Ryan and the irreducible indeterminacy of corporate law

VC Noble’s opinion in Ryan v. Lyondell is still getting attention. That case gave apparently scant effect to a due care waiver despite Delaware’s authorization of such clauses in 102(b)(7).

Gordon Smith says we should blame the Delaware Supreme Court for opening up a wide good faith exception.

Steve Bainbridge responds that the Delaware legislature should fix 102(b)(7) by adopting tighter language, a la MBCA 2.02(b)(4), noting that

although certainty and predictability long have been hallmarks of Delaware law, section 102(b)(7) was a botch job from the outset that has been made worse through judicial interpretation.

But Bill Carney and George Shepherd would take issue with Steve’s general assessment of Delaware law. They argue, in The Mystery of Delaware Law’s Continuing Success, that Delaware’s “hallmark” has actually been costly indeterminacy.

Carney & Shepherd debated this with Chancellor Chandler at the U of I last fall, where Bob Thompson and I also chimed in. Carney & Shepherd see the MBCA -- and not just 2.02(b)(4) -- as a model of determinacy for Delaware. Yet corporations still choose Delaware.  That's the “mystery.”

My contribution to the debate, The Uncorporation and Corporate Indeterminacy, argues that corporate indeterminacy is inherent in the regulatory nature of corporate law. By contrast, the law of unincorporated firms, particularly including Delaware's law on this subject, features clear enforcement of customized contracts.

This difference between corporations and uncorporations was demonstrated recently in the Delaware Supreme Court’s Wood v. Baum, which I recently discussed on the Harvard blog. So as I commented on my own blog in response to Ryan:

It’s increasingly looking like the best and maybe only chance for managers to comfortably avoid liability, or at least a messy trial, is in an unincorporated firm.

I suspect that the Delaware legislature will pick up on Steve's suggestion and clarify good faith out of 102(b)(7).  But I also suspect that this won't solve the problem because, again, indeterminacy is inherent in the public corporations that Delaware specializes in.

Why must corporations be indeterminate?  Part of the reason is that high transaction costs inhibit contracts in publicly held firms.  Courts and legislatures therefore have to keep firms up to date with ever-mutating substantive rules.  This is Henry Hansmann's thesis, in Corporation and Contract.

Bob Thompson’s analysis at the Illinois conference, Delaware’s Disclosure, adds another explanation for inherent indeterminacy: it's a product of Delaware’s competing with federal law to remain the leading forum for corporate disputes by accommodating disclosure and substantive duties.

These arguments relate indeterminacy to publicly traded firms, and not to the form these firms take -- that is, corporate or uncorporate.  But, again, keep in mind that Wood v. Baum, enforced an opt out in a publicly traded LLC.  So the line between corporations and uncorporations remains, at least for now, even in the publicly traded firm context.

And why should that be? Why distinguish publicly held LLCs from publicly held corporations?  Some answers are suggested by my Uncorporating the Large Firm. But that's enough theorizing for now.