Corporate America's Main Street

Vice Chancellor Leo Strine of the Delaware Court of Chancery (Photo by Hugh Williams).

Richard Posner should have been a U.S. Supreme Court justice.

I flash on him as I watch Vice Chancellor Leo Strine of the Delaware Court of Chancery stride back and forth before a rapt audience of hundreds of Harvard Law Students in October 2007.

Strine’s brilliance is staggering, his energy enormous; a boiling rage for the law of the now that is in your face and seething. He relishes skewering fat cats like Hannibal Lecter loves fava beans and a nice Chianti.

And there is Posner, just like it was yesterday. It was 1984, and I am a first-year law student at the University of Chicago. He is a 7th U.S. Circuit Court of Appeals Justice, law professor, author and the anchor of the legendary economic analysis that will come to define the law of an era.

It is civil procedure class and he is sucking the marrow out of the injustice of the federal docket being littered with so many lost limbs – and really, is a lost limb to a poor person actually worth $10,000, or whatever the legal minimum for federal court jurisdiction is at the time. I know I am seeing genius. I am also slightly nauseated, but can see this is a rare legal mind which shifts a generation of jurisprudence to evaluate cases based on economic incentives and motivations.

Over the years, the legend of Posner, now 70, as the best legal mind of his generation has only grown, while the test for the Supreme Court had veered, Scalia aside, toward the Stepfordian.

And here is Strine, 45. He is called the most brilliant jurist of his generation. He works doggedly and is as subtle as an ice pick, whether dealing with dozens of AIG apologists, IBP’s demand that Tyson Foods consummate its poultrigarchy or a dispute over property rights to a suburban Wilmington shopping mall. I’m not surprised that he ran for more than 4,730 days straight, stopping only in a bid for sanity. He is a product of small-town Delaware, soccer, Skadden Arps and politics, having served as chief counsel to Gov. Thomas Carper, now a U.S. Senator.

And then there’s Delaware Supreme Court Chief Justice Myron Steele, who owing to a certain mettle and the tides of the times, was not known on the national scene until recent years, but who is every bit the measure of his younger colleague.

Strine and Steele are in many ways a mirror image of one another that refracts the past of Delaware law and U.S. corporate governance as their divergence reflects its future.

As intense as Strine, Steele, 63, combines military toughness with leadership in a fashion I have rarely encountered. He is a product of the University of Virginia, the military, the well-connected Prickett Jones firm and the land. He still works his farm and his Dover chambers display the ducks on the losing side of his shooting excursions.

I note the ducks as I’m visiting Dover for the Delaware Supreme Court’s annual lunch in January 2008. The meeting is an opportunity for Steele to update leading legislators and legal luminaries on current developments.

We are eating crab cakes from a buffet and Strine simply must point out to Steele a typo in the day's program.

I see Leo mounted on Steele’s wall.

They are different and yet the same, better together than apart. And, of course, that’s the brilliance of the thing.

“It’s as if the Beatles never broke up,” says Ted Mirvis, one of the nation’s elite litigators who often litigates in Chancery.

Mirvis is speaking specifically of the Chancery Court, which has produced a murderer’s row of all stars, including the current lineup – Chancellor William Chandler III, Vice Chancellors John Noble, Stephen Lamb, Donald Parsons and Strine. Included in the all-star sentiment is the Supreme Court, which oversees Chancery, and includes Steele, Jack B. Jacobs, Randy Holland, Carolyn Berger and Henry DuPont Ridgely.

And those are just the current members of courts that have included William T. Allen, Norman Veasey, Andrew Moore and Collins Seitz, who in 1952 on Chancery became the first judge in the U.S. to find that separate but equal in education is unconstitutional. His reasoning laid the foundation for the historic 1954 Brown v. Board of Education opinion.

It is the finest bench, pound for pound in the United States. The gem of the nation’s “first state” because the excellence of its judges in terms of rigor, devotion, intelligence and scrutiny have made Delaware the forum of choice for the nation’s corporations for more than 200 years.

“I would put the Delaware judiciary person to person up against any judiciary in any state in the United States,” says Stacey Mobley, who recently retired after a career at DuPont, the last 10 years as general counsel, and joined Dickstein Shapiro.

Delaware has just 853,476 residents, yet is home to more than half of the publicly traded companies in the U.S., including 60 percent of the Fortune 500 (and that figure does not include the tens of thousands of privately held corporations and alternative entities sited there). Delaware earns 40 percent of its revenue – 22 percent in registration taxes and 18 percent in escheat – from its role as Corporate America’s Main Street.

So if you care about corporate America – love it or hate it, think Wall Streeters should burn for their excess or that we can’t live without them, are an executive or shareholder activist – you care about Delaware.

Delaware is to American corporate law as the U.S. Supreme Court is to the nation’s overall jurisprudence. It swiped the title of Miss Corporation from next-door New Jersey when Governor Woodrow Wilson raised the taxes on New Jersey corporations. Delaware promptly copied New Jersey’s statute with a modest franchise tax and the rest is history.

Since then, the First State has coyly realized that to retain its title, it needs to boast a bench that will neither scare Corporate America nor coddle it. Will a merger go forward or die? Ask Delaware. Did a corporation pay its CEO too much? Ask Delaware. Can a corporate raider use a new maneuver to install his chosen board members and take over a company? Ask Delaware.

They are the question and the answer. The textbook of corporate law, whose authors are its jurists.

The entire Delaware bench is held in high esteem, but it is Chancery and its overseers on the Supreme Court that are the rock stars. They dictate the futures of eBay, Hewlett-Packard, Apple, Disney and these days Citibank, AIG and all the other wreckage piled up along the shore.

The unparalleled esteem in which the Delaware court is held has, perhaps not surprisingly, led to a chicken and egg question, posed mostly by academicians and other curious sorts who wonder if the Delaware court deliberately rules in favor of “corporations” or is wantonly ambiguous to allow them plenty of grey area.

The only answer needed to that question is a reading of Strine’s AIG flambe, issued in February in the derivative action against its directors and auditors.

“But here? Really?” he asks incredulously at the attempt by two AIG executives to be dismissed from a suit brought by shareholders. “The Complaint fairly supports the assertion that AIG’s Inner Circle led a – and I use this term with knowledge of its strength – criminal organization. The diversity, pervasiveness, and materiality of the alleged financial wrongdoing at AIG is extraordinary.”

And that is the more complex answer that Delaware naysayers and Americans in shock over our economic meltdown need to come to grips with. For more than 200 years, the Delaware bench has parsed the interests of the shareholders, directors and executives, which combine to create a corporation.

It’s easy is to talk in black and white, about defrauded pensioners or greedy executives or negligent boardmembers. What’s hard is to sift through who is responsible and who met and who failed their obligations, their fiduciary responsibilities, and where, at the end of the bloody day, does justice lay its head.

That’s what Delaware’s judiciary does better than any other in the world.

That’s the realization I come to after spending more than two years interviewing nearly 50 Delaware lawyers and judges, those litigation superstars who love Chancery and those national dealmakers who structure deals for Delaware corporations. Among the reasons it’s so good is that Delaware’s small bar yields members of an equally small bench that is constitutionally required to be politically balanced – “a majority of not more than one judge may be from the same political party” – and which is extended lengthy terms, generally 12 years, to yield a measured and proud approach to jurisprudence.

“We’re insulated from the French revolution going on now,” says Steele, who like Strine is a Democrat. “We don’t have the Guillotine on the Green,” which is the name of the historic Dover square where the Supreme Court sits.

To gain membership on the Chancery bench, you are required to spend years immersed in the unique Delaware legal community, whose birthright is that the business of the state is business. But it also requires an understanding that, though directors are ultimately the ship’s captain under the business judgment rule, shareholders and management are equally corporate stakeholders. To Steele and his brethren, corporations are real, breathing beings.

“The first principle of the Delaware courts and General Assembly that approves our statutes is that our corporate citizens are citizens just like other citizens. And they will all be treated fairly and evenhandedly,” says Steele.

While other states have tried to create equally friendly havens for corporations, by passing favorable legislation or establishing business courts, none have made a dent thanks to the power of the Delaware judiciary.

“Chancery is the reason corporations are here,” says Potter Anderson’s chairman Donald J. Wolfe, one of the most distinguished Chancery advocates. He’s a veteran of such battles as Hexion v. Huntsman, the Hewlett-Packard shareholder litigation and the Walt Disney proxy contest as well as the co-author of the leading treatise on Chancery practice. He is currently representing Citigroup in connection with an internal board investigation related to the collapse of the subprime markets.

“We have to be the balance of the interest of people in Corporate America. We can’t go hog wild one way or another to favor shareholders or management,” says Donald Bussard of Richards Layton.

Delaware’s bench has a total of 115 jurists, all of whom are also subject to geographic parity. Great care and quiet conversation are given to selecting and encouraging great attorneys to apply for and stay on the bench. There are also nine federal jurists presiding over a burgeoning bankruptcy and intellectual property caseload.

“It is a great luxury that judges will understand your argument,” says Thomas J. Allingham II, of Skadden’s Wilmington office who has tried cases across the country.

The first steps of each Delaware judge are commemorated on plaques posted aside the doors of the Delaware Supreme Court. Steele is there (1970), as is Strine (1988).

The tradition began with Thomas Spry in 1687, and consistently confounds attorneys from other states who took the bar at convention centers alongside 10,000 other applicants. It is quaint and entirely Delawarean that when he or she passes the Delaware bar, an attorney’s name is engraved on a small brass placard attached to a wooden panel mounted to the wall alongside the door to the Delaware Supreme Court.

The notion of being admitted to the Delaware bar is treated as an honor long before it is conferred. Each aspiring member of the Delaware bar must be sponsored by a preceptor, a local member of the bar, who is held accountable for the hopeful’s behavior for the next 40 years. The aspiring lawyer also must clerk for a Delaware firm for five months, completing a checklist that includes going to family court, drafting a will and attending a real estate closing.

“Once you get a reputation, it sticks with you in Delaware,” says Vincent Bifferato, who spent almost his entire career on the Delaware bench before becoming a mediator with his sons at Bifferato LLC. His son Connor agrees, “You only get one chance in Delaware. You can’t hide here. If you’re not going to be straight and above board it sticks with you forever.” That sentiment is echoed by Allingham, whose litigation practice extends beyond Delaware but who loves his home courts. "Everyone starts with the same presumption of credibility. But spend your credibility capital unwisely in front of a Delaware judge, and everyone will know – and no one forgets."

The bar exam is given just once a year and the pass rate is low, about 60 percent. Each year, successful applicants (160 last year) drive to Dover to be sworn in.

Delaware has the third highest per capita representation of lawyers, following just Washington, D.C. (27.6 lawyers for every 10,000 residents) and New York (20.4). With roughly 4,000 lawyers, Delaware weighs in with 18 lawyers for every 10,000 people.

Wilmington is Corporate America’s Main Street and home to most Delaware lawyers. Downtown is surprisingly bare soled while the surrounding area is lovely. The train station is famous because of Joe Biden, and most corporate litigators worth their salt have stayed at the Hotel DuPont, from which you can walk to any of the major firms in three minutes. (Legend has it that during the Hewlett-Packard fight, one firm punched through a wall of the hotel to an adjoining office building to ensure security and access to their war room.)

There are four big hometown firms – Richards Layton & Finger; Potter Anderson & Corroon; Morris Nichols Arsht & Tunnell; and Young Conaway Stargatt & Taylor. They are complemented by a great local office of Skadden, a few standout boutiques, including Abrams & Laster; Bouchard Margules & Friedlander; and on the plaintiff side, Grant & Eisenhofer. Rounding out the bunch are Connolly Bove; the Bayard Firm; the hometown Bifferato Gentilotti alongside a host of locally respected local firms. Increasingly, out of town firms are opening offices in Wilmington, which some longtime practitioners say is changing the bar.

Delaware lawyers excel in the art of corporate origami - the singular skill that defines them long before he ascends to the bench. (And we use the term “him” with full awareness of its meaning.)

“Outside Delaware, lawyers focus on substance over form. In Delaware, it’s exactly the opposite. It’s form over substance,” says Mark Morton, a corporate specialist at Potter Anderson. Key to Rupert Murdoch’s takeover of Dow Jones, for example, was the ability under Delaware law to pay a premium to controlling shareholders, a practice not allowed in other states; that was among the levers Murdoch’s News Corp. was able to use to pull off the deal.

By and very large – though there are a handful of exceptions including Wolfe, Allingham, Bill Lafferty and Andre Bouchard, who compete as national counsel with the top New York lawyers – Delaware lawyers serve as local counsel to the nation’s top firms. Cravath, Wachtell, Sullivan, Simpson and others handle the overall structuring of a deal, and turn to the Delawareans for their unique knowledge of each decision or batted eye of every Chancery judge, which guides them in where to bend a corporate structuring to accomplish a board’s desired goal.

“If you look at the volume of work that flies across people’s plates here with the same kind of discrete questions coming up over and over again, it gives you an unmatched depth of experience,” says Morton. “If you’re a New York M&A lawyer, you may be doing two or three huge deals a year, soup to nuts. We look at precise statutory pieces, ways to structure or adapt transactions to allow you to tap into prior caselaw that can be archaic.”

Like the bar, the bench is acutely aware of its ability to shape and guide practice through its direct interaction, outside of written opinions, with members of the local and national bars. Delaware judges teach at law schools, are active in the ABA and frequently author articles, a level of interaction and forecasting their thoughts that is rare. These activities are collectively known as the Delaware guidance function.

The guidance function led Chief Justice Steele to win an addition to the Delaware Constitution allowing the state Supreme Court to provide advice to questions referred by the Securities and Exchange Commission. The procedure has been used just once, in the CA v. AFSCME case, in which the court reaffirmed the bedrock principle of Delaware corporate law that the directors of the corporation, not the shareholders, manage the business and affairs of the corporation, according to Robert Giuffra, of Sullivan & Cromwell, who represented CA in the case. More such referrals are expected.

It has also led to Strine’s stints at law schools, including Penn (his alma mater), Vanderbilt, Harvard and UCLA, where he recently taught “Real World M&A,” with Rick Climan of Cooley, a far cry from civil procedure. At the Harvard M&A course Strine teaches with former Dean Robert Clark, the guest lecturers are pulled from the headlines and include Bruce Wasserstein, Martin Lipton and Richard Parsons.

“I look up at the students in the class and realize I'm envious of them,” said Climan, a standout corporate dealmaker educated at Harvard, who has recently handled multi-billion dollar M&A transactions for Gilead Sciences and Brocade Communication Systems. “They get to hear the candid insights of a brilliant, sitting judge whose decisions are changing the face of corporate law.”

Wilmington’s bar is insular or collegial, depending on whom you ask. (Its insularity was on display in a recent rare misstep by Steele, dubbed the 9th most ethical business leader in the world by Ethisphere magazine, when he sent a cheeky email to 38 male friends from his government account.) Let’s just say you can still kick off a spirited debate by asking whether it’s appropriate to appear in Chancery in anything other than a blue suit, white shirt and red tie. But at least you’re no longer required to wear your hat to cross the street and get a sandwich.

“Every partner knows he or she is what they are because they were fortunate enough to come to this firm,” says Gregory Williams, the chairman of Richards Layton’s corporate department. Most partners at the big four feel the same way about their firm.

We talk in the early evening in his office near Rodney Square. He is the picture of elegance and accomplishment and talks about his friendship with Tom Murphy, the former head of ABC who was chairman of Save the Children. He represented the directors in the Disney proxy fight, and last year successfully defended an attempt to enjoin the acquisition of WCI Steel. He credits Richards Layton’s legendary partners for his success – Frank Balotti correcting his grammar, Charlie Richards telling him why to put binders in your litigation bag upside down, and why to always travel with a small stapler.

You wouldn’t know that he grew up very blue collar in Wilmington, the son of a DuPont lab technician who did textile design experiments. His childhood bed was a hand-me-down mattress from the lab, which had used it for pressure testing. He never thought of Wilmington being anything special until he was taking corporate law at William & Mary and noted that nine of the first 10 cases were from his hometown. “My instructor explained I was from a very special place,” says Williams, who came back and became one of dozens of locals who now make up the power structure of the Delaware bar.

Delaware lawyers believe to a person that theirs is one of the nation’s best known secrets: a top quality law practice in a pleasant small-town environment, where they can ride their bike to work and raise a family without the pressures of New York, Washington, D.C., or even nearby Philadelphia. Leave home at 8:52 am and be in the office by 9 am. More junior members of the Wilmington bar have moved there for the excellence of the practice and the opportunity it represents.

Wilmington is a sandlot where the World Series is regularly played. And home plate is at 500 N. King Street, where it intersects with 5th in downtown Wilmington, population 72,826. I walk from the train station to the most powerful corporate court in America against a strong wind with sleet coming down. Though the journey is mostly through corporate towers sprinkled with anonymous blight, I’m still expecting something like the steps of the U.S. Supreme Court to rise before me.

Instead, I find a sleek, modern courthouse that accommodates confused jurors, unhappy family law litigants and the entire range of humanity that passes through the legal system. Taking the elevator to the 12th floor, I find the home of Corporate America’s Sultans of Swing.

The emperors of equity are based here, behind a hushed receptionist. Down the hall, there is often $1 million a day in legal talent convened to argue about AIG, Citibank or any of the other debacles currently being sorted through. The range, breadth and depth of recent opinions issued by Lamb, Noble, Parsons, Chandler and Strine are breathtaking, and while Strine gets much of the attention in this article and elsewhere, he is well aware that he is surrounded by chancellors of outstanding capabilities.

Chancery is a unique court as a court of equity, the only one in the United States. There are no juries, and its jurists make decisions sure and swift based on the equities – what’s right, what’s just while paying heed to the law of other states.

The current lineup has been together since 2003, when Parsons joined. This July 28, the Beatles will split. That’s when Vice Chancellor Stephen Lamb, a former Skadden partner and a brilliant jurist, will retire. By some accounts, Chancellor Chandler is also expected to step down in the near future. Some reports have Strine ascending to the Chancellorship if that happens and J. Travis Laster of Abrams & Laster taking Lamb’s slot as both are Republicans from New Castle County, where Wilmington resides.

Steele is confident that the next version of Chancery can be as strong as the last – despite statewide budget pressures that currently require all state employees to take an 8 percent pay cut. While judges are constitutionally buffered from such cuts, it is vintage Steele that he will very publicly take an 8 percent pay cut, as well, if other state employees must. “The probability is all sitting judges will voluntarily forgo 8 percent of their pay,” he says. “It would be impossible for me to walk into an office of people who took an 8 percent cut when we didn’t.” The cuts come in a year when he had hoped to win pay increases for his bench to retain its all-star appeal.

“The way the Delaware bar has always come to the plate when we needed good judges suggests to me that tradition is so embodied in our culture that it won’t change,” he says, though he is clearly mindful of the pressures on his jurists who could make far more in private practice.

Chief among them is Strine, the son of teenaged parents who was born in Baltimore and moved to Hockessin when he was nine. He raises his sons there now, and they, too, are avid travel soccer players. He weathered a bruising confirmation battle to win his appointment in 1998, and has not just proven that he belongs, but set a new standard for excellence.

“Strine could turn out an 85 page opinion with expertise and an eye to detail that is just breathtaking. Every member of the court can and does do that,” says Mirvis of Wachtell Lipton. “And when you come under scrutiny by the Delaware Court, you leave there feeling like you had a full body MRI, but somebody turned up the heat.”

The AIG opinion is 104 pages and Exhibit A not just for Delaware’s supremacy and fairness as the arbiter of corporate disputes, but also for the unquestioned mantle Strine has earned – under Steele’s ever watchful eye – as the leading corporate jurist in the nation. The opinion rips and bleeds and bites and has what will become a legendary footnote – #246 – expressing his dismay at the need to dismiss PricewaterhouseCoopers under New York law to promote the predictability required by the Delaware Supreme Court. He all but drafts the amended complaint against the giant accountancy, which earned $213 million looking over AIG’s cooked books from 2000 to 2004.

The decision is just one chapter in what is almost certainly this decade’s Enron. Stuart Grant of Grant & Eisenhofer has brought a shareholder derivative action on behalf of the Teachers’ Retirement System of Louisiana as shareholders of AIG, suing the longtime leader of AIG, Maurice Greenberg, his inner circle, other employees, GenRe and PricewaterhouseCoopers, the company’s longtime auditors, for what is already $1.6 billion in fines assessed against the insurance conglomerate. As a derivative suit, Grant is trying to claw back to the shareholders’ value and other fines lost by the corporation because of the bad acts of its directors and affiliates.

AIG is alleged to have committed a decade’s long crime spree that would make Bernie Madoff blush, including a fraudulent $500 million reinsurance transaction in which AIG insiders staged an artificial transaction with Gen Re Corporation simply to improve AIG’s balance sheet, insiders’ use of secret offshore subsidiaries to mask AIG losses, blatant misstatements of accounts with no basis for adjustments, and AIG hiding its involvement in controversial insurance policies that involved betting on when elderly people would die.

There may be uncertainty about when elderly people will die, but there is no lack of clarity in Strine’s horror at AIG’s practices.

In November, Strine hears arguments on the motion to dismiss various defendants and PricewaterhouseCoopers. He dubs the company the “Baskin Robbins of Innovation,” by which he means a waffle cone of cow intestines and garbage rather than cookies and cream. He reams the defense lawyers on the social utility of AIG’s products, pressing them particularly on the policy implications of letting PricewaterhouseCoopers off the hook when it earned so, so very much auditing AIG.

“Why in the circumstance when the gatekeeper’s role is most important, and there are litigable issues about the gatekeeper’s compliance with its obligations to its client, would public policy exculpate the gatekeeper?” Strine asks Thomas Rafferty of Cravath in an hour-long duel over PricewaterhouseCoopers’ request that it be dismissed from the suit.

You can feel the gnashing of his teeth when he releases his decision in February, dismissing most of the employees for lack of personal jurisdiction, denying dismissal to the insiders, and shockingly granting Price Waterhouse’s motion to dismiss.

Strine is trapped by the drafting of the plaintiffs’ pleading and the requirement of his Supreme Court that he apply the Restatement (Second) of Conflict of Laws “to promote consistency among the states and avoid unnecessary clashes of interest, where that can be sensibly achieved.” Consequently, he must apply New York law, which almost uniquely insulates auditors from third-party liability. Given the pleading offered by the plaintiff, that means Pricewaterhouse must be dismissed.

Strine nearly riots – or at least takes up serial running again – over an insidious 7th Circuit decision that bred New York’s law giving safe harbor to auditors.

The case is Cenco v. Seidman & Seidman (1982), which considers “A corporation … a legal fiction.” Strine is perplexed at the perspective of Cenco’s author, which he deems sufficiently “free wheeling” to quote from it at length: “From the standpoint of deterrence, the question is whether the type of fraud that engulfed Cenco between 1970 and 1975 will be deterred more effectively if Cenco can shift the entire cost of the fraud from itself (which is to say, from its stockholders’ pockets) to the independent auditor who failed to prevent the fraud. We think not.”

Cenco was a massive fraud perpetrated by some managerial employees of Cenco Incorporated, that started in one division, but eventually metastasized to the chairman and other top managers, as well as two board members. Seidman was Cenco’s auditor, earning 70 percent of its revenue from auditing Cenco.

And, in his 1982 decision, Judge Richard Posner thought a board would have better incentive to prevent fraud if it could not turn to its auditors for blame.

Strine dismisses the claims against Pricewaterhouse as pled, without prejudice.

I meet Strine at Libby’s, the local lawyer’s restaurant, just before Christmas for chicken orzo. It’s $12 for two.

No sales tax. He has not yet released his AIG opinion, but the economic meltdown astounds him, particularly the lack of responsibility and the buck-passing. He is in a hurry. He has told this morning’s litigants his wife will whup his butt if he doesn’t get some Christmas presents picked up. He walks up the street, head down against the cold and I wonder, as I make my way to the train station, where he can find presents in downtown Wilmington.

I know where he can find 200,000 U.S. corporations. They’re based in a building over on Orange Street. Ford is there. So are American Airlines, General Motors, Coca-Cola and Kentucky Fried Chicken. And I realize that is the burden of being Steele or Strine, particularly in this age, when the gilded excess has crashed.

The future of Corporate America will largely be written in their courtrooms in the years to come. And while all Delawareans depend on them, so does a different ethic for America’s business.