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?
Yes, though corporate law is extraordinary in this regard: corporations are legal fictions; the centuries-long search for equilibrium among competing interests (the State, the Shareholder, the Creditor) is meant to justify these legal fictions; as such, the accretion of complexity is inevitable and maybe even desirable from the State’s perspective.
For your thesis — that legal complexity maximizes the advantage held by the folks who are able to hire the best attorneys — I’d go with the Cretin’s Labyrinth of tax law. That shit is ridiculous.
— Kristoffer V. Sargent · Oct 18, 03:54 PM · #
I’d run this post by your source and ask him or her to verify. This is not the law in Delaware.
— Steven Donegal · Oct 18, 05:55 PM · #
That’s not the law in Delaware, although it is conceivable that there is some particular type of resolution that is required to be signed and dated pursuant to some other rule (a tax reg, say, or an SEC reg).
And, yes, children, complicated regulatory regimes require smart people to navigate them, and those smart people demand high compensation for taking on difficult, boring work. That is why lawyers have been well-paid for many centuries, and will continue to be.
— y81 · Oct 19, 12:59 PM · #
This sounds much more like public agency law than corporate law. In a small public agency (say, for example, a water district), the powers of the general manager are limited by statute. The elected Board of Directors, and only the Board, has the authority to take certain actions, like binding the agency to large-dollar contracts.
So, let’s say the GM and the Board president are corrupt and the other Board members are clueless. The GM could sign a contract in advance of having the authority to do so and then the President could try to get the Board to ratify the contract after the commitment has been made.
If the firm which wanted the contract but didn’t get it decides to hire a lawyer, it would be entirely appropriate to assign a first-year associate with the responsibility to do what’s called “due diligence” on the agency’s approval of the contract, including reviewing the minutes of the Board and comparing the dates of Board actions with the date of the GM’s signature on the contract.
— Francis · Oct 19, 03:04 PM · #
Even given Conor’s fact pattern arguendo, what’s the take-home? What is he arguing for?
Anarchy? Judges working according to their sense of situation-justice, notwithstanding clear rules that are silly in the particular context? A unified field theory of sound law?
Society is complex. Large organizations have their own internal rules, which can be as silly and constricting as any law. Everybody has read Dilbert. A lot of us have gone to universities.
Unless we’re willing to jettison large organizations—the full agrarian—we’re stuck with it. It’s not just the legislators or the judges.
— Joe S. · Oct 19, 05:34 PM · #
But couldn’t this kind of regulation actually prevent future litigation if it is followed correctly? It doesn’t seem like mandating that corporations keep clear, dated records is out of order, or that it would require an undue amount of attorney-hours to ensure that the corporation complies with the rules.
— Sunny · Oct 20, 07:04 PM · #