Why Delaware Courts Should Abolish the Schnell Doctrine

By Siegel, Mary | American University Business Law Review, July 1, 2016 | Go to article overview

Why Delaware Courts Should Abolish the Schnell Doctrine


Siegel, Mary, American University Business Law Review


INTRODUCTION

Today, the proposition that Delaware courts can grant equitable relief is incontrovertible. Apparently, however, this proposition was debatable after the passage in 1967 of the Delaware General Corporation Law ("DGCL").1 Many scholars credit the Schnell doctrine, created in 1971, with securing the current availability of equitable relief.2 The Schnell doctrine permits courts to invalidate conduct that is technically in compliance with applicable law if the court deems that conduct to be inequitable;3 therefore, compliance with the corporate statute is the minimum, but not necessarily the sole, requirement for legality. Throughout its forty-five-year life, the Schnell doctrine has surfaced intermittently in Delaware case law. Recently, the doctrine has moved front and center in Delaware corporate law as Delaware courts have raised the specter of the Schnell doctrine to test the validity of contentious director-enacted bylaws if and when corporations implement them.4 While the Schnell doctrine is ingrained in Delaware law, this Article nevertheless offers a bold recommendation: abolish the Schnell doctrine entirely. The reason is simple: the Schnell doctrine adds nothing positive to existing Delaware law.

The thesis of this Article accepts the view that Schnell has served the critical function of establishing the role of equity, but argues that the Schnell doctrine is currently superfluous for one reason: there is-or should be-a Schnell violation only when there is also a breach of fiduciary duty. Thus, the coexistence of the Schnell doctrine and fiduciary breaches incorrectly suggests that a Schnell violation is different from a breach of fiduciary duty and imposes costs for this incorrect inference. Since the doctrine imposes costs and offers no discemable current benefit, this Article recommends that Delaware courts abolish the Schnell doctrine. Because this Article agrees with the vital role of equity in Delaware corporate law, but contends that the Schnell doctrine no longer adds to that vitality, this proposal would not weaken the robust protection that equity currently provides.

Part I first discusses the Schnell case and how, at its origin, it established the role of equity in judicial review. Thereafter, Part I discusses two other key cases: Weinberger v. UOP, Inc.5 and Blasius Industries, Inc. v. Atlas Corp.6 All three cases are identical in one respect: after finding that the respective directors meticulously complied with the relevant statutory provisions, the Delaware courts in these three cases nevertheless held that such compliance alone was insufficient. The most interesting aspect of these cases for the purposes of this Article is that these courts gave three different responses regarding why the directors' conduct was invalid: (1) the Delaware Supreme Court in Schnell held that the directors' conduct was inequitable; (2) the Delaware Supreme Court in Weinberger held that directors and controlling shareholders violated their fiduciary duty of loyalty; and (3) the Delaware Chancery Court in Blasius also held that the directors violated their duty of loyalty, but reasoned that, because the directors had acted in good faith, this violation was unintentional.

Since the court's response in Schnell was that the conduct was inequitable, and the response in Weinberger and Blasius was that the conduct breached the directors' fiduciary duties, Part II begins by examining all cases where Delaware courts found Schnell violations and concludes that all but two were nothing more than fiduciary breaches. Part II then posits that these two outlier cases illuminate the cost of retaining the Schnell doctrine because the judges in these two cases invalidated legal conduct based solely on their sense that the directors had acted unfairly. Although legislation has resolved the contentious issues raised in two other recent cases,7 Part II concludes with an analysis of these two cases that Delaware courts had, prior to this legislation, reserved for a future Schnell analysis. …

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