The Delaware Court of Chancery is poised for significant change in 2009. As many as four of the court's five judges may move on. President-elect Obama and a Democratic Congress will likely pass legislation that may threaten Delaware's hegemony in corporate law and will almost certainly have significant implications for it. And the court will hear different kinds of cases as the leveraged buyout boom and subsequent bust fade and matters involving troubled companies take more of the court's time.
Vice Chancellor Leo E. Strine Jr. is poised to make the most significant jump from Chancery. His deep connections in Delaware politics and his status as a leading voice in the national discussion over corporate governance, combined with the ascension of Delaware senator Joseph Biden to the vice presidency, may help Strine make the jump to Washington, either to one of the two open seats on the U.S. Court of Appeals for the District of Columbia Circuit or to a spot as a regulator.
While Strine's future is unclear, the Wilmington bar has long expected that his colleague, Stephen Lamb, will step down from the bench when his 12-year term expires next year.
Chancellor William B. Chandler III may well follow suit. His term also concludes next year, but he may stay on into 2010 to complete 25 years of service as a state judge. Both are Republicans. Donald F. Parsons Jr., a Democrat, could be tapped for the U.S. District Court of Delaware, where his expertise as a longtime patent lawyer would be more useful than it is on Chancery.
Chandler is a resident of Kent County in southern Delaware, from which his successor would also have to come, but Strine, Lamb and Parsons all live around Wilmington, meaning the city's ample corporate bar would likely provide their successors.
No front-runners have yet emerged.
Whoever sits on Chancery will have an eye cocked on Congress, 110 miles to the southwest, a wary watchfulness that dates to the passage of the Sarbanes-Oxley Act in 2002. The Delaware courts responded vigorously to a perceived threat to their role as the pre-eminent arbiters of corporate law. In five cases between August 2002 and April 2003, the state's Supreme Court overruled decisions from the Court of Chancery in ways that showed a skepticism of corporate managers and boards and an affinity for shareholders.
Since the great takeover cases of the 1980s, Delaware has aimed to craft a jurisprudence that strikes a balance between the two groups, so the decisions reflected a sense of political pragmatism rather than a fundamental rethinking of the state's law.
Strine took such an approach in an article that ran in the Business Lawyer this fall. In "Breaking the Corporate Governance Logjam in Washington: Some Constructive Thoughts on a Responsible Path Forward," the judge suggested Delaware could blunt calls for greater federal oversight of executive compensation, traditionally a matter of board discretion and therefore of state corporate law, by tweaking the state's law to allow dissident shareholders greater access to company proxies, a move the state had previously resisted.
The paper was more than idle musing. In two cases this spring, Jana Master Fund Ltd. v. Cnet Networks Inc. and Levitt Corp. v. Office Depot Inc., Chandler and Vice Chancellor John Noble construed election-related corporate bylaws against the company and in favor of dissident shareholders.
And in CA Inc. v. Afscme Employees Pension Plan, the most important corporate law decision the Delaware Supreme Court handed down this year, Justice Jack Jacobs held that shareholders have the right to propose election-related bylaws.
The case was the first the U.S. Securities and Exchange Commission has certified to the Delaware courts, but the two entities will likely find themselves working together much more often on such matters.
Congress has already claimed oversight over the compensation of executives at banks that receive government funds, a power whose ambit many Democrats wish to extend. Here, too, Strine was ahead of the curve. He and Chandler noted in a 2003 paper about the relation between Sarbanes-Oxley and state law that the "Argentina-like increase" in CEO compensation might demand a response from Delaware, perhaps through a freshening of the legal concept of waste.
Two years later, Chandler acknowledged "the protean nature of ideal corporate governance practices" and their effect on the law in dismissing a suit by Walt Disney Co. shareholders challenging the $140 million severance payment made to Michael Ovitz upon his 1996 ouster.
"Unlike ideals of corporate governance, a fiduciary's duties do not change over time," he wrote. "How we understand those duties may evolve and become refined over time, but the duties themselves have not changed."
Delaware judges' ability to strike such a delicate balance, the SEC's comfort with the state's courts and Biden's presence in an Obama White House may spare the state from the sort of scrutiny it received after the scandals of 2001 and 2002.
And while the reformist impulses that led to Sarbanes-Oxley stemmed from failures in corporate governance, the current crisis is the product of lax regulatory oversight of financial institutions, an area for which Delaware has never had any responsibility.
Congress' response may still tread on areas traditionally reserved for state corporate law, but the Delaware courts have long since realized the need to manage those tensions.
As the state's judges do so, they'll also hear the kinds of cases that emerge in a bear market.
Parsons wisely ducked deciding whether the Bear Stearns Cos. board violated its fiduciary duties to shareholders by agreeing to an ironclad sale to J.P. Morgan Chase & Co., but the same fact pattern will recur in less politically fraught situations: Financially troubled target signs merger agreement with minimal outs to avoid bankruptcy, and then a much better offer comes across the transom.
That situation inspired the most controversial Delaware case of the last decade, Omnicare Inc. v. NCS Healthcare Inc., where the state's Supreme Court held that a target has to leave itself the option of taking a better offer.
Current Chief Justice Myron T. Steele issued a blistering dissent to Justice Randy Holland's 2003 opinion, and Steele has made clear his belief that Omnicare should be overturned, or at least narrowed. Holland and Justice Carolyn Berger, who joined him in Omnicare, remain on the court, while Jacobs rose from Chancery to the Supreme Court just after the case was decided and would likely side with Steele. That leaves Justice Henry duPont Ridgely, a criminal law specialist, as the swing vote.
But aside from a possible reprise of Omnicare, the Supreme Court is unlikely to increase its modest role in the development of Delaware corporate law. The real action will remain in Chancery even if that court's composition changes dramatically in the next year.