Note

Conflicts of Precedent

The law of the circuit doctrine requires three-judge panels in the federal courts of appeals to give stare decisis effect to past decisions of the circuit, which can only be overruled by the circuit sitting en banc or by the U.S. Supreme Court. This doctrine presents a recurring dilemma for circuit panels: the applicability of circuit precedent that is undermined by, but not conclusively overruled by, intervening Supreme Court precedent. The circuits have developed disparate approaches to addressing these scenarios: some permit three-judge panels to overrule undermined circuit precedent, others require an en banc proceeding to reject circuit precedent that is not unequivocally overruled by the Supreme Court, and still others have an internal procedure for circuit judges to agree on the proper approach.

This Note explores how federal courts of appeals ought to treat undermined-but-not-overruled circuit precedent. It first rejects the potential argument that horizontal stare decisis in the court of appeals is compelled by the Constitution or by statute. As such, the Note explains how the values of uniformity, institutional legitimacy, accuracy, reliance, and judicial economy are served by the practices of vertical and horizontal stare decisis, and it concludes that those values are better served by following vertical precedent than horizontal. Accordingly, this Note argues that circuit panels should apply a presumption in favor of overruling undermined precedent to align circuit doctrine with recent Supreme Court decisions. Moreover, the Note argues that the strength of this presumption should be tailored to the context of the case. By re-orienting the focus of precedent toward Supreme Court decisions rather than contradicted circuit doctrine, the courts of appeals can bring greater uniformity to the content of federal law, enhance efficiency within the legal system, and better enable the Supreme Court to realize its position atop the judicial hierarchy.

I. Introduction

Recall the classic case of Flood v. Kuhn, where the U.S. Supreme Court had to decide whether the Sherman Antitrust Act applied to professional baseball.1 1.407 U.S. 258, 259 (1972).Show More The Court was not writing on a blank slate in Kuhn; fifty years earlier in Federal Baseball Club of Baltimore Inc. v. National League of Professional Baseball Clubs, it held that the Sherman Act did not cover professional baseball.2 2.259 U.S. 200, 209 (1922).Show More But in the meantime, the Supreme Court had interpreted the Sherman Act to reach professional boxing3 3.United States v. Int’l Boxing Club of N.Y., Inc., 348 U.S. 236, 242 (1955).Show More and football.4 4.Radovich v. Nat’l Football League, 352 U.S. 445, 452 (1957). The Supreme Court had also reaffirmed Federal Baseball Club’s holding in Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953) (per curiam), but that case was decided before International Boxing Club or Radovich.Show More By the time of Flood v. Kuhn, Federal Baseball Club was an outlier, and yet the Court adhered to baseball’s unique exemption from antitrust liability on the grounds of stare decisis.5 5.Kuhn, 407 U.S. at 283–84.Show More

Now let’s put a twist on that story. Imagine that at Time 1, a federal court of appeals, rather than the Supreme Court, decided Federal Baseball Club and held professional baseball to be exempt from the Sherman Act. Subsequently at Time 2, the U.S. Supreme Court held that the Sherman Act was applicable to professional boxing and football. At Time 3, the equivalent of Flood v. Kuhn, challenging the continued viability of Federal Baseball Club, comes before the court of appeals. How should the court proceed in light of the Time 2 Supreme Court decisions that cast doubt on, but do not directly overturn, the appellate court’s Time 1 precedent?

This type of case poses a significant dilemma for stare decisis in the federal courts of appeals. Under the law of the circuit doctrine, circuit precedents are binding on that court unless a majority of active judges in the circuit overturn a decision in an en banc proceeding or the precedent is directly overruled by the Supreme Court.6 6.See, e.g., Lewis v. Humboldt Acquisition Corp., 634 F.3d 879, 881 (6th Cir. 2011) (en banc).Show More But in some circuits, when a Supreme Court decision casts doubt on—without directly overruling—a prior circuit precedent, a panel of court of appeals judges can overrule that precedent and bypass an en banc proceeding.7 7.See, e.g.,United States v. Villareal-Amarillas, 562 F.3d 892, 898 n.4 (8th Cir. 2009).Show More In other circuits, a panel’s authority to overrule circuit precedent under these circumstances is very narrowly circumscribed.8 8.See, e.g.,United States v. Staten, 466 F.3d 708, 717–20 (9th Cir. 2006).Show More This type of situation commonly arises when the Supreme Court interprets a statute that bears some relation to the one addressed by a circuit precedent. The issue also presents itself when the Supreme Court interprets the same constitutional or statutory provision as the circuit precedent but considers different factual subject matter.

The problem of undermined-but-not-overruled circuit precedent is a recurring dilemma for federal courts of appeals.9 9.Andrew C. Michaels, Implicit Overruling and Foreign Lost Profits, 25 B.U. J. Sci. & Tech. L. 408, 409 (2019) (“[H]ow might a court choose between following a directly-on-point circuit panel precedent, versus a subsequent Supreme Court case that is less directly on point but arguably overruled that panel precedent? Despite the fact that federal circuit courts (and district courts) are faced with this question on a regular basis, the answer is not clear.”).Show More The Sixth Circuit, for example, recently faced this dilemma in Jacobs v. Alam.10 10.915 F.3d 1028 (6th Cir. 2019).Show More The plaintiff filed a Bivens11 11.Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388 (1971).Show More action against federal law enforcement agents to recover damages for excessive force, false arrest, malicious prosecution, fabrication of evidence, and civil conspiracy.12 12.Jacobs, 915 F.3d at 1033.Show More The Sixth Circuit (but not the Supreme Court) had previously recognized Bivens claims for damages in all of those contexts.13 13.See Webb v. United States, 789 F.3d 647, 659–60, 666–72 (6th Cir. 2015) (discussing the merits of Bivens actions for malicious prosecution, false arrest, fabrication of evidence, and civil conspiracy); Burley v. Gagacki, 729 F.3d 610, 621 (6th Cir. 2013) (explaining plaintiff’s burden for an excessive force Bivens action).Show More But after those Sixth Circuit decisions, the Supreme Court decided Ziglar v. Abbasi, which concluded that if a case presents a new Bivens context that is “different in a meaningful way from previous Bivens cases decided by [the Supreme] Court,” then the deciding court should not make a Bivens remedy available if there are “special factors counselling hesitation.”14 14.137 S. Ct. 1843, 1857, 1859 (2017) (emphasis added) (quoting Carlson v. Green, 446 U.S. 14, 18 (1980)) (internal quotation marks omitted).Show More The Sixth Circuit panel in Jacobs recognized that had Abbasi not been decided, “defendants’ appeal would have no merit” under circuit precedent.15 15.Jacobs, 915 F.3d at 1036.Show More But although Abbasi did not directly overrule those Bivens circuit precedents,16 16.AccordLoumiet v. United States, 292 F. Supp. 3d 222, 229 (D.D.C. 2017) (rejecting the theory that “after Abbasi, a district court may no longer rely on circuit court precedent recognizing a Bivens cause of action in a context that has not expressly been recognized (or expressly rejected) by the Supreme Court”).Show More the decision called into question whether they were still good law, or whether the court needed to perform a special factors analysis. Ultimately, the Jacobs panel did not “deem these Sixth Circuit precedents inconsistent with Ziglar [v. Abbasi],” and thus, it concluded that it was bound to follow them without resort to a special factors analysis.17 17. Jacobs, 915 F.3d at 1036–39.Show More

The D.C. Circuit, however, took the opposite tack in the context of Bivens claims following Ziglar v. Abbasi. In Loumiet v. United States, the court considered whether to permit a Bivens action for a First Amendment retaliation claim.18 18.948 F.3d 376, 378 (D.C. Cir. 2020).Show More Although the D.C. Circuit had previously recognized Bivens claims in this context,19 19.See, e.g., Haynesworth v. Miller, 820 F.2d 1245, 1255 (D.C. Cir. 1987) (holding that “retaliatory prosecution constitutes an actionable First Amendment wrong redressable under Bivens” (footnote omitted)).Show More the court held that “those cases have been overtaken by Abbasi’s holding that the new-context analysis may consider only Supreme Court decisions approving Bivens actions.”20 20.Loumiet, 948 F.3d at 382.Show More Instead, the D.C. Circuit panel performed a special factors analysis and held that a Bivens remedy was not available for First Amendment retaliation, despite the fact that its own circuit precedents supported a contrary decision.21 21.Id.at 382–86; accordVanderklok v. United States, 868 F.3d 189, 198–99 (3d Cir. 2017) (concluding that “[the circuit’s own] past pronouncements are thus not controlling” in the context of Bivens claims that had not been addressed by the Supreme Court).Show More

While the problem of undermined circuit precedent is frequently presented, the circuits have not developed a sufficiently nuanced framework for handling these challenging cases. The courts of appeals take disparate approaches in addressing these situations, and notably, no circuit tailors its approach to the specific legal context presented by the case.

In light of the motivations behind vertical and horizontal stare decisis, this Note argues that circuit court panels ought to apply a general presumption in favor of overruling an undermined circuit precedent. Importantly, however, special circumstances justify a stronger or weaker application of this general rule. This Note proceeds in four parts. Part II examines how the federal courts of appeals have handled latent conflicts between on-point circuit precedents and intervening Supreme Court cases that undermine those decisions. Part III explores the practice of stare decisis in the American judiciary. It explains the potential constitutional, statutory, and pragmatic sources of vertical and horizontal precedent at the court of appeals level. Part IV proposes an approach for how courts of appeals ought to handle these conflicts grounded in the justifications behind vertical and horizontal stare decisis. Part V concludes.

  1. * J.D., University of Virginia School of Law, 2020. Winner of the Roger and Madeleine Traynor Prize. Special thanks are first owed to my advisor Caleb Nelson, who provided invaluable commentary and direction throughout this project. I would also like to thank those whose feedback further refined the paper, including Hanaa Khan, Jackson Myers, Jonah Panikar, and the rest of the Virginia Law Review’s hard-working staff. Final and most important thanks are owed to my wife, Allyson Dickman, whose editorial assistance and constant encouragement made this Note possible. ↑

  2. 407 U.S. 258, 259 (1972). ↑

  3. 259 U.S. 200, 209 (1922). ↑

  4. United States v. Int’l Boxing Club of N.Y., Inc., 348 U.S. 236, 242 (1955). ↑

  5. Radovich v. Nat’l Football League, 352 U.S. 445, 452 (1957). The Supreme Court had also reaffirmed Federal Baseball Club’s holding in Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953) (per curiam), but that case was decided before International Boxing Club or Radovich. ↑

  6. Kuhn, 407 U.S. at 283–84. ↑

  7. See, e.g., Lewis v. Humboldt Acquisition Corp., 634 F.3d 879, 881 (6th Cir. 2011) (en banc). ↑

  8. See, e.g., United States v. Villareal-Amarillas, 562 F.3d 892, 898 n.4 (8th Cir. 2009). ↑

  9. See, e.g., United States v. Staten, 466 F.3d 708, 717–20 (9th Cir. 2006). ↑

  10. Andrew C. Michaels, Implicit Overruling and Foreign Lost Profits, 25 B.U. J. Sci. & Tech. L. 408, 409 (2019) (“[H]ow might a court choose between following a directly-on-point circuit panel precedent, versus a subsequent Supreme Court case that is less directly on point but arguably overruled that panel precedent? Despite the fact that federal circuit courts (and district courts) are faced with this question on a regular basis, the answer is not clear.”). ↑

  11. 915 F.3d 1028 (6th Cir. 2019). ↑

  12. Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388 (1971). ↑

  13. Jacobs, 915 F.3d at 1033. ↑

  14. See Webb v. United States, 789 F.3d 647, 659–60, 666–72 (6th Cir. 2015) (discussing the merits of Bivens actions for malicious prosecution, false arrest, fabrication of evidence, and civil conspiracy); Burley v. Gagacki, 729 F.3d 610, 621 (6th Cir. 2013) (explaining plaintiff’s burden for an excessive force Bivens action). ↑

  15. 137 S. Ct. 1843, 1857, 1859 (2017) (emphasis added) (quoting Carlson v. Green, 446 U.S. 14, 18 (1980)) (internal quotation marks omitted). ↑

  16. Jacobs, 915 F.3d at 1036. ↑

  17. Accord Loumiet v. United States, 292 F. Supp. 3d 222, 229 (D.D.C. 2017) (rejecting the theory that “after Abbasi, a district court may no longer rely on circuit court precedent recognizing a Bivens cause of action in a context that has not expressly been recognized (or expressly rejected) by the Supreme Court”). ↑

  18. Jacobs, 915 F.3d at 1036–39. ↑

  19. 948 F.3d 376, 378 (D.C. Cir. 2020). ↑

  20. See, e.g., Haynesworth v. Miller, 820 F.2d 1245, 1255 (D.C. Cir. 1987) (holding that “retaliatory prosecution constitutes an actionable First Amendment wrong redressable under Bivens” (footnote omitted)). ↑

  21. Loumiet, 948 F.3d at 382. ↑

  22. Id. at 382–86; accord Vanderklok v. United States, 868 F.3d 189, 198–99 (3d Cir. 2017) (concluding that “[the circuit’s own] past pronouncements are thus not controlling” in the context of Bivens claims that had not been addressed by the Supreme Court). ↑

Defining Appraisal Fair Value

Appraisal is a statutory mechanism that entitles dissenting stockholders of Delaware merger targets to receive a judicially determined valuation of their shares. During a decade when Delaware courts significantly constrained other legal avenues of merger dissent, appraisal petitions increased dramatically, with individual cases potentially implicating billions of dollars of stockholder value. Recent appraisal case law has sparked considerable controversy over the role of market prices in courts’ appraisal valuations. Courts and commentators have struggled to articulate exactly when market prices are the best evidence of fair value, as well as what types of market prices are most relevant to appraisal fair value. This Note presents a revised conception of appraisal fair value that is informed by economic theory and rooted in Delaware corporate law’s longstanding goals of facilitating capital formation and maximizing stockholder value.

This Note proposes two changes to existing conceptions of merger deal prices in appraisal cases. First, the appraisal statute should be understood to exclude the value of reduced agency costs from appraisal awards. Second, when material non-public information is disclosed to the buyer but withheld from the market, both the appraisal statute and basic notions of market efficiency demand that courts take cognizance of it. The best way to operationalize these conceptual modifications is to presume that the target’s unaffected stock price equals fair value unless the petitioner establishes that material information was withheld from the market.

This approach adds needed clarity to the Delaware Supreme Court’s salutary recent embrace of the efficient capital markets hypothesis in the appraisal context. Adopting it would increase stockholder value, encourage efficient change-of-control transactions, and simplify appraisal proceedings. It preserves appraisal’s foundational role as a safeguard against the exploitation of minority stockholders by compensating them when the deal price omits suppressed material information.

I. Introduction

Section 262 of the Delaware General Corporation Law (“DGCL”) provides that a dissenting target stockholder in a merger or consolidation transaction may petition the Court of Chancery for an award of the fair value of her shares.1 1.Del. Code Ann. tit. 8, § 262 (2020). The appraisal remedy is limited to two types of transactions: “squeeze-outs” effected under §§ 253 and 267, and other mergers or consolidation transactions involving some cash consideration. See id.Show More Appraisal is a critical safety net for minority stockholders, and appraisal petitions increased dramatically during the past decade as Delaware courts have constrained other methods for challenging change-of-control transactions.2 2.See infra notes 20–22 and accompanying text.Show More Disagreement persists about whether and when the market price, the deal price, or some other metric is the best indicator of fair value. Each of these approaches is rooted in an incomplete conception of the determinants of merger prices. This Note presents a revised model of merger deal prices that resolves many of the theoretical and practical impediments to articulating a properly functional appraisal remedy. It then suggests a method for operationalizing the revised model.

In two 2017 decisions, the Delaware Supreme Court (“Supreme Court”) relied on the Efficient Capital Markets Hypothesis (“ECMH”) to reverse the Court of Chancery and endorse the deal price as the best evidence of fair value. The decisions and the Supreme Court’s treatment of the ECMH sparked widespread debate about the proper role of the ECMH in appraisal law and the broader purposes of the appraisal statute. Unresolved questions about the proper role of the ECMH and its broader purposes remain pending before the Supreme Court as of the time of this writing. Although Delaware’s recent emphasis on the ECMH is a welcome development, its failure to account for the role of reduced agency costs and the value of non-public information threatens to undermine the benefits of adopting the ECMH. A more complete theory of appraisal law must acknowledge two critical facts. First, agency cost reductions—the value created by replacing existing managers with more effective ones—are a key motivation for pursuing mergers, and they should belong to the acquirer. To incentivize efficient change-of-control transactions, courts should exclude the value of reduced agency costs from appraisal awards. Second, the value of non-public information about the target company is often a key element of merger prices. By relying on the ECMH without explicitly incorporating the value of non-public information into appraisal fair value, courts subvert the theory’s ability to provide reliable estimates of fair value. The best formulation of the appraisal remedy—and the one most consistent with the ECMH, the appraisal statute, and the purposes of Delaware corporate law—presumes market prices are fair in the absence of evidence that material non-public information was withheld from the market.

To define the “fair value” of an appraisal petitioner’s shares, it is first necessary to re-examine the composition of merger deal prices. If the target company’s stock trades in an efficient market, then its stock price “reflects all publicly available information as a consensus, per-share valuation.”3 3.Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd. (Dell), 177 A.3d 1, 16 (Del. 2017).Show More The existing stock price sets the presumptive baseline for merger fair value because no rational stockholder would tender her shares to an acquirer at a lower price than she would receive on the open market.4 4.It is assumed that the Supreme Court has endorsed the ECMH inclusive of that theory’s conventional assumption that market participants are rational. See Steven M. Sheffrin, Rational Expectations 99 (2d ed. 1996). This assumption is uncontroversial in the present context—i.e., it is beyond doubt that no reasonable shareholder would tender her shares at a lower price than she could readily receive elsewhere—but it has been contested in others. See, e.g., Franco Modigliani & Richard A. Cohn, Inflation, Rational Valuation and the Market, 35 Fin. Analysts J. 24, 24 (1979) (arguing that persistent inflation distorts market prices of securities, a finding inconsistent with some forms of the ECMH); Lawrence H. Summers, Does the Stock Market Rationally Reflect Fundamental Values?, 41 J. Fin. 591 (1986) (arguing that empirical evidence does not conclusively confirm the ECMH and that market prices do not always rationally reflect the fundamental values of securities). This Note does not aspire to contribute to scholarly commentary on the ECMH; like the Supreme Court, it adopts the hypothesis as a tool for deciding appraisal cases. See Dell, 177 A.3d at 24; see also Are Markets Efficient?, Chi. Booth Rev. (June 30, 2016), https://review.chicagobooth.edu/­economics/2016/video/are-markets-efficient [https://perma.cc/7HBU-C4ZL] (interview with Eugene Fama and Richard Thaler) (“The point is not that markets are efficient. . . . It’s just a model.”).Show More The second component of merger prices is the value of merger “synergies,” the value created by combining formerly separate business units. Agency cost reductions are a third source of value, created when an acquirer replaces existing management with superior business administrators. Finally, material non-public information (MNPI) is an often-overlooked fourth component of merger value. Prospective buyers receive MNPI during the diligence phase of merger transactions.5 5.See infra Section III.B.Show More MNPI is by definition relevant to company value; it is information which “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information available” about the company.6 6.Klang v. Smith’s Food & Drug Ctrs., Inc., 702 A.2d 150, 156 (Del. 1997) (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)). Note, too, that MNPI may be value-positive or value-negative. See infra Section III.D.Show More

The appraisal statute excludes from appraisal awards “any element of value arising from the accomplishment or expectation of the merger,”7 7.Del. Code Ann. tit. 8, § 262(h) (2020).Show More and synergies are consequently not included in appraisal awards. This Note will argue that the statute should also bar appraisal petitioners from recovering the value of agency cost reductions because they, too, are created by the transaction itself. This observation has important policy implications for capital formation; most importantly, excluding reduced agency costs is essential to incentivizing efficient change-of-control transactions.

Courts and academics analyzing appraisal have neglected to account for the value of non-public information as a determinant of merger prices. MNPI is definitionally value-laden, but in a world governed by the ECMH, it is not incorporated into market prices.8 8.This Note adopts the “semi-strong” form of the ECMH embraced by the Supreme Court, which holds that market prices incorporate all publicly available information about asset prices. See Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. (Aruba III), 210 A.3d 128, 137–38, 138 n.53 (Del. 2019).Show More When MNPI disseminated to the buyer is withheld from the market (e.g., if the board fails to disclose a conflict when it recommends stockholders vote in favor of a merger), the risk of minority stockholder exploitation is high. Appraisal analysis should therefore explicitly acknowledge that suppressed MNPI is relevant to company value. However, MNPI will often be prohibitively difficult for courts to value. For example, suppose that an appraisal petitioner establishes at trial that the merger buyer induced the target’s CEO to support an unfairly low deal price by secretly offering her employment at the merged firm. It will likely be very difficult to determine with precision how this undisclosed conflict affected the ultimate sale price; the petitioner certainly should have received a better price for her shares, but it is not clear how much. This presents a dilemma for implementing the proposed merger deal price model in appraisal cases.

The solution is to define market prices as the baseline for appraisal fair value, presuming that the target’s unaffected stock price is the best evidence of the company’s value. This automatically excises synergies and agency cost reductions from appraisal awards. The presumption can be surmounted by evidence of MNPI suppression. Where this threshold is met, the court should exercise its discretion to determine the appraisal award, as it currently does, bearing in mind that buyers are entitled to the value they create through synergies and reduced agency costs. This approach will meaningfully simplify appraisal proceedings and refocus the remedy on the policy goals it serves—facilitating capital formation and encouraging efficient, non-exploitative mergers.

Part II situates the appraisal remedy within its doctrinal context. It introduces appraisal as an important safeguard against minority stockholder exploitation in change-of-control transactions, one that operates outside of the traditional breach of fiduciary duty merger litigation arena. It details several cases that collectively embody the recent controversy over the ECMH’s role in appraisal proceedings and concludes with an economic analysis of appraisal’s role in the broader corporate contract. Part III presents the revised merger deal price framework. Starting with the assumption that Delaware corporate law exists to facilitate investment and maximize long-term stockholder value, it argues that courts should exclude agency cost reductions and include the value of MNPI. It then develops the foregoing analysis into a method for adjudicating appraisal petitions that relies on a rebuttable presumption that market prices are fair.

Part IV analyzes the proposed framework’s likely consequences. It applies the framework to three noteworthy recent appraisal cases, reaching divergent results from the Delaware courts in each. It then argues that, if adopted, the adjudicatory model would bring much-needed clarity and rigor to the Supreme Court’s embrace of the ECMH, enabling courts to more fully utilize the ECMH’s analytical advantages. It would reduce some of the complexity associated with judicial determinations of company value, decrease the volume of appraisal petitions, and discourage speculative appraisal petitions—an outcome consistent with recent trends in Delaware deal jurisprudence. Next, it considers the likely effects on capital formation and the broader merger and acquisition (“M&A”) market. Excluding agency cost reductions would allow M&A buyers to retain the value they create when they replace inefficient management, increasing their incentives to pursue efficient corporate control transactions. It would also further the goal of maximizing stockholder value by eliminating appraisal premia. And, by incorporating MNPI into the fair value calculation, the suggested framework would discourage collusion between targets and buyers during the deal process, thereby preserving appraisal’s traditional function as a check on process adequacy. Part IV closes by describing appraisal’s continuing importance under the revised framework. Many firms’ shares do not trade in efficient markets, and this Note makes no attempt to supplant appraisal’s established role in such cases. Furthermore, appraisal will remain an effective judicial tool for policing process adequacy, particularly in conflict transactions. A brief conclusion follows in Part V.

  1. * J.D. & M.B.A., University of Virginia, 2020. I am very grateful to Professor Quinn Curtis, who introduced me to corporate law and advised me on this Note. For helpful comments and suggestions, I thank Wade Houston, Will Walsh, George Geis, Joe Fore, Nick Carey, Rebecca Lamb, F.D. Carroll, Matt Hoffer-Hawlik, and Matt Levine. I thank Charlotte K. Newell for educating me about the history of Delaware’s appraisal statute, and the staff of the Virginia Law Review for their input and editorial work on this Note—especially Matt West. ↑
  2. Del. Code Ann. tit. 8, § 262 (2020). The appraisal remedy is limited to two types of transactions: “squeeze-outs” effected under §§ 253 and 267, and other mergers or consolidation transactions involving some cash consideration. See id. ↑
  3. See infra notes 20–22 and accompanying text. ↑
  4. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd. (Dell), 177 A.3d 1, 16 (Del. 2017). ↑
  5. It is assumed that the Supreme Court has endorsed the ECMH inclusive of that theory’s conventional assumption that market participants are rational. See Steven M. Sheffrin, Rational Expectations 99 (2d ed. 1996). This assumption is uncontroversial in the present context—i.e., it is beyond doubt that no reasonable shareholder would tender her shares at a lower price than she could readily receive elsewhere—but it has been contested in others. See, e.g., Franco Modigliani & Richard A. Cohn, Inflation, Rational Valuation and the Market, 35 Fin. Analysts J. 24, 24 (1979) (arguing that persistent inflation distorts market prices of securities, a finding inconsistent with some forms of the ECMH); Lawrence H. Summers, Does the Stock Market Rationally Reflect Fundamental Values?, 41 J. Fin. 591 (1986) (arguing that empirical evidence does not conclusively confirm the ECMH and that market prices do not always rationally reflect the fundamental values of securities). This Note does not aspire to contribute to scholarly commentary on the ECMH; like the Supreme Court, it adopts the hypothesis as a tool for deciding appraisal cases. See Dell, 177 A.3d at 24; see also Are Markets Efficient?, Chi. Booth Rev. (June 30, 2016), https://review.chicagobooth.edu/­economics/2016/video/are-markets-efficient [https://perma.cc/7HBU-C4ZL] (interview with Eugene Fama and Richard Thaler) (“The point is not that markets are efficient. . . . It’s just a model.”). ↑
  6. See infra Section III.B. ↑
  7. Klang v. Smith’s Food & Drug Ctrs., Inc., 702 A.2d 150, 156 (Del. 1997) (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)). Note, too, that MNPI may be value-positive or value-negative. See infra Section III.D. ↑
  8. Del. Code Ann. tit. 8, § 262(h) (2020). ↑
  9. This Note adopts the “semi-strong” form of the ECMH embraced by the Supreme Court, which holds that market prices incorporate all publicly available information about asset prices. See Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. (Aruba III), 210 A.3d 128, 137–38, 138 n.53 (Del. 2019). ↑

Colonial Virginia: Incubator of Judicial Review

What is the historical origin of judicial review in the United States? Although scholars have acknowledged that British imperial “disallowance” of colonial law was an influential antecedent, the extant historical scholarship devoted to the mechanics of disallowance is sparse. This limited exploration is surprising. Not unlike modern judicial review, the guiding question imperial overseers considered when disallowing colonial legislation was whether it was ‘repugnant’ to the laws of England. In response, this Note’s first contribution is to explain the process by which the so-called repugnancy principle was enforced against inferior colonial law. Even fewer scholars have attempted to connect the ultimate repugnancy assessment to the historical context surrounding disallowed colonial laws. This Note’s second contribution is thus to augment existing literature by exploring colonial Virginia’s specific experience under imperial supervision.

Among the scholars that have explored the connection between colonial disallowance and the origins of judicial review, some have documented the link between imperial legislative review of colonial legislation and James Madison’s proposed constitutional solution to the problem of unrestrained state legislatures in the aftermath of independence. What remains to be explored, however, is how Madison explicitly drew on the history of imperial review of colonial Virginia’s laws as he argued at the Constitutional Convention for a federal power to “negative” state laws. Accordingly, this Note’s third contribution is to reveal that the historical practice of imperial review in Madison’s native Virginia animated his proposed solution to check the unrestrained popular will of state legislators. Although his proposed solution was ultimately rejected at the Convention, that rejection was conditioned on the judiciary possessing the power of judicial review. By exposing this hidden link, this Note demonstrates that colonial Virginia rightly may be regarded as the intellectual incubator of judicial review.

Introduction

During the British imperial era, the supreme laws of England trumped conflicting inferior colonial law. Colonial assemblies—by the terms of their colonial charters—were prohibited from enacting legislation repugnant to the laws of England. The British monarch, to both monitor the colonial assemblies and to ensure compliance with the superior laws of England, empowered the Board of Trade (“Board”) and the Privy Council with the duty to enforce the so-called repugnancy principle. That principle required the Privy Council and the Board to compare colonial legislation to English law. If the colonial legislation was, upon that comparison, deemed repugnant to the laws of England, then the law was disallowed.1 1.Disallowance was the term used to proclaim that colonial law was legally inoperative as it diverged from the laws of England. See Dudley Odell McGovney, The British Privy Council’s Power to Restrain the Legislatures of Colonial America: Power to Disallow Statutes: Power to Veto, 94 U. Pa. L. Rev. 59, 81 (1946); see also Robin L. Einhorn, American Taxation, American Slavery 15 (2006) (equating disallowance to a “veto”); Robert J. Steinfeld, The Rejection of Horizontal Judicial Review During America’s Colonial Period, 2 Critical Analysis L. 214, 218 n.19 (2015) (“[D]isallowance operated as a ‘repeal’ of the statute.”).Show More The historical record suggests that the imperial power of legislative review was not one the Privy Council and the Board were hesitant to exercise. Indeed, from 1696, when the Board of Trade was established, to 1776, when the United States declared its independence, scholars have estimated that more than 8,500 colonial laws were reviewed,2 2.Mary S. Bilder, The Corporate Origins of Judicial Review, 116 Yale L.J. 502, 538 (2006).Show More and over 400 colonial laws were disallowed for being repugnant to the laws of England.3 3.Jonathan R.T. Hughes, Social Control in the Colonial Economy 13 n.12 (1976); see also Leon T. David, Councillors and the Law Officers in the Colonies in America, 12 Am. U. L. Rev. 23, 32 (1963) (“Of some 8,563 acts submitted for approval, it disallowed 469.”); Sharon Hamby O’Connor & Mary Sarah Bilder, Appeals to the Privy Council Before American Independence:An Annotated Digital Catalogue, 104 Law Libr. J. 83, 85 (2012) (“The Council could disallow a law; approximately 8563 were sent for review and 469 (5.5%) disallowed.”).Show More This historical system of oversight and disallowance echoes a similar, more modern institution: American judicial review. The similarity between British imperial oversight and modern judicial review has not gone unnoticed. In the words of one historian, the Privy Council and the Board subjected colonial “provincial laws to a kind of constitutional test.”4 4.Oliver Morton Dickerson, American Colonial Government 1696–1765, at 234 (1912).Show More

Within the last decade, Mary Bilder and Alison LaCroix have explored the connection between the disallowance of colonial legislation and the origin of judicial review.5 5.See Mary Sarah Bilder, The Transatlantic Constitution: Colonial Legal Culture and the Empire (2004); Alison L. LaCroix, The Authority for Federalism: Madison’s Negative and the Origins of Federal Ideology, 28 Law & Hist. Rev. 451, 466–69 (2010). But see Philip Hamburger, A Tale of Two Paradigms: Judicial Review and Judicial Duty, 78 Geo. Wash. L. Rev. 1162, 1174–75 n.38 (2010). His research shows that “judges had for centuries done their duty by holding government acts unlawful and void. They had done this as to sovereign acts of the king and even as to legislation, other than acts of Parliament. As a result, early American judges did not need to establish precedents for a power of judicial review.” Id. Although Professor Hamburger offers a compelling alternative account, he overlooks the fact that even though crown officials “consistently recognized the assemblies’ authority to pass laws, they always insisted that those bodies were subordinate institutions.” Jack P. Greene, Law and Origins of the American Revolution in The Cambridge History of Law in America 447, 449 (Michael Grossberg & Christopher Tomlins eds., 2008). The insubordination of colonial assemblies beneath the British imperial apparatus thus also provides a historical antecedent from which Americans, like James Madison, could derive intellectual inspiration for American judicial review.Show More The argument is that “recurrent administrative testing of colonial statutes against a ‘constitutional’ standard exemplified in the laws of England helped pave the way for acceptance of the doctrine of judicial review in the new nation.”6 6.Joseph H. Smith, Administrative Control of the Courts of the American Plantations, 61 Colum. L. Rev. 1210, 1253 (1961).Show More Yet the extant historical scholarship devoted to this striking similarity hardly touches upon the mechanics of imperial disallowance.7 7.Astonishingly, Oliver Morton Dickerson’s American Colonial Government, which was published in 1912, remains the authoritative source on the mechanics of imperial disallowance.Show More In this respect, this Note’s first contribution is to explain the mechanics by which the repugnancy principle was enforced against inferior colonial law.

By a similar token, even fewer scholars have attempted to connect colonial legislation and the law’s surrounding historical context to the Board and the Privy Council’s ultimate repugnancy assessment.8 8.See Mary Sarah Bilder, Colonial Constitutionalism and Constitutional Law, in Transformations in American Legal History: Essays in Honor of Professor Morton J. Horwitz 28, 43 (Daniel W. Hamilton & Alfred L. Brophy eds., 2009).Show More The reason for the dearth of scholarly literature linking together these narratives is that there exists “no comprehensive list of disallowed acts.”9 9.Id.Show More This lacuna in source material also explains why “comparably little study has been given to the topic” of imperial review of colonial law in general.10 10.Id.Show More In response, this Note’s second contribution is to augment the existing literature by exploring the colonial experience under imperial supervision, specifically in the Colony of Virginia.

Colonial Virginia, after all, “had the largest population of any colony in North America,” possessed an influential economic and legal system, and “produced great leaders,” many of whom would go onto shape the Constitution’s structural framework.11 11.William E. Nelson, The Law of Colonial Maryland: Virginia Without Its Grandeur, 54 Am. J. Legal Hist. 168, 198–99 (2014).Show More Virginia was, on balance, “the jewel in the crown” of Britain’s overseas empire.12 12.Mary Carroll Johansen, The Relationship Between the Board of Trade and Plantations and the Colonial Government of Virginia, 1696–1775, at 38 (1992) (unpublished M.A. thesis, The College of William & Mary) (on file with The College of William & Mary Libraries).Show More This fact alone makes the absence of a thorough analysis of colonial Virginia’s interaction with the Privy Council remarkable. And this historical gap is only compounded by the fact that the “father of the Constitution,” James Madison, was himself a son of colonial Virginia.13 13.Michael P. Zuckert, Judicial Review and the Incomplete Constitution: A Madisonian Perspective on the Supreme Court and the Idea of Constitutionalism, in The Supreme Court and the Idea of Constitutionalism 53, 55 (Steven Kautz et al. eds., 2009).Show More In modern times, Madison is rightly memorialized for his profound influence on the Federal Constitution’s structure and for “laying the foundations of the Republic.”14 14.Charles Evans Hughes, James Madison, 18 A.B.A. J. 854, 854 (1932) (referring to Madison as the “Father of the Constitution”); see also Daniel J. Hulsebosch, Being Seen Like a State: How Americans (and Britons) Built the Constitutional Infrastructure of a Developing Nation, 59 Wm. & Mary L. Rev. 1239, 1269 (2018) (“His theory of factional checks and balances is why many consider him the most thoughtful constitution maker.”).Show More He understood the “overall logic of the new order better than anyone else at the time.”15 15.Zuckert, supra note 13, at 55.Show More His understanding of the new order was, as it turns out, deeply shaped by his experience with the old. According to Alison LaCroix, the “centerpiece of Madison’s plan to reconstitute the Republic . . . sprang directly from the institutions and practices of the British Empire, the thralldom of which the American colonies had escaped.”16 16.LaCroix, supra note 5, at 464.Show More Likewise, Michael Zuckert contends that Madison had both “an unparalleled understanding of the political nature of the Constitution,” and possessed “an unexcelled understanding of what judicial review was to be in the new system.”17 17.Zuckert, supra note 13, at 55.Show More Yet underappreciated, until now, is the influence that Privy Council disallowance of his own commonwealth’s legislation had on Madison’s frame of mind and his approach to subordinating the will of state and national electorates to the supreme law of the land.

Herein lies this Note’s third contribution. In short, I seek to enrich the existing scholarship on the origins of judicial review by offering a targeted analysis of the experience in colonial Virginia. Many scholars have argued that the concept of judicial review originated from Madison’s proposals at the Constitutional Convention.18 18.See Steven G. Calabresi, Originalism and James Bradley Thayer, 113 Nw. U. L. Rev. 1419, 1450–51 (2019) (building on James Bradley Thayer’s discussion of Madison’s proposed continuation of the imperial practice of legislative review); see also Sean Gailmard, Imperial Politics, English Law, and the Strategic Foundations of Constitutional Review in America, 113 Am. Pol. Sci. Rev. 778, 788 (2019) (“My argument is that delegates to the Constitutional Convention of 1787 recognized and sought to preserve benefits of Crown review by the Privy Council as an external bound on legislation.”).Show More The general story tracing the link between the Privy Council, the Constitutional Convention, and the federal courts’ ability to disallow repugnant legislation has been told.19 19.Section 25 of the Judiciary Act of 1789 granted federal courts jurisdiction over state courts in matters where “the validity of a statute” is drawn into question “on the ground of their being repugnant to the constitution.” Judiciary Act of Sept. 24, 1789, ch. 20, § 25, 1 Stat. 73, 85. In essence, the federal courts were empowered, much like the Board and the Privy Council, with the duty to enforce the repugnancy principle against state and federal legislation that conflicted, not with the laws of England, but with the text of the Constitution.Show More Against the backdrop of these abstract accounts, this Note restricts the study of Privy Council oversight specifically to colonial Virginia. This narrow focus better facilitates an understanding of how Madison, through his knowledge of actual practice, envisioned the will of subordinate legislatures conforming to the supremacy of the new Federal Constitution.20 20.Indeed, Professor Jordan Cash has observed that “judicial review had long been practiced in Virginia, and the English jurisdictional tradition continued to be influential into the early national period.” Jordan T. Cash, The Court and the Old Dominion: Judicial Review Among the Virginia Jeffersonians, 35 Law & Hist. Rev. 351, 365 (2017). Although less general than most accounts, Professor Cash’s assertion still paints with too broad a brush, as it does not explore British imperial oversight’s influence upon Madison’s proposed constitutional solutions.Show More As this Note uncovers, Madison himself thought deeply about imperial review of colonial legislation—particularly that of colonial Virginia—in the years leading up to the Constitutional Convention. And it was from Madison’s Privy Council-influenced proposals that judicial review ultimately sprung. This Note, therefore, confines itself to the study of Privy Council oversight of colonial Virginia and explores the story of three Virginian colonial acts, and their interaction with the British imperial system, to cast useful light on Madison’s vision of judicial review and constitutional theory more generally.

This Note is divided into three Parts. Part I discusses the history of the Board of Trade and the Privy Council’s enforcement of the repugnancy principle. Surprisingly, that enforcement process, and the innerworkings of both the Privy Council and the Board, has received remarkably little scholarly attention. Part II details the three Virginian Acts in chronological order. Discussing each Act’s historical context and ultimate demise brings to the surface some of the major issues that plagued colonial society. It also calls attention to the process and general cultural perception of legislative review in colonial Virginia. Part III turns to the influence imperial oversight of Virginia’s colonial legislation had on Madison—an influence that inspired Madison’s proposed federal constitutional framework. In short, the influence that both the Privy Council and Board’s scrutiny of Virginia’s colonial legislation had on Madison’s attempt to restrain the democratic will of state and national electorates may help us more clearly understand the imperial, colonial origin of judicial review.

  1. * University of Virginia School of Law, J.D. 2020. I am grateful first and foremost for Professor Cynthia Nicoletti and her insightful input, unwavering patience, and immense generosity. I would like to thank both Christian Talley and Anna Cecile Pepper for helpful comments and also the members of the Virginia Law Review, especially Clay Phillips, for careful editing and feedback. I am solely responsible for all errors. ↑
  2. Disallowance was the term used to proclaim that colonial law was legally inoperative as it diverged from the laws of England. See Dudley Odell McGovney, The British Privy Council’s Power to Restrain the Legislatures of Colonial America: Power to Disallow Statutes: Power to Veto, 94 U. Pa. L. Rev
    .

    59, 81 (1946); see also Robin L. Einhorn, American Taxation, American Slavery 15 (2006) (equating disallowance to a “veto”); Robert J. Steinfeld, The Rejection of Horizontal Judicial Review During America’s Colonial Period, 2 Critical Analysis L. 214, 218 n.19 (2015) (“[D]isallowance operated as a ‘repeal’ of the statute.”). ↑

  3. Mary S. Bilder, The Corporate Origins of Judicial Review, 116 Yale L.J
    .

    502, 538 (2006). ↑

  4. Jonathan R.T. Hughes, Social Control in the Colonial Economy 13 n.12 (1976); see also Leon T. David, Councillors and the Law Officers in the Colonies in America, 12 Am. U. L. Rev
    .

    23, 32 (1963) (“Of some 8,563 acts submitted for approval, it disallowed 469.”); Sharon Hamby O’Connor & Mary Sarah Bilder, Appeals to the Privy Council Before American Independence: An Annotated Digital Catalogue, 104 Law Libr. J

    .

    83, 85 (2012) (“The Council could disallow a law; approximately 8563 were sent for review and 469 (5.5%) disallowed.”). ↑

  5. Oliver Morton Dickerson, American Colonial Government 1696–1765, at 234 (1912). ↑
  6. See Mary Sarah Bilder, The Transatlantic Constitution: Colonial Legal Culture and the Empire (2004); Alison L. LaCroix, The Authority for Federalism: Madison’s Negative and the Origins of Federal Ideology, 28 Law & Hist. Rev. 451, 466–69 (2010). But see Philip Hamburger, A Tale of Two Paradigms: Judicial Review and Judicial Duty, 78 Geo. Wash. L. Rev. 1162, 1174–75 n.38 (2010). His research shows that “judges had for centuries done their duty by holding government acts unlawful and void. They had done this as to sovereign acts of the king and even as to legislation, other than acts of Parliament. As a result, early American judges did not need to establish precedents for a power of judicial review.” Id. Although Professor Hamburger offers a compelling alternative account, he overlooks the fact that even though crown officials “consistently recognized the assemblies’ authority to pass laws, they always insisted that those bodies were subordinate institutions.” Jack P. Greene, Law and Origins of the American Revolution in The Cambridge History of Law in America 447, 449 (Michael Grossberg & Christopher Tomlins eds., 2008). The insubordination of colonial assemblies beneath the British imperial apparatus thus also provides a historical antecedent from which Americans, like James Madison, could derive intellectual inspiration for American judicial review. ↑
  7. Joseph H. Smith, Administrative Control of the Courts of the American Plantations, 61 Colum. L. Rev. 1210, 1253 (1961). ↑
  8. Astonishingly, Oliver Morton Dickerson’s American Colonial Government, which was published in 1912, remains the authoritative source on the mechanics of imperial disallowance. ↑
  9. See Mary Sarah Bilder, Colonial Constitutionalism and Constitutional Law, in Transformations in American Legal History: Essays in Honor of Professor Morton J. Horwitz 28, 43 (Daniel W. Hamilton & Alfred L. Brophy eds., 2009). ↑
  10. Id. ↑
  11. Id. ↑
  12. William E. Nelson, The Law of Colonial Maryland: Virginia Without Its Grandeur, 54 Am. J. Legal Hist. 168, 198–99 (2014). ↑
  13. Mary Carroll Johansen, The Relationship Between the Board of Trade and Plantations and the Colonial Government of Virginia, 1696–1775, at 38 (1992) (unpublished M.A. thesis, The College of William & Mary) (on file with The College of William & Mary Libraries). ↑
  14. Michael P. Zuckert, Judicial Review and the Incomplete Constitution: A Madisonian Perspective on the Supreme Court and the Idea of Constitutionalism, in The Supreme Court and the Idea of Constitutionalism 53, 55 (Steven Kautz et al. eds., 2009). ↑
  15. Charles Evans Hughes, James Madison, 18 A.B.A. J. 854, 854 (1932) (referring to Madison as the “Father of the Constitution”); see also Daniel J. Hulsebosch, Being Seen Like a State: How Americans (and Britons) Built the Constitutional Infrastructure of a Developing Nation, 59 Wm. & Mary L. Rev. 1239, 1269 (2018) (“His theory of factional checks and balances is why many consider him the most thoughtful constitution maker.”). ↑
  16. Zuckert, supra note 13, at 55. ↑
  17. LaCroix, supra note 5, at 464. ↑
  18. Zuckert, supra note 13, at 55. ↑
  19. See Steven G. Calabresi, Originalism and James Bradley Thayer, 113 Nw. U. L. Rev. 1419, 1450–51 (2019) (building on James Bradley Thayer’s discussion of Madison’s proposed continuation of the imperial practice of legislative review); see also Sean Gailmard, Imperial Politics, English Law, and the Strategic Foundations of Constitutional Review in America, 113 Am. Pol. Sci. Rev. 778, 788 (2019) (“My argument is that delegates to the Constitutional Convention of 1787 recognized and sought to preserve benefits of Crown review by the Privy Council as an external bound on legislation.”). ↑
  20. Section 25 of the Judiciary Act of 1789 granted federal courts jurisdiction over state courts in matters where “the validity of a statute” is drawn into question “on the ground of their being repugnant to the constitution.” Judiciary Act of Sept. 24, 1789, ch. 20, § 25, 1 Stat. 73, 85. In essence, the federal courts were empowered, much like the Board and the Privy Council, with the duty to enforce the repugnancy principle against state and federal legislation that conflicted, not with the laws of England, but with the text of the Constitution. ↑
  21. Indeed, Professor Jordan Cash has observed that “judicial review had long been practiced in Virginia, and the English jurisdictional tradition continued to be influential into the early national period.” Jordan T. Cash, The Court and the Old Dominion: Judicial Review Among the Virginia Jeffersonians, 35 Law & Hist. Rev. 351, 365 (2017). Although less general than most accounts, Professor Cash’s assertion still paints with too broad a brush, as it does not explore British imperial oversight’s influence upon Madison’s proposed constitutional solutions. ↑
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