How the Law Works

I’m going to relate some information I learned at a dinner party earlier tonight. I’ve yet to corroborate it. My hope is that readers can point out any errors in the story as I’ve heard it, and help me to think through its ramifications.

Here goes, as told to me.

In Delaware, when a corporate board of directors issues an order, it is compelled by law to sign and date it, else the action taken is legally invalid. So say that the board of directors wants to sell stock held by the company. It isn’t enough that it acknowledges having approved the sale of stock. Each board member who favors selling the stock must actually sign a dated statement to that effect.

The law is intended to prevent CEOs from abusing their power. The idea is that CEOs were taking controversial actions, and persuading their boards of directors to rubber stamp them after the fact. Legislators assumed that board members willing to validate actions ex post facto would be less willing to sign backdated documents to fraudulently corroborate that permission was given.

This came up in a conversation about the amount that law associates at corporate firms are paid. The person telling the story was trying to give an example of how a first year associate might add value to the firm and its clients. In this case, the first year associate knew about this Delaware law. It empowered the firm to check up on a corporation — I don’t know whether it was a client or the adversary of a client — to see whether or their board of directors complied with this regulation. As the story was told to me, the firm had mistakenly neglected to date certain orders that validated actions it took. These weren’t cases of the CEO seeking ex post facto approval for controversial actions, but it was nevertheless the case that certain significant actions taken by the firm were technically invalid.

If all this is accurate, it strikes me as an excellent example of how a seemingly reasonable regulation, passed with the best intentions, can contribute to a legal regime so complicated that we wind up in a society where it makes sense to pay many lawyers hundreds of dollars an hour to navigate it, and where the law is less effective at encouraging fair play as it is at maximizing the advantage held by the folks who are able to hire the best attorneys.

Does this strike folks as sound, factually and analytically?