-case on management proposals to adopt an exclusive forum provision. Considerations include the reasons for the proposal, regulations, governance and shareholder rights available in the applicable jurisdiction, and the breadth of the application of the bylaw.”  And Glass Lewis’ 2021 Proxy Paper Guidelines (2020, p.52) recommend that shareholders oppose such proposals “unless the company: (i) provides a compelling argument on why the provision would directly benefit shareholders; (ii) provides evidence of abuse of legal process in other, non-favored jurisdictions; (iii) narrowly tailors such provision to the risks involved; and (iv) maintains a strong record of good corporate governance practices.”

     Although courts (and some legislatures) will certainly be visiting (or revisiting) the issue of forum selection by corporations, careful and informed drafting could well enable boards of directors not only to stand but also to choose their legal ground(s).


      Rarely mentioned by caselaw, or in such core corporate documents as articles of incorporation and bylaws, a “board observer” is a creature of contracts— including stockholder agreements, investment agreements, and board observer agreements—who attends board meetings to monitor the proceedings on behalf of her principal, an investor in the company.

      Perhaps the highest-profile example of a board observer is Adam Neumann, the co-founder and former chairman and CEO of WeWork, who took on that role in 2019, after surrendering control of the company to investor SoftBank.

     As the name suggests, during meetings an observer’s role is (overtly, at least) passive.

     In Obasi Investment Ltd. v. Tibet Pharmaceuticals, Inc., 931 F.3d 179, 181 (3rd Cir. 2019), the Court of Appeals held, after an extended examination of the meanings of “director,” and “similar,” that “under Section 11 of the Securities Act of 1933, 15 U.S.C. §77k, a nonvoting board observer affiliated with an issuer’s placement agent is [not] a ‘person who, with his consent, is named in the registration statement as being or about to become a director[ ] [or] person performing similar functions.’”

     The registration statement at issue indicated that although the two board observers “will not be able to vote, they may nevertheless significantly influence the outcome of matters submitted to the Board of Directors for approval,” id. at 183. 

     Yet the Court found that “Three features differentiate [the observers] from directors.  First, and most fundamentally, [they] cannot vote for board action.  Second, they are aligned with the placement agent, . . . not [the corporation].  And third, their tenures are set to end automatically [based on dilution of the initial investors’ share ownership, or on the trading price of the shares], with no opportunity to vote them out.” Id.  In addition, the registration statement referred to the fiduciary duties of directors, but not of the observers.

      Investors and companies arranging for the presence of board observers should consider clarifying issues in following categories, among others:

      ● First, the observer’s qualifications.  What criteria can, should, the company insist on in board observers? 

     For example, should observers meet any specific definitions of independence? What restrictions should be placed on their past, current, and future employment by, or board membership of, competitors of the corporation? 

     Can, and should, counsel for the investor serve as an observer?  Can the corporation require, for one or more specified reasons—or for no reason—that the investor replace a particular observer with someone else?  Should the investor designate in advance one or more alternate observers, in case one cannot attend a meeting?

     Can one investor be granted a veto power over a second investor’s selection of a specific person as the second investor’s observer?  (Should there be any restrictions on different investors’ observers talking with each other about the company and its management?)

     ● Second, the observer’s (non-)participation.  Observer agreements generally provide that the observer is not able to vote during board deliberations; some add that the observer cannot “participate” in the meetings. 

     Does this mean that, unlike directors, observers cannot ask before or during a meeting that an item be added to the agenda, or that one or more officers be invited to make a presentation to the board on a certain topic? Although observers are usually prohibited from making motions or offering resolutions, are they allowed to make informal suggestions or recommendations, before and/or during meetings, to the directors as a group, to subsets of the board members, and/or to individual directors?

     Is a board observer authorized to distribute to the board, for their information, material that she (or he principal) has prepared and/or collected?

     ● Third, the observer’s access to, or exclusion from, meetings.  Are observers, who must usually receive the same meeting notices as do directors, allowed to attend all portions of each session—including executive sessions—of every board and committee meeting? 

     Some observer arrangements allow for the exclusion of the observer from those parts of a meeting that involve the company’s attorney-client communications, to preserve the privilege.  See Finjan, Inc. v. Sonicwall, Inc., 2020 WL 4192285 (N.D. Cal.), at *5 (company waived attorney-client privilege by discussing otherwise privileged-material in the presence of a board observer from an investor who did not have a common legal interest, as opposed to a common commercial interest, with the company).

     These documents also enable the observer to be excluded from discussions of the company’s relationship with the investor whom the observer represents, to prevent the observer from having a conflict of interest; and from proceedings involving the company’s trade secrets and/or material furnished to the company subject to a nondisclosure agreement requiring the company to restrict its dissemination. 

     More vaguely, an agreement could prevent an observer from attending “if the Observer’s presence at such meeting would. . . be deemed by a majority of the Board of Directors of the Company to be detrimental to the Company or the Board of Directors’ deliberations.” Holdings, Inc. v. ABS Capital Partners Inc., 2018 WL 3006118 (Del. Ch.), at *3 (quoting a document granting board observer rights to the preferred stockholders).

     By what process can any of those circumstances be declared?  By a majority vote of the directors (in attendance), or simply at the discretion of the director presiding at that meeting?  Must the company always furnish the observer with a reason for her exclusion?  Is there any immediate way for the observer to apply for reconsideration of that decision?

      And, what constitutes a “meeting” for these purposes?  Might not directors or committee members, without formal notice to each other or the board observer, simply gather “informally,” whether face-to-face or virtually, to “share our thoughts on different matters”— without actually voting?  How can the observer’s principal avoid— and/or detect—such a sub rosa meeting?

      ● Fourth, the observer’s access to materials.  In Braga Investment & Advisory, LLC v. Yenni Income Opportunities Fund I, L.P., 2020 WL 3042236 (Del. Ch.) at *16, the relevant agreement called for the board observer to “receive copies of all Board packages prepared for Board members concurrent with receipt thereof by all Board members.”   

     Although the observer’s principal argued that it was thereby entitled to what the court categorized as “a sweeping amount of information,” including: “documents ‘uploaded to the Board Data Room,’”; any information provided to other board observers; and all information “related to [the company’s] operations and finances, to which [a director] is entitled,” the Court of Chancery agreed with the company that “the language at issue reflects no more than an intention to include [the observer] as part of [the company’s] normal distribution of its Board packages.”  Id. at *17. 

     Recognizing that “[t]he term ‘Board package’ is not static and does not equate to an unvarying checklist of items,” the Court found that in this context its “ordinary and usual meaning” was, the “set of materials that [the company’s] management determines, in good faith, are necessary to provide to Board members in connection with a Board meeting so that they can perform their duties in an informed manner.” Id. at *18.  Therefore, the observer was not entitled to “every scrap of paper that a Board member theoretically could ask to see untethered to” such materials.  Id.

      Observer agreements clarifying the scope of the observer’s access to material might address her ability to obtain material that is usually available to directors on request but that has not (yet) been distributed to them as part of a meeting “package”; and whether she minutes of board and committee meetings held (during a specified time period) before she became involved with the company will be made available to her.

     ● Fifth, the observer’s confidentiality obligations.  Like directors, who have a fiduciary duty of loyalty, observers are normally prohibited from taking corporate opportunities and from insider trading. However, their confidentiality obligations (and any exceptions), are often set forth in extreme detail, especially since their role calls for them to share information with their principals.  See Holdings, Inc, supra, at *3-4 (reproducing an observer agreement’s confidentiality provisions).

     Are observers subject to the same restrictions, if any, that the company may impose on directors with regard to taking, and retaining, notes of meetings?  Would such notes be subject to disclosure to shareholders of the company, and/or to shareholders or others bringing actions against the principals?

     Are previous observers allowed to share their recollections and insights with current observers of the same board?  With the permission of their principals (if necessary), are observers authorized to discuss with third parties their broad impressions of the capabilities and effectiveness of—and their assessments of the mental and/or physical health of—particular members of the board and of the company’s senior management?

    Are observers permitted to discuss with anyone other than their principals the board’s and management’s general approach to decision-making, especially if it is particularly distinctive and effective?

     ● Sixth, the insulation of the observer from liability.  Although exculpation provisions generally apply only to directors, observer agreements typically call for the company to provide both insurance and indemnification to observers.  See Zimmerman v. Crothall, 62 A.3d 676, 715 (Del. Ch. 2013) (quoting a purchase agreement that provides indemnification for board observers). Must this be the same type and coverage of insurance as the company’s directors receive?

      (Finally, can an analogy be made to elements of quantum mechanics, and/or of Eastern philosophies and religions, in which the mere presence of the observer affects the system being observed?)


None of the Delaware General Corporation Law (DGCL), the Model Business Corporation Act, and the NYSE and NASDAQ listing standards requires a board of directors to create an “executive committee.”  Only a small minority of major corporations currently appear to have such a committee.

     In fact, executive committees are barely referred to in the policy statements of major institutional investors and proxy advisors, and are not discussed at length in reported state or federal decisions—although it does seem that minutes of executive committee meetings are just as available for production to shareholders as are minutes of board meetings. See Cain v. Merck & Co., Inc., 415 N.J. Super. 319, 323 (App. Div. 2010) (holding that under the relevant New Jersey statute, “the qualified right of inspection. . .  extends to the minutes of the board of directors and the executive committee”); Monaco v. Bear Stearns Residential Mortgage Corp., 2011 WL 13124505 (C.D. Cal.), at *6 (not distinguishing between board minutes and executive committee minutes, in this context).

     Yet an executive committee typically and traditionally is authorized to exercise the full power of the board between regular board meetings, to the extent that any committee can legally do so. (Under DGCL Sections 141(c)(1)—or 141(c)(2), for companies incorporated after July 1, 1996, or that were incorporated before that date but have chosen to be governed by that provision instead—subject to some exceptions, committees generally cannot unilaterally approve, adopt, or recommend to shareholders any action or matter required by that statute to be submitted to shareholders for approval; nor can they amend the corporation’s bylaws.)

    Perhaps one reason for the relative and recent scarcity of executive committees is that—beyond the ability of directors to take action without a meeting under DGCL Section 141(f)(1), by unanimous consent “in writing, or [since 2000] by electronic transmission”—directors who are now very familiar with Zoom (and equivalent teleconferencing technologies) may consider it less of a burden than ever to participate in regular or special meetings of the full board. 

     In that sense, the typical reference in executive committee charters to the committee’s having been formed to take actions “when the board is not in session” may now be outmoded.  (In an early joke, stand-up comedian Steven Wright mentioned complaining to the worker he found locking the front door of a grocery store: “The sign says you’re open ‘twenty-four hours.’  He said, ‘Yes, but not in a row.’”)

     But a board that currently has, or is contemplating the creation of, an executive committee might not only carefully clarify (as with executive sessions and executive chairs) the term’s sometimes-ambiguous connotations, but also consider the following issues:

     First, which directors should be on the committee ex officio (i.e., by virtue of their other positions in the corporation)— the CEO (if also a director), the board chair, the lead independent director (if any), and/or the chairs of specific committees (such as the audit, nominating/governance, compensation, and risk committees)?  Cf. Memphis Health Center, Inc. v. Grant, 2006 WL 2088407 (Tenn. Ct. App.), at *9 (noting that “the Bylaws provide that the Chief Executive officer, as an ex-officio member of the Board, is considered ‘an ex-officio member of all committees except the Executive Committee.’” [emphasis added])

    Second, does the board chair, if she is also a member of the executive committee, automatically become the chair of that committee?  If not, how is the executive committee’s chair chosen (or changed), and by whom?

    Third, does an executive committee, by its nature, have any “regular,” as opposed to “special,” meetings?  Which directors and/or officers can call an executive committee meeting, of either type?

     Fourth, how would (and should) the executive committee’s composition and role be affected by the activation of a corporation’s emergency bylaw provisions, if the company has them?

     Fifth, should a company’s bylaws and/or its executive committee’s charter specifically prohibit that committee from taking certain types of actions, in routine and/or emergency situations, that would otherwise be permitted to it under the state of incorporation’s corporate statute?

     Sixth, should a company’s bylaws require that a certain number and/or proportion of the members of the committee be independent directors?  That the presence of a certain number and/or proportion of independent directors is required to constitute a quorum?

     Seventh, should the committee’s voting protocols depart from the default “one-director, one vote” and “majority rules” practices, which could concentrate committee (and thus, board) power in the hands of a very small number of directors?  Should an executive committee charter adopt variable voting and/or supermajority (or even unanimity) rules for some or all of its decisions?

     Eighth, can the executive committee create a subcommittee of itself?  Can the executive committee, as the full board generally can under DGCL Section 141(c), create new board committees and/or subcommittees of those new, or of previously existing, committees?

     Ninth, is it a recommended practice for the executive committee, rather than the full board, to determine, on the basis of a Special Committee’s investigation and report, not to pursue a shareholder’s allegations of wrongdoing by agents of the corporation?  Scattered Corp. v. Chicago Stock Exchange, Inc., 701 A.2d 70 (Del. 1997), at 72 n.1 (setting out facts) and 75 (finding the arrangement appropriate).

     Tenth, is it a recommended practice for the executive committee itself to create such a Special Committee?  See id. at 76 (upholding, and quoting, the Court of Chancery’s conclusion that for purposes of a motion to dismiss, “the only legal issue was whether the complaint alleged particularized facts creating a reason to doubt that the investigation of the demand was reasonable and conducted in good faith,” and that whether the Special Committee had been created by the executive committee or by the full board (as turned out to be the case) “has no logical or legal bearing on that issue”).  

     Eleventh, would it ever be appropriate for the executive committee (as permitted by DCGL Section 141(c)) to consist of only one director?  For a subcommittee of the executive committee to consist of only one director?

     Twelfth, is it a recommended practice for the executive committee, rather than the full board, to hire, or to fire, the CEO/President?  See, e.g., InterFirst Bank Dallas, N.A. v. FDIC, 808 F.2d 1105, 1106 (5th Cir. 1987) (“After several meetings, the Executive Committee of First National offered, and Mr. Wageman accepted, employment as the bank’s new president and chief executive officer”); In re Capitol Spouts, Inc. (Capitol Vial, Inc.), 640 N.Y.S.2d 688, 688 (App. Div. 1996) (noting that the individual serving as “the president and chief executive officer of both companies. . . was removed from his executive position [at one of them] by [the other’s] executive committee.”) 

    Thirteenth, is it a recommended practice for the “executive committee” itself to supplant the CEO?  See Crossborder Resources, Inc. v. Keybanc Capital Markets, Inc., 2014 WL 12531161 (N.D. Tex.), at *3 (observing that Crossborder’s “Chief Executive Officer position was put under the control of an executive committee chaired by . . . the Chairman, President, and CEO of” a company with a “significant ownership” interest in Crossborder.); Kuo v. Sun, 2009 WL 162730 (Cal. App.), at *2 (indicating that a “three-member executive committee of the board. . . took over the day-to-day operations of [a company] and performed the duties of a CEO” during a “long transitional period”); Shaw and Associates, Inc. v. American Contractors Indemnity Co., 2006 WL 8444536 (D.N.M.), at *4 (noting that a company “created a three-person Executive Committee. . . to act as CEO”); Travis v. Kurron Shares of America, Inc., 272 F.Supp.2d 816, 818 (D. Minn. 2003) (indicating that a company “created an Executive Committee that possessed the powers of a CEO”).

     Fourteenth, can any other committee create its own executive subcommittee, to exercise the power of that committee between that committee’s regular and special meetings?

     Fifteenth, by what procedures and on what timetable should an executive committee report its actions to the full board and/or to other committees? 

     Sixteenth, should the full board be required to formally and affirmatively ratify any, any specific types, or all of the decisions of the executive committee?  Or, can at least some of the committee’s decisions be deemed to have been ratified tacitly by the board, if no objection has been raised by any board member (or, by a majority of the directors?) within a specific time?

     [Portions of this post were adapted from Section 3.08B of my book on corporate governance.]


     The corporate governance principles/guidelines of many companies refer to internal “on-boarding” programs designed to familiarize new directors not only with the company’s operations but with their boardroom responsibilities. 

     Some companies also encourage or require all directors, during the course of their tenure, to attend presentations, whether in-house or external, on developments in corporate governance.

     The first category of information (often featuring presentations by officers, and possibly visits to company facilities) is probably largely unnecessary for “inside directors” who are also serving the company as officers (for example, as CEO). 

     The second category might be redundant for many directors who have board experience at other companies.

     And all directors, and potential directors, should read not only the company’s proxy statement but its securities filings, such as Form 10-K, 10-Q, and 8-K.

     However, directors might consider adding to their summer (and subsequent) reading lists the corporate documents—and (mostly) non-law books—identified below.

     First, every director could benefit from regularly reviewing the core corporate documents (probably) publicly provided on the company’s Web site: the articles/certificate of incorporation, bylaws, committee charters, and conduct/ethics code, as well as any separate specialized policies concerning such issues as the company’s political or other contributions, the “clawback” of excessive compensation, and supplier compliance.

     Second, directors might examine, perhaps with the guidance of the company’s counsel, the company’s risk management plan; its compliance policies; its major contracts with outside law and accounting firms; and its insurance, indemnification, and exculpation arrangements (including exceptions to each, and areas of potential overlap) for directors.

    Third, new directors could read, from the past three years or so, minutes of board meetings and committee meetings; board resolutions; and documents relating to litigation brought by or against the company. 

     Fourth, the board should review and (if necessary) update, at least annually, plans for the succession of senior executives.

    Fifth, whether or not a formal policy requires directors to submit their resignations if they might have, even in their “off-hours” and law-abiding activities, embarrassed the company, counsel might regularly provide to all directors a summary of situations in which executives of other companies have attracted unfavorable attention.

    Sixth, directors might also wish to examine, or be briefed (possibly by board’s Nomination and Governance Committee) on, or at least on changes to, the annual summaries prepared by (and available for downloading, on the Web sites of) proxy advisors such as Glass Lewis and ISS; asset management firms like BlackRock, State Street, and Vanguard; major institutional investors such as CalPERS, CalSTRS, and TIAA; and the Council of Institutional Investors.

    Seventh, below are a few (idiosyncratic) reading suggestions, almost all of which are available in inexpensive paperback editions, for directors’ (and their counsel’s) consideration:

     Daniel Kahneman, Thinking, Fast and Slow (2011)- a sobering, and humbling, survey of cognitive traps, by a Nobel Prize-winning economist who has spent decades studying how individuals and groups can optimize their decision-making.

     Sharon Bertsch McGrayne, The Theory That Would Not Die (2011)- discusses, in much more detail than Kahneman does, the role and applications of Bayes’ Theorem in effectively incorporating new information into decision-making processes.

     Philip Zimbardo, The Lucifer Effect: Understanding How Good People Turn Evil (2007)- by a psychologist involved—two years after he pioneered tests of the “broken window theory”—in the (in)famous “Stanford Prison Experiment” of 1971.  Disturbing and detailed discussions of that experiment, and of its relationship to subsequent activities at the Abu Ghraib prison in Iraq.  Directors might focus on Zimbardo’s “Ten-Step Program to Resist Unwanted Influences” (pages 451-456), offered as a “starter kit toward building individual resistance and communal resilience against undesirable influences and illegitimate attempts at persuasion.”

     Andrew Grove, Only the Paranoid Survive (1996)- the former chairman and CEO of Intel discusses how to recognize and react to “strategic inflection points” that affect one’s industry, one’s company, and (in the last chapter, easily by itself worth the price of the book) one’s career.

     Useful (though now-dated), and possibly inspirational, examples of attempts to identify trends, if not inflection points, include: Mark Penn’s Microtrends (2007) and Microtrends Squared (2018); various “Non Obvious” books by Rohit Bhargava; and Mauro F. Guillen’s 2030 (2020).  Also of interest: Robin McGrath’s Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen (2019).

     John Carreyrou, Bad Blood: Secrets and Lies in a Silicon Valley Startup (2018)- an extraordinary profile of dysfunctional governance at a company that promised accurate and efficient analyses of medical patients’ blood samples.

     Mitchell Waldrop, Complexity: The Emerging Science at the Edge of Order and Chaos (1992)- explores, using very little mathematics, the study of the marketplace, the human brain, evolution, and other “complex, self-organizing, adaptive systems [that] have somehow acquired the ability to bring order and chaos into a special kind of balance. . . . The edge of        chaos is the constantly shifting battle zone between stagnation and anarchy, the one place where a complex system can be spontaneous, adaptive, and alive.”  Poetic and scientific at the same time. 

     For another early mass-market treatment of similar systemic concerns, see Kevin Kelly (the founding executive editor of Wired magazine), Out of Control: The New Biology of Machines, Social Systems, and the Economic World (1992).

     David Priess, The President’s Book of Secrets: The Untold Story of Intelligence Briefings to America’s Presidents (2016)- a fascinating discussion of the evolution of the substance, style, and methods of presentation of the President’s Daily Brief (PDB), beginning in the Kennedy Administration.  It contains many lessons for executives, their counsel, and others who advise decision-makers.

     Michael Lewis, Flash Boys: A Wall Street Revolt (2014)- An extended illustration, in the context of high-frequency trading (HFT), of many people’s lack of understanding of the technical foundation/chassis/plumbing/architecture of their profession’s (or investment managers’) systems; and of the continuing tensions among technologists, regulators, and businesspeople.   

     The American Law Institute’s two-volume Restatement 3d of Agency (abbreviated versions of which are also available), although not a statute, is an influential codification of the fiduciary duties of agents (including officers; and, though they are not technically agents of the corporation, directors); the duties owed to them by their principals (the corporation); and the ways in which they can commit (even an unknowing or unwilling) principal to contractual and tort liability,

    In a more specialized context, because lawyers are agents of their clients (and, simultaneously, are “officers of the court”), directors might derive from the plain-English, annotated Model Rules of Professional Conduct a better sense of the responsibilities of and restrictions on their in-house and outside counsel.

     A third perspective on agent-principal relationships is the memoir of a prominent “Hollywood agent” who received more than $130 million in severance compensation after serving for about fourteen months (October 1995-January 1997) as the president of The Walt Disney Company: Who Is Michael Ovitz? (2018).  (A sample: “Sometimes, representing a client’s best interests means not getting him what he thinks he wants.  The judgment part of the job requires knowing when to redirect a client’s desires.”)

    Of the court opinions generated to resolve shareholder-initiated litigation against the Disney board for initially offering Ovitz that compensation arrangement, and for then declining to terminate him for cause (which would have deprived him of the severance payment), a most illuminating and instructive review of directors’ fiduciary duties was issued by Delaware’s Chancery Court in 2005 (Google “907 A.2d 693”). 

     Near the beginning of what amounts to a factual and legal primer, the court observed that “I have tried to outline carefully the relevant facts and law, in a detailed manner and with abundant citations to the voluminous record. I do this, in part, because of the possibility that the Opinion may serve as guidance for future officers and directors—not only of The Walt Disney Company, but of other Delaware corporations.”

     David Kaiser, How the Hippies Saved Physics (2011)- a mind-expanding exploration of how, beginning in the pre-Internet era of the 1970s, a group of “fringe” physicists focused on the mind-expanding implications of quantum mechanics formed, maintained, and expanded their professional and philosophical network, which included, at various points, prominent “mainstream” physicists; elements of the intelligence and defense communities and their contractors; “New Age” figures like Werner Erhard of est, and the leaders and habitues of the Esalen Institute; and best-selling authors like Fritjof Capra and Gary Zukav.  Among its themes are the relationships of theoretical to practical research, and the sponsorship/patronage of each; the popularization, and cultural relevance, of scientific concepts; and the harmoniziation of science with (particularly Eastern) philosophy (to a much greater technical degree than in Robert Pirsig’s Zen and the Art of Motorcycle Maintenance (1975)).

     As the Grateful Dead famously sang, “Once in a while, you get shown the light / In the strangest of places, if you look at it right.”

     Best wishes for happy summer reading. 

     [Readers’ recommendations are invited and welcome: e-mail, effross at]


According to one biography of Elon Musk, the CEO of Tesla and SpaceX, during a birthday party (apparently his 42nd, in 2013), he “donned a blindfold, got pushed up against a wall, and held balloons in each hand and another between his legs. The knife thrower then went to work.  ‘I’d seen him before, but did worry that maybe he could have an off day,’ Musk said.  ‘Still, I thought, he would maybe hit one gonad but not both.’”

     At the same party, Musk entered a ring with “[o]ne of the world’s top sumo wrestlers. . . . ‘He was three hundred and fifty pounds, and they were not jiggly pounds. . . . I went full adrenaline rush and managed to lift the guy off the ground.  He let me win that first round and then beat me.  I think my back is still screwed up.’”

    However, in the realm of entirely voluntary—and totally gratuitous—assumption of potentially deadly risk, Jeff Bezos, the 57-year-old founder, chairman, and CEO of, has just declared, “Hold my beer, / This won’t take long / Step back, son, and let me show you/ Just how it’s done.” 

    Reportedly, Musk plans to travel to Mars someday on a SpaceX vehicle.  (Virgin Group founder Richard Branson, who is not its current CEO, intends to be among the first passengers on Virgin Galactic’s spacecraft next year.)

     But in an Instagram video posted on June 7, Bezos announced that on July 20 he and his brother Mark will be aboard the Bezos-founded Blue Origin, LLC’s first flight to carry people: “[I]t’s a thing I’ve wanted to do all my life.  It’s an adventure.  It’s a big deal for me.” 

     Blue Origin describes its New Shepard vehicle, which travels about 62 miles above the Earth’s surface (“past the Karman line—the internationally recognized boundary of space,” so the sky will literally not be the limit) before returning to Earth with the aid of a parachute, as “fully autonomous.  Every person onboard is a passenger—there are no pilots.” 

     Yet the Wall Street Journal recently observed that passengers of “space tourism” companies “aren’t protected by the meticulous federal safety regulations that govern commercial air travel”; instead, those firms are allowed to regulate themselves.

    Beyond fulfilling the long-held dreams of these extremely successful executives, their vertical excursions will no doubt generate even more publicity for them and all of their companies. 

    But in planning such flights, are these maverick corporate leaders breaching their fiduciary duties to their (somewhat) more mundane companies, like Amazon and Tesla?  If the boards of those companies fail even to attempt to oppose these activities, are the directors breaching their own fiduciary duties?

    After all, as soon as the protagonist of Ralph Ellison’s Invisible Man (1947) is appointed to a responsible position in a social activist organization, a superior advises him, “We’d better go now so that you can get some sleep. . . . You’re a soldier now, your health belongs to the organization.”

    If Bezos’ flight is successful, will that really prompt anyone to buy even more goods or services from, or through, Amazon?  (For that matter, does it really make any difference to other potential Blue Origin passengers whether Bezos goes first, later, or not at all?)

    If, however, the trip results in Bezos’ incapacity and/or absence, would Amazon— which, for all its popularity, is currently confronting concerns including employee treatment, consumer privacy, and antitrust issues—proceed to succeed (or, to succeed as much) without his insights and perspective? 

    Even though Bezos disclosed in February his plan to relinquish on July 5 his positions as Amazon’s CEO and chairman, and to assume the still ill-defined role of  “executive chair,” Brad Stone’s in-depth profiles, The Everything Store (2013) and Amazon Unbound (2021) leave no doubt that he is the company’s chief visionary and driving force.

    In short, where is this flight plan’s upside, so to speak, for Amazon?

    More generally, what level of personal risk should corporate leaders, many of whom are protected constantly (and at great expense) by their companies’ security teams, be allowed to assume, on their own initiatives and inclinations?

    In February 2012, the CEO of Micron Technology died in the crash of the high-performance personal aircraft that he had been piloting.  According to the Wall Street Journal’s Shara Tibken and Don Clark, the executive had, several years previously, suffered serious injuries from a crash while performing a stunt for a Micron video, but had “credited his love of high-velocity sporting with helping him make snap business decisions,” and rejected the directors’ request that he discontinue his stunt flying.

     The Journal’s Joann S. Lublin, in an article one month later, reported that the directors of another company had prevailed upon their own CEO, a former fighter pilot, to stop flying his single-engine prop plane on solo commuting trips between their Ohio headquarters and his home in New York state. 

     Having agreed to use a company plane and a co-pilot, that executive could no longer enjoy his previous practice of turning on the autopilot and doing “a lot of reading.” 

     The board ultimately allowed the CEO to make his commute alone in a private plane that he had purchased, but insisted on a company co-pilot during flights in which one of his colleagues was also aboard.

     If their CEOs, or other key executives (including directors), are high-flying literally and/or figuratively (or possibly even flying while high, as did Harvard’s Richard Alpert (later known as Ram Dass)), boards and their counsel could consider at least eleven related issues.

    First, should candidates for, or holders of, such positions be required to disclose to the board their habits of, and plans to engage in, physically and/or psychologically risky activities?  If so, how will risk be defined and appropriate levels determined?  (Although in this context line-drawing might well be complex, “the edge of space” could be a good starting point.)

    Second, will the company require the executive to submit medical reports, and/or a physician’s (or other expert’s) approval, before engaging, or continuing to engage, in this activity?  Will the company specify the medical or other experts who will make such determinations?

    Third, will the company have any say in (or veto power over) the circumstances, equipment, leaders, and/or supervisors of an approved activity of an executive?

    Fourth, if an executive requests approval to begin or continue a risky activity, which individual, or what group or committee, will make that determination on behalf of the company, and how (by majority vote?) will such a group resolve any disagreements among its constituents?

     Fifth, what will be the penalty (reduction of compensation? termination?) for an executive who doesn’t fully disclose in advance the details of a proposed activity, who doesn’t request approval, and/or who disregards the company’s disapproval?  Or are some executives so central  to the company’s operations that they are effectively beyond penalizing?

     Sixth, will it make a difference if an executive claims that a possibly-risky (and/or -illegal) practice enhances her governance performance? 

     For instance, in his 2018 best-seller on the spiritual and psychological benefits that might be obtained from psychedelic drugs, Michael Pollan observed, “As I write, the practice of microdosing—taking a tiny, ‘subperceptual’ regular dose of LSD as a kind of mental tonic—is all the rage in the tech community.”

      Seventh, is there any legitimacy to the executive’s arguments that these restrictions will undulycramp my style”? 

    Not necessarily, if the board has already found it appropriate to require (at least the submission of) the resignation of any director who has committed “an act which might tend to bring [her] into public disrepute, contempt, scandal, or ridicule, or an act which might tend to reflect unfavorably on the Company or its business or reputation,” or of any director who has become “the subject of media attention that reflects unfavorably on his or her continued service on the Board.”  By contrast, risk-related restrictions might be seen as both more objective and more justifiable.

     Moreover, many top athletes are reportedly prohibited by their team/league contracts from participating even in friendly and casual extracurricular contests, because they might be injured.

     In addition, just as the infamous irascibility of some larger-than-life CEOs has led to speculation that they could have been (or could be) even more effective leaders if they had been (or were) more personable, executives’ outsized personal “risk appetites” could be seen as similarly dispensable, and certainly at least as dangerous to the company’s bottom line.

    Eighth, will it make a difference if other companies allow their own executives to engage in such behavior? 

     Not according to Shlensky v. Wrigley, 237 N.E. 2d 776, 781 (Ill. App. Ct. 1968), which held that “Directors are elected for their business capabilities and judgment and the courts cannot require them to forego their judgment because of the decisions of directors of other companies. Courts may not decide [allegations of negligence] in the absence of a clear showing of dereliction of duty on the part of the specific directors and mere failure to ‘follow the crowd’ is not such a dereliction.”

    Ninth, is an executive’s propensity (whether or not indulged) to engage in personally risky activities a risk factor that must be reported by the company in its securities filings?

    Tenth, should such tendencies and/or conduct also be disclosed to the providers of “key man insurance” that covers such an executive?  (If the insurer isn’t already asking for such information and updates, shouldn’t it?)

    Eleventh, should lenders and other creditors who are aware of a key executive’s risky habits or inclinations provide in their agreements with the company that his engaging in such behavior will constitute an event of default?  Should they include such a provision even if they know of no particular predilection for personal risk-taking among the company’s key executives?  In either case, how would such provisions be worded?

    Twelfth, there is an interesting inverse of these concerns, both legally and morally: Does a board, or any individual director or officer, have any duty to encourage a fellow director or officer to seek assistance when effective treatment might actually diminish their colleague’s ability to contribute to the company?

     For example, in a 2007 biography of Charles Schulz (1922-2000), the author and illustrator of the phenomenally successful Peanuts comic strip, one of his friends recalled, “He was always sad. . . . Who knows why?  And I said to him, ‘You should go to a psychiatrist,’ and he said, ‘No, I don’t want to go to a psychiatrist because it will take away my talent.’”

    Contemplating questions of such gravity, boards grounded in the fundamentals of “the governance space” might well consider how to bring their executives, one way or another, back down to earth.

     [Portions of this post were adapted from Section 2.02 of my book on corporate governance.]

     [This post is dedicated to the memory of Princeton’s Professor Robert Hollander (1933-2021), whose “Great Books“ course (the official title of which I don’t remember) introduced me, as a freshman, to the mysteries, marvels, and magic of Don Quixote, Paradise Lost, and, most of all, Inferno—which he and his wife, Jean Hollander, would later translate, along with Purgatorio and Paradiso, to great acclaim.

     [Professor Hollander—who was by all accounts an extraordinary explicator of the Divine Comedy—probably never read, but I think that he would have appreciated, a reminiscence of Daitsu Tom Wright, a translator of Roshi Kosho Uchiyama’s commentaries on a classic Zen text:

     [“One day I went in to see Roshi to ask him a question about something I had read in [the text].  Coincidentally, Roshi had a copy of the book open on his desk.  He showed it to me, and I couldn’t help but sense how old the copy was, because it was all beaten up and every page was filled with notes in the margins.  I kidded him that it must be about time to buy a new copy.  Silently, he lifted his hand and pointed his finger at the bookshelf behind me.  When I found the shelf he was pointing to, he said to take a look at the books there.  In all, I counted fourteen copies of [the book] and every one of them was as raggedy as the next.  And all of them had many lines underlined with notes in all the margins.  I asked Roshi what changes when you read the same book so many times.  His reply was quite interesting.  He said, that ‘the lines you underline change.'”]


     On June 3, 2021, United States Magistrate Judge Nathanael M. Cousins of the Northern District of California issued a six-page order holding that claims of attorney-client privilege did not prevent the admissibility into evidence of thirteen corporate documents.

   The ruling drew attention as the latest development in the prosecution of Elizabeth Holmes, the founder (in 2003) and former CEO of Theranos, on charges of wire fraud, in connection with the company’s representations that its proprietary technology and devices could, using only a few drops of a patient’s blood, conduct a variety of diagnostic analyses that would otherwise require several different machines.


     Wall Street Journal reporter John Carreyrou’s best-selling account, Bad Blood (2018), of Theranos, Holmes, and Ramesh “Sunny” Balwani (who was the company’s president and chief operating officer, and whose separate trial is pending) does not discuss privilege in detail.  However, it shares with the court order the theme of confidentiality, especially in the context of parallel personal and professional roles and relationships.

     Perhaps the simplest is the allegation that Holmes and Balwani had been “romantically involved.”  Carreyrou notes that even though “[t]here were no rules against that sort of thing in Silicon Valley’s private startup world[,] Holmes seemed to be hiding the relationship from her board. . . . If Holmes wasn’t forthright with her board about her relationship with Balwani, then what else might she be keeping from it?”

    On a different plane of confidentiality, “Many companies in Silicon Valley make their employees sign nondisclosure agreements, but at Theranos the obsession with secrecy reached a whole different level.”

     As legal enforcers of this obligation, David Boies—“arguably the country’s most famous lawyer” and “one of the most powerful and prominent lawyers in America”—and his firm, Boies Schiller Flexner LLP (BSF), aggressively pursued not only the filers of a competing patent, but also (for allegedly retaining trade secrets of, and/or defaming, or preparing to defame, Theranos) Carreyrou, several of his sources, and the Wall Street Journal itself. 

     Two of the book’s most compelling confrontations involve some form of privilege. 

     In a meeting in the Wall Street Journal’s offices in June 2015, Carreyrou and the newspaper’s executives invoked journalistic privilege when refusing to identify their sources to a Theranos team that included Boies, two other BSF partners, and the company’s in-house counsel (herself a former BSF partner).

     One month earlier, Tyler Shultz, a Theranos employee (and Carreyrou source), while visiting his grandfather George Shultz—a Theranos board member and a former Secretary of State—was  “blindsided” (“’[T]here are two Theranos lawyers upstairs,’ George said.  ‘Can I go get them?’”) by two BSF partners who threatened to institute a lawsuit alleging that he had violated the company’s confidentiality requirements.  

     Although Balwani had dismissed a Theranos colleague’s suggestion with the response that information technology professionals “are like lawyers, avoid them as long as possible,” Tyler would resist signing a BSF-prepared affidavit, saying, “A Theranos lawyer has drafted this with Theranos’ best interests in mind. . . I think I need a lawyer to look at it with my best interests in mind.”

     Tyler subsequently retained a lawyer who “arranged for [his parents] to have their own legal counsel.  That way he could communicate with them through attorneys and those conversations would be protected by attorney-client privilege.”

The Board– Including (2015-2016) Boies

    Bad Blood questions the effectiveness of the board, and particularly its high-profile directors (including fellow former secretary of state Henry Kissinger, and several former senior military officials; from 2010 to 2012, Holmes had interested the military in “the idea of using Theranos devices on the battlefield,” although the proposal failed because the FDA had not reviewed and approved the device for commercial use).

     Carreyrou reports that a less prominent director who privately raised governance concerns with Theranos’ chairman in 2007 was told that Holmes wanted him to resign from the board; when he subsequently identified what he considered “irreconcilable discrepancies” in board documents and proposed that Theranos retain more experienced managers than Holmes, the chairman told him, “Well, I think you should resign.”

     In mid-2011, Holmes told a prospective employee that “The board is just a placeholder. . . I make all the decisions here.”  Two and a half years later, she “forced through a resolution that assigned one hundred votes to every share she owned, giving her 99.7 percent of the voting rights. . . . When he was later questioned about board deliberations in a deposition, George Shultz said, ‘We never took any votes at Theranos.  It was pointless.  Elizabeth was going to decide whatever she decided.’”

     Technically, that would not have been true of the board’s decision-making—despite her domination of the shareholder vote, and her ability thereby to remove any dissident directors—unless Holmes had separately arranged to have a decisive number of multiple votes as a director.

     In late 2015, after the publication of Carreyrou’s first article on Theranos, the “aging ex-statesmen all left [the Theranos board] to join a new ceremonial body called a board of counselors.  In their place, Theranos made a new director appointment that signaled an escalation of hostilities: David Boies.”

     Boies would remain on the board until late 2016 or early 2017, “a few months” after the company’s general counsel returned to her partnership at BSF, which “stopped doing legal work for Theranos after falling out with Holmes over how to handle the federal investigations.”

    Indeed, the magistrate judge noted that Holmes claimed to have believed that Boies and his firm represented both herself and Theranos “up to the point when she retained separate counsel to represent her in the Securities and Exchange Commission and Department of Justice investigations into Theranos in 2016.”

Parenthetical: Concurrent Counsel for the Company and a “Constituent”

   Such a dual representation, if it had existed, would not necessarily have violated the ABA’s Model Rules of Professional Conduct, whose Rule 1.13(g) provides that “A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the [Rules’ prohibition of conflicts].”

   Official Comment 10 to Rule 1.13 adds that if the company’s and the constituent’s interests conflict, counsel should advise the individual that he cannot represent her, and that she “may wish to obtain independent representation. . . . Care must be taken to assure that [she] understands that [in such a situation, their discussions] may not be privileged.”

Outside Counsel as an Outside Director

      Separately, Official Comment 35 to Model Rule of Professional Conduct 1.7 observes that a conflict might be created by the service of a company’s counsel as one of its directors. 

     Such counsel should therefore consider “the frequency with which such situations may arise, [and] the potential intensity of the conflict,” among other factors.  “If there is material risk that the dual role will compromise the lawyer’s independence of professional judgment, the lawyer should not serve as a director or should cease to act as the corporation’s lawyer when conflicts of interest arise.”

     Moreover, “The lawyer should advise the other members of the board that in some circumstances matters discussed at board meetings while the lawyer is present in the capacity of director might not be protected by the attorney-client privilege and that conflict of interest considerations might require the lawyer’s recusal as a director or might require the lawyer and the lawyer’s firm to decline representation of the corporation in a matter.”

     Similarly, the ABA’s Formal (Ethics) Opinion 98-410 (1998) reminds a lawyer/director to “reasonably assure at the outset of the dual relationship that management and the other board members understand the different responsibilities of legal counsel and director; [and] understand that in some circumstances matters discussed at board meetings with the lawyer in her role as director will not receive the protection of the attorney-client privilege. . .”

     In his New York Times “Deal Professor” column on February 3, 2016, Steven Davidoff Solomon noted of Boies’ simultaneous status as outside director and as outside counsel, “This gets complicated for Mr. Boies, because Theranos is a corporate governance disaster. Ms. Holmes [through her special class of stock] controls the company.  This is a problem because the company is essentially Ms. Holmes. . . . If the technology is shown to be flawed, she may not be quick to admit that to the benefit of the remaining shareholders. . . . What if Ms. Holmes resists changes that would be in the interest of shareholders?”  Solomon concluded that “for someone so successful and savvy to put himself in a position that is bound to be problematic is puzzling.” 

BSF as Shareholder (2011- )

    In fact, even before he joined the board, Boies and BSF had been more than simply outside counsel to Theranos: as Carreyrou explains, in 2011, as payment for its legal services, “Elizabeth had granted [BSF] 300,000 Theranos shares at a price of $15 per share. . . . [Boies thus] had a vested financial interest in Theranos that made him more than just its legal advocate.  It helped explain why, in early 2013, Boies began attending all of the company’s board meetings.”

     A client’s compensating counsel with an ownership interest in the client is generally permitted by Formal (Ethics) Opinion 00-418 (2000), so long as: the transaction is fair to the client; the lawyer “specif[ies] in writing the scope of the services to be performed”; and the client “has had an opportunity to consult with independent counsel” about the arrangement.

    In addition, “At the outset, the lawyer should also inform the client that events following the stock acquisition could create a conflict between the lawyer’s exercise of her independent professional judgment as a lawyer on behalf of the corporation and her desire to protect the value of her stock,” and that such a conflict might result in her withdrawing as counsel, or at least recommending that the client retain another lawyer for a particular matter.

Documenting Dual Roles (and Their Risks)

     If Formal Opinion 00-418 required the “lawyer as shareholder” relationship to be expressed in writing, Formal Opinion 98-410 suggests that in the case of a “lawyer as director,”

     “Because of the need for the lawyer and the corporation’s management and board to give ongoing attention to potential conflicts, attorney-client privilege protection and other issues that may arise as a result of the dual role, the lawyer-director should consider providing a written memorandum in addition to an oral explanation.  A written memorandum is of particular assistance in describing the lawyer’s role as counsel for the corporate entity and not for its constituent officers or directors and in explaining the differences between serving as a director and serving as counsel.” (emphasis added)

     If BSF and Theranos did clarify these issues in writing, it does not appear to have been publicly reported.

     In fact, the second paragraph of the court’s order observes:

     “After the representation began [on a patent matter, in 2011], BSF continued to offer Holmes and Theranos a variety of legal services in relation to Theranos’ patent portfolio, press interactions, and inquiries from government agencies and departments. . . Despite the breadth and duration of BSF’s involvement, Holmes and BSF did not sign an engagement letter or establish any formal guidelines describing the scope of BSF’s representation.” (emphasis added)

     The court held that the standard for determining joint representation was not “Holmes’ subjective belief,” but the test enunciated by U.S. v. Graf, 610 F.3d 1148, 1161 (9th Cir. 2010), which required Holmes to show that:

     (1) she “approached counsel for the purpose of seeking legal advice”;

     (2) she “made it clear that [she was] seeking legal advice in [her] individual [capacity]”;

     (3) “counsel saw fit to communicate with [her] in [her] individual capacit[y], knowing that a possible conflict could arise”;

     (4) her “conversations with counsel were confidential”; and

     (5) “the substance of [her] conversations with counsel did not concern matters within the company or the general affairs of the company.”

    Holmes could not, ruled the court, establish factors (2), (4), and (5).

    Under (2), although she claimed that the dual representation “is a matter of public record,” Holmes could not document this.  By her own admission, “there was no engagement letter relating to Mr. Boies’ or his firm’s representation of Ms. Holmes and/or Theranos,” (emphasis added).  Nor did Holmes produce “any financial records showing that she paid Boies or BSF from her own accounts, not Theranos’.”

     With regard to (4), “None of the contested documents include conversations exclusively between Holmes and Boies or BSF. . . [T]he presence of Theranos employees and attorneys destroys the [assertion of personal] privilege.”

     Finally, under (5), “None of the [documents at issue] discuss Holmes’ individual legal interests.  All thirteen documents related to her ‘official duties’ or the ‘general affairs’ of the company like conversations with investors, billing, and media strategy.” 

     Because the entity assigned the right to invoke the privilege on Theranos’ behalf had already waived it, the documents were admitted as evidence. 

     In other words—the immortal words of The Godfather’s (1972) Michael Corleone (Al Pacino)—the court held that, with regard to the attorney-client privilege that Holmes had attempted to invoke, “It’s not personal, Sonny.  It’s strictly business.

     Boards reviewing these developments and issues might consider adopting some of the following policies:

     First, ensuring that the company executes “engagement letters”/”retention agreements” with all outside counsel working for the company.

     Second, requiring that individual outside counsel who also serve as members of the board—and individual counsel (and/or their firms) whose are being compensated for their legal services with shares in the company—provide in writing the clarifications indicated by the ABA’s Formal Opinions and its Rules of Professional Conduct.

     Third, developing simple methods to indicate, during board and committee meetings (and in other communications, including e-mails), when a director who is also a lawyer—whether she serves as the company’s in-house counsel or outside counsel, or even if she is an outside director who (and whose firm) does not formally represent the company– is participating (by making statements, asking questions, or even listening silently) in her role as director (for purposes of making business decisions) rather than as a lawyer (rendering, whether explicitly or tacitly, legal advice).  Those processes should include policies that govern designations for communications sent to the lawyer/director by directors and officers.

     Fourth, in this context, regularly reviewing, during board meetings and/or by distributing a written reminder, the factors involved in determining when board (or committee) discussions that include a director who is also a lawyer—and/or e-mails or other individual communications to the lawyer/director—might be privileged.

     Fifth (the “table-clearing option”), including as part of the company’s (nonbinding) corporate governance guidelines/principles, or enunciating as a separate rule, that no director of the company will simultaneously: (a) serve as (or as part of) the company’s in-house counsel; (b) serve as outside counsel to the company, to the board, to any board committee, or to any one or more of its directors and officers personally, in any matter; or (c) (for outside counsel) be a member of a firm that represents any of the individuals or groups identified in (b).

     If, as it is said, “Honesty is the best policy,” simplicity (or, at least as much simplicity as possible) might run a close second place.


     The title character of Kenny Rogers’ 1978 hit song, “The Gambler,” warned another unnamed, down-on-his-luck card-player, “If you’re gonna play the game, boy,/ You’ve gotta learn to play it right.”

     His famous and final wisdom, immediately characterized by his companion as “an ace that I could keep,” included:

          You’ve got to know when to hold ’em

          Know when to fold ’em

          Know when to walk away

          Know when to run. . . .

     However, beyond enumerating these crucial skills, the man who “made a life/ Out of readin’ people’s faces/ [And] knowin’ what the cards were / By the way they held their eyes” offered no details on how to master these crucial topics.

     Similarly, Nobel Prize-winner Daniel Kahneman, summarizing for a popular audience, in the humbling—and mind-expanding— Thinking, Fast and Slow (2011), his decades of pioneering research in identifying cognitive traps, concluded:

     “How can we improve judgments and decisions, both our own and those of the institutions that we serve and that serve us? The short answer is that little can be achieved without a considerable investment of effort.…Except for some effects that I attribute mostly to age, my intuitive thinking is just as prone to overconfidence, extreme predictions, and the planning fallacy as it was before I made a study of these issues. I have improved only in my ability to recognize situations in which errors are likely.…

     “Organizations are better than individuals when it comes to avoiding errors, because they naturally think more slowly and have the power to impose orderly procedures. Organizations can institute and enforce the application of useful checklists, as well as more elaborate exercises.”

     Ten years later, some procedures, checklists, and exercises are featured in Noise: A Flaw in Human Judgment, co-authored by Kahneman, Oliver Siboney (You’re About to Make a Terrible Mistake! (2020)), and Cass R. Sunstein (with Richard Thaler, Nudge: Improving Decisions about Health, Wealth, and Happiness (2008)). 

     However, a number of readers might find the book a faster-paced, jazzier version of proven crowd-pleasing material—or, the same apparent ace, dealt one more time.

     Kahneman, Siboney, and Sunstein sidestep some of today’s most socially sensitive issues about fairness and accuracy in decision-making, by declaring that bias—a  predictable deviation from a norm (whether conscious or subconscious; and whether for reasons innocuous or otherwise)— “is a compelling figure, but noise is the background to which we [usually] pay no attention.”   

     Information theory defines “noise” as unintentional and undesirable additions, distortions, or other errors in the transmission of an original “signal.” 

For these authors, though, “noise” refers to an array of “undesirable variability in judgments of the same problem”—for example, in divergent sentences handed down for the same offense by judges of different dispositions towards leniency (“level noise”); for the same offense, by the same judge during different moods (“occasion noise”); and by “patterned differences between judges in the influence of offense/offender characteristics” (“pattern noise”).  In light of this list (at least the last of whose elements might be difficult always to distinguish from “bias”), it is hardly surprising that the authors insist that, “Wherever there is judgment, there is noise, and more of it than you think.”

     They turn to “the technical psychological literature” for the definition of “judgment,” as “measurement in which the instrument is a human mind.”  If the varieties of noise might overlap, there is also no clear line between “predictive judgments” (such as, “How well will Candidate V perform if we hire her for Job W?”) and “evaluative judgments” (“How well did Y perform for us in Position Z over the last year?”) 

    Compounding this confusion, the authors acknowledge that “Matters of judgment, including professional judgments, occupy a space between questions of fact or computation on the one hand and matters of taste or opinion on the other.  They are defined by the expectation of bounded disagreement.

     And yet, in the book’s depiction of a hypothetical boardroom meeting conducted to minimize noise, a CEO admonishes an outspoken director: “[W]e are all reasonable people and we disagree, so this must be a subject on which reasonable people can disagree.” 

     Given the authors’ own vagueness about the acceptable limits of disagreement, which “is itself a judgment call and depends on the difficulty of the problem,” this CEO’s slippery circularity might strike careful readers as disingenuous as best (and perhaps prompt them to wish that Kahneman, Sibony and Sunstein had devoted much more discussion to scholarly studies of “bullshit receptivity”).

     In fact, by the authors’ own definition, considerations of “noise” do not apply to directors’ (or anyone else’s) “singular decisions” (as in their boardroom example, approving or rejecting a potential acquisition), which are not “recurrent judgments that interchangeable employees routinely make in large organizations.”  It is unclear how noise and “bounded disagreement” would apply to any decision or “judgment” that, in contrast to handing down a discretionary sentence or otherwise selecting one option from several (or many) available, consists simply of the approval or disapproval of a proposed transaction. 

     However, the authors maintain that the same techniques used, in the context of repeated decisions, for reducing bias and noise—which themselves “play the same role in the calculation of overall error”—would enhance the process for making “singular decisions.” 

     They then introduce a few diagrams, some simple formulas, and some references to Carl Friedrich Gauss’s “method of least squares” for measuring “error,” which they define to encompass both bias and noise. 

     Although Gauss’s mathematical technique, developed in 1795, is “the intellectual foundation of this book,” the authors admit that it relies on “detailed arguments. . . far beyond the scope of this book,” and “is not immediately obvious.”  In fact, “The idea seems arbitrary, even bizarre.”

     At this point, these three experts in exposing the fallibilities of human intuition state that the formula “builds on an intuition that you almost certainly share. . . [N]o other formula would be compatible with your intuition. . . .”

     Even so, the formula “does not apply to evaluative judgments, . . . because the concept of error, which depends on the existence of a true value, is far more difficult to apply.”    

     What practical guidance does Noise ultimately offer to directors?  Instead of intuition-based processes for decision-making, the authors recommend statistical approaches, although warning that, as a form of the “System 2” approaches discussed in Kahneman’s previous work, “statistical thinking is effortful”; it also “demands specialized training.”  

     Other elements resurfacing from the authors’ works include warnings against “informational cascades” (in which group decisions are affected by the order and authority with which members contribute opinions and information) and “group polarization” (“The basic idea is that when people speak with one another, they often end up at a more extreme point in line with their original inclinations”).  On a “Bias Observation Checklist” provided in an appendix, now-familiar concepts like anchoring, loss aversion, and present bias appear.

     To reduce noise, key “decision hygiene” principles include “sequencing [exposure to] information [including other decision-makers’ opinions] to limit the formation of premature intuitions,” and assembling teams whose members “are selected for being both good at what they do and complementary to one another.”

    The content of two brief chapters could serve as the basis of a useful book of its own: “In predictive judgments, human experts are easily outperformed by simple formulas—models of reality, models of a judge, or even randomly generated models,” or crude models that weight all relevant variables equally.  Even “frugal models” that “look like ridiculously simplified, back-of-the-envelope calculations” can under certain circumstances “produce surprisingly good predictions.”  The authors acknowledge the potential of “algorithmic bias,” particularly with regard to race and gender, but claim that algorithms “can be more transparent than human beings are” in this regard.

    Another chapter presents “a stylized example that is a composite of several real cases,” to illustrate the effect of a Mediating Assessments Protocol (or, MAP) on a board considering a potential acquisition (although the situation is described as a “one-off, singular decision,” which the authors have already defined as being less susceptible to noise-minimization considerations). 

     If the process emphasizes independently-submitted assessments at the beginning, “[a] board member would need to come up with strong reasons to be against the deal while staring at a list of mediating assessments that mostly supported it.”

     Although this approach might complicate the efforts of a director to dominate, “game,” or stymie the deliberations (particularly, the authors suggest, as compared to situations involving the board’s application of a formula), it certainly would not preclude such concerns, especially if that director had read Noise. 

     Similarly, I proposed some years ago, in connection with my own summary list of decision-making traps, that a “cognitive curriculum” of the popular literature in this area would not only improve the board’s function but would also “help to immunize executives against aggressive attempts by their competitors, creditors, and customers to exploit the dozens of vulnerabilities identified by these works.”

     Rather than (as the authors recommend in another appendix) “conducting a noise audit,” or appointing a “decision observer, someone who watches [the] group and uses a checklist to diagnose whether any biases may be pushing the group away from the best possible judgment,” boards might be better served simply by: (1) providing each director with a copy of Thinking, Fast and Slow; (2) devoting a few minutes at each of their succeeding meetings to discuss (or having an expert lead a discussion of) a portion of it; and (3) developing their own customized procedures, checklists, and exercises.

     As Kenny Rogers sang in 1978,

       Every gambler knows that the secret to surviving

       Is knowing what to throw away

       And knowing what to keep. . . .

     Or, as information theorists might say, knowing how to distinguish the “signal” from the “Noise.”        


     It has been said that Casey Stengel, the first (1962-1965) manager of the New York Mets, was so confounded by the team’s ineptitude during its inaugural season that he demanded, “Can’t anybody here play this game?”

     The same might be inquired of corporate directors, in the context of the nebulous concept, and the even more vague (and underinclusive) requirement, of their “financial literacy.”

     In September 1998, the NYSE and NASDAQ exchanges established a Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees.  Five months later, the ten recommendations of the Committee’s final report included the establishment of a financial literacy requirement for all directors serving on audit committees.

     The Committee explained that “a director’s ability to ask and intelligently evaluate the answers to [‘probing questions about the corporation’s financial risks and accounting’] may not require ‘expertise’ but rather hinges on intelligence, diligence, a probing mind, and a certain basic ‘financial literacy.”  It added, “Directors who have limited familiarity with finance can achieve such ‘literacy’ through company-sponsored training programs.”  Report and Recommendations of the Blue Ribbon Committee, 54 Bus. Law. 1067, 1081-1082 (1999).

     Effective January 31, 2000, the SEC approved the exchanges’ revised listing standards, which adopted the Committee’s definition of financial literacy: the ability “to read and understand fundamental financial statements, including a Company’s balance sheet, income statement, and cash flow statement.”  Id. at 1081; Commentary to NYSE Listed Company Manual Section 303A.07(a);  NASDAQ Listing Rule 5605(c)(2)(A).

     However, this requirement is not so simple as it seems.

     First, “financial literacy” is far from a precise term, and it has not been addressed or interpreted by caselaw.

     For instance, what other documents, besides those specified, should a member of the audit committee be able to “read and understand”?  And, to what degree or level must such a director “understand” these often-complex and usually-footnoted documents? 

     (Both sets of listing standards additionally, though still somewhat murkily, require that at least one member of an audit committee have a deeper background in accounting: for NYSE, “accounting or related financial management expertise, as the listed company’s board interprets such qualification in its business judgment”; and for NASDAQ, “past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.”)

     Compounding this confusion and cloudiness, the audit committee charters of some companies find it necessary to add that directors on the committee should have “a working familiarity with basic financial and accounting practices” or a “general knowledge of key business and financial risks and related controls or control processes.” 

     Second, boards should clarify how a current or potential director’s financial literacy is to be determined, rather than leaving it to, as many corporate governance guidelines (and the NYSE’s Commentary) permit, “the board’s business judgment.” 

     At least one company’s corporate governance guidelines call for each member of the audit committee “to complete an appropriate questionnaire.” 

     The most specific approach may be that of Proctor & Gamble’s governance guidelines, whose Appendix C provides a two-part definition of “financial literacy” and lists seven non-exclusive ways to satisfy this qualification, including “Financial training provided as part of new Committee member onboarding”; “Accounting or other financial education”; and various forms of professional experience.

     (One simple but effective approach might be for a board to retain an independent third party, such as a business school professor, to furnish a set of (real or mock) financial statements to any candidate, along with a series of questions to be answered in the examiner’s (physical or virtual) presence over the next ninety minutes.)

     Third, the NYSE Commentary and many audit committee charters indicate that if a director is not already financially literate when she joins the audit committee, she must become so “within a reasonable period of time thereafter.”  What is a “reasonable period of time” for a skill this fundamental to the directors’ monitoring role?

     According to New Jersey lore, in patronage-pervaded Hudson County, a newly-appointed director of the state’s Office of Weights and Measures, asked by a reporter at his swearing-in ceremony, “How many ounces are in a pound?”, replied, “Give me a break—I just got this job!”

     Fourth, shouldn’t financial literacy—however that might be defined—be required of all corporate directors, as of the time they join the board, rather than just those on the audit committees of NYSE- and NASDAQ-listed companies, “within a reasonable period of time” after joining the committee?

     In fact, some companies’ governance guidelines (which, both by their own titles and terms and by common understanding, do not legally bind the board) indicate that financial literacy is a factor to be considered in assessing potential candidates for directorships. 

     Some guidelines do state that all directors “should know how to read and understand fundamental financial statements and understand the use of financial ratios and information in evaluating the financial performance of the Company,” or “should know how to read a balance sheet, income statement, and cash flow statement, and understand the use of financial ratios and other indices for evaluating company performance.”

    A universal requirement of financial literacy would simplify, for listed companies, the question of quickly filling a vacancy on the audit committee, since all directors would already satisfy this qualification.

     Indeed, this basic but essential capability—and responsibility— appears among those identified forty years ago by the New Jersey Supreme Court, in its interpretation of the requirement (under N.J.S.A. 14A:6-14) that directors of companies incorporated in New Jersey “discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.”

     In Francis v. United Jersey Bank, 432 A.2d 814, 821-823 (N.J. 1981), the Court held that, “As a general rule, a director should acquire at least a rudimentary understanding of the business of the corporation. Accordingly, a director should become familiar with the fundamentals of the business in which the corporation is engaged.”

     “Directors are under a continuing obligation to keep informed about the activities of the corporation. . . . Directors may not shut their eyes to corporate misconduct and then claim that because they did not see the misconduct, they did not have a duty to look. The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect.”

     “Directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies. . . .  Accordingly, a director is well advised to attend board meetings regularly. . . . Regular attendance does not mean that directors must attend every meeting, but that directors should attend meetings as a matter of practice.”

     “While directors are not required to audit corporate books, they should maintain familiarity with the financial status of the corporation by a regular review of financial statements. . .  . In some circumstances, directors may be charged with assuring that bookkeeping methods conform to industry custom and usage. . . . Adequate financial review normally would be more informal in a private corporation than in a publicly held corporation.”

     “The review of financial statements, however, may give rise to a duty to inquire further into matters revealed by those statements. . . . Upon discovery of an illegal course of action, a director has a duty to object and, if the corporation does not correct the conduct, to resign. . . . Sometimes a director may be required to seek the advice of counsel.” [emphasis added]

     Fifth, and finally, might not both the level at which a director should “understand” key financial documents, and the “reasonable time” in which she should attain this capability, be determined at least in part by the nature of her particular company’s business? 

     The Francis Court found that “the  most striking circumstances” surrounding a director’s failure to detect and stop embezzlement by her sons included “the character of the reinsurance industry [, in which insurance companies distribute among themselves the risk that a particular insured will have a particularly large claim to be paid] and the nature of the misappropriated funds. . .  The hallmark of the reinsurance industry has been the unqualified trust and confidence reposed by ceding companies and reinsurers in reinsurance brokers. Those companies entrust money to reinsurance intermediaries with the justifiable expectation that the funds will be transmitted to the appropriate parties. . . .

     “[The company] received annually as a fiduciary millions of dollars of clients’ money which it was under a duty to segregate.  To this extent, it resembled a bank rather than a small family business. Accordingly, [the director’s] relationship to the clientele of [the company] was akin to that of a director of a bank to its depositors. All parties agree that [the company] held the misappropriated funds in an implied trust. That trust relationship gave rise to a fiduciary duty to guard the funds with fidelity and good faith.”  432 A.2d at 825.

     The New Jersey Supreme Court declared, “A director is not an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto, ‘dummy director.’” Id. at 823.

     Boards might thus be well-advised to provide, in their “on-boarding” process for all incoming directors, not only educational material—from the most introductory to more specialized and complex treatments—but also training, on “financial literacy.”

      If not a perfect solution, that might be (with apologies to Mr. Stengel), a pretty good baseline for keeping directors in-bounds.

     [Those interested in the dynamics of the New Jersey Supreme Court during a key portion (1985-1994) of the (1979-1996) term of Chief Justice Robert N. Wilentz might find of professional and personal interest the insights of former Associate Justice Daniel J. O’Hern (for whom I had the great privilege of clerking) in What Makes a Court Supreme (posthumously published in 2020).]


    Section 141(d) of the Delaware General Corporation Law enables corporations to create “classified” (or, “staggered”) boards, only a fraction of whose seats can be filled by shareholder voting in a given year.

    That Section also allows certificates of incorporation to designate certain seats on the board to be filled by the vote of specified classes or series of a companies’ stock, and to indicate the voting powers of those directors, which “may be greater than or less than those of any other director or class of directors.” 

     (By default, each director casts one vote, under Section 141(c)(4): “The vote of the majority of the members of a committee or subcommittee present at a meeting at which a quorum is present shall be the act of the committee or subcommittee. . . .”)

     Finally, under Section 141(d), “the certificate of incorporation may confer upon 1 or more directors, whether or not elected separately by the holders of any class or series of stock, voting powers greater than or less than those of other directors. Any such provision conferring greater or lesser voting power shall apply to voting in any committee or subcommittee, unless otherwise provided in the certificate of incorporation or bylaws.”  

     (For instance, one company’s certificate of incorporation “provides that the total votes possessed by this eleven-member Board is fifteen.  [The director designated by a private equity fund] is entitled to exercise five of the fifteen votes and each of the other directors is entitled to exercise one vote.” Marchand v. Barnhill, 2018 WL 4657159 (Del. Ch.), at *13.)

    In Carmody v. Toll Brothers, Inc., 723 A.2d 1180 (Del. Ch. 1998), the Delaware Court of Chancery examined Section 141(d) in the context of a “dead hand” poison pill rights plan, adopted as a takeover defense: a third party’s acquisition of 15% or more of Toll Brothers’ outstanding common shares would entitle all other stockholders “to buy two shares of Toll Brothers common stock or other securities at half price,” thereby “massively dilut[ing] the value of the holdings of the unwanted acquiror.” 

     Moreover, if Toll Brothers were acquired, or were “the surviving corporation and its common stock [were] changed or exchanged,” id., each of the other stockholders would be “entitled to purchase common stock of the acquiring company, again at half-price, thereby impairing the acquiror’s capital structure and drastically diluting the interest of the acquiror’s other stockholders.” Id. at 1183-84.

     The “dead hand” feature called for the rights to be redeemed only by a vote of the “Continuing [i.e., pre-acquisition] Directors” and of any new directors whose “nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors.”  Id. at 1184.

     Although these provisions appeared in a separate Rights Agreement, rather than, as required by Section 141(d), in the company’s certificate of incorporation, the directors argued that they were still valid because they effectively created a special committee of the board empowered to redeem the rights, and whose powers would not have to be enumerated in the certificate of incorporation.  Id. at 1190.

     In a case of first impression in Delaware, the Court of Chancery held, id. at 1191-1192, that the provision violated Section 141(d) in two ways:

     To begin with, the different voting powers of the directors did not appear in the certificate of incorporation. See also Sinchareonkul v. Fahnemann, 2015 WL 292314 (Del. Ch.), at *8 (invalidating, because it did not appear in the certificate of incorporation but only in the bylaws, a provision that granted a “deciding vote” to the board chair in the case of a director deadlock).

     In addition, Section 141(d) authorizes only the shareholders, not some or all of the directors, to create such differently-voting groups of directors. 

     The Court dismissed the analogy to a special committee, whose creation “would not impose long term structural power-related distinctions between different groups of directors of the same board. The board that creates a special committee may abolish it at any time, as could any successor board. On the other hand, the Toll Brothers ‘dead hand’ provision, if legally valid, would embed structural power-related distinctions between groups of directors that no successor board could abolish until after the Rights expire in 2007.”  Id. at 1192.

      (The Court also held that, because the replacement of some of the board would diminish, and of all the board would negate, the board’s opportunity to redeem the rights, the Rights Plan would impermissibly interfere with the board’s general power under Section 141(a) to manage the corporation’s business and affairs.)

     However, seven years after its Carmody decision, the Court of Chancery upheld the validity of a variation of the dead hand provision. 

     In California Public Employees’ Retirement System [CalPERS] v. Coulter, 2005 WL 1074354 at *1, “change of control payments” would be made to senior officers “if a majority of its board of directors ceased to be ‘Existing Directors.’  ‘Existing Directors’ were those directors in office at the time of the change of control agreements and those new directors who were ‘approved’ by [a majority of the] Existing Directors.  The views of new directors who were not approved as ‘Existing Directors’ would not be considered in determining whether subsequent new directors would be considered ‘Existing Directors.’”

     The Court reasoned that, “If the directors in office at the time of the Change of Control Contracts approve a new director and, thus, the new director is classified as an Existing Director, all directors had the same input, and the concerns motivating the Carmody Court are not implicated.  Similarly, if those directors fail to support another new director, that director will not be deemed an Existing Director, but there still has been no exercise of differential voting power.  [The more difficult situation is] when the next director comes to the Board and the director who is not classified as an Existing Director will not be considered in the subsequent determination of whether the next director is to be considered an Existing Director.”  Id. at *5.

     But even that situation did not violate the Carmody holding, or Section 141(d), because “A new board member who is not considered an Existing Director is not denied the right to vote in any instance. . . . Thus, the Existing Directors provision neither limits nor expands the voting powers of any director.”  Id. 

     In other words, the only differences between the Existing Directors and other directors (“Non-Existing Directors”?  “Existential Directors”?) were: (1) only the votes of Existing Directors were counted in determining whether a new director would herself qualify as an Existing Director; and (2) if the proportion of Existing Directors on the board fell below a majority, the change of control payments would be authorized.

     The Court concluded, “It is reasonable that a change of control agreement have some mechanism by which the corporation’s obligation to make such payments can be avoided if the composition of the Board has changed in name only.  The definitional approach [examined in this decision] is an acceptable methodology; it may not be the only one.”  Id. at *6.

     It also warned that “incumbent directors may not employ a similar device, in a different context, to deprive various directors of their voting power or to deprive them of the capacity to exercise that power when necessary[, which could] constitute a breach of the fiduciary duties owed by the board to the shareholders.”  Id. at *5 n.25.

     Boards reviewing or updating their governance documents, and shareholders interested in proposing amendments to those documents, might consider:

     First, should the certificate of incorporation grant special voting powers to the chair—for  example, an additional vote, to break a tie vote among the directors? 

     Or, perhaps, the ability to break only a “deadlock”—possibly defined in the certificate of incorporation as a continuing (over what period of time?) tie vote of directors addressing (which specific) issues?

     Second, could some directors have special voting powers that would be triggered by the occurrence of specific events, internal or external to the company?  What would those powers, and those events be?  Would an emergency be among them?  What type of director vote would determine whether such a condition had been satisfied?

     Third, could a director lose her special voting powers, and/or some or all of her regular voting powers, under certain conditions—for instance, if she engages in conduct that, though entirely legal, embarrasses the corporation?  What type of director vote would determine whether such a condition had been satisfied?

     Fourth, should a certificate of incorporation grant more than one vote, on specific issues or on all issues, to independent directors (however those might be defined)— and/or less than a full vote, on specific issues or on all issues, to a chair who also serves as CEO?

     Fifth, should directors who have served for longer terms on the board have greater voting powers in some ways than other directors?  Cf.  Williams v. Geier, 671 A.2d 1368, 1370 (Del. 1996) (upholding “a form of ‘tenure voting’ whereby holders of common stock on the record date would receive ten votes per share. Upon sale or other transfer, however, each share would revert to one-vote-per-share status until that share is held by its owner for three years.”). 

     Or would “tenure voting” for directors conflict with a concern that long-tenured directors might be seen as less than “independent,” and might thereby be deserving of fewer voting powers than the default?  Would there be some type of arc (default, to greater, to default, to lesser voting powers) over the course of a director’s tenure on the board?

     Sixth, could a board approve a committee charter that itself, without a corresponding provision in the articles of incorporation or bylaws, purported to grant greater or lesser voting powers than the default to one or more of the directors serving on the committee (for instance, greater voting powers to the committee chair)?