by Robert Teitelman | Published March 7, 2012 at 12:00 PM
The encomiums are rolling in for Delaware Chancellor Leo Strine on his El Paso decision, a verbal thrashing of any number of parties in the transaction, notably Goldman, Sachs & Co., for a devil's own brew of conflicts. Strine is once again the It Girl of Delaware. As Steven Davidoff writes in DealBook, "This decision once again shows that Chancellor Strine is a bold judge, one who is brilliant and willing to make waves. It is yet one more in a line of cases chastising chief executives for steering the negotiating process to their own benefit." Stephen Bainbridge compares him to a minor prophet in the Old Testament, and notes his willingness to "shame sinners" and "hold them up as examples of what not to do." (To his credit, Bainbridge also observes that he's been historically ambivalent on the "controversial question of whether shaming is an appropriate action in corporate law." Still, based on his recent book on corporate governance, Bainbridge clearly favors this method of regulation, over the more rules-intensive federalization of corporate law embodied in Dodd-Frank.) And Francis Pileggi, who helpfully rounds up the various trumpeters of praise in his Delaware Corporate & Commercial Litigation blog, even cites some overheated comments from Katrina Dewey at Lawdragon.com in 2009: "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."
As Ronald Reagan used to say: Whoa, Nelly. Let's be clear here. Strine is clearly the leading light in Chancery these days, which is good, because he's now in charge. He is immensely articulate, often funny, in a Borscht Belt kind of way, and occasionally irreverent; he often doesn't seem to be a judge at all, which, at least from my corner, is a compliment. While he can be stern-the folks at Goldman Sachs and El Paso CEO Doug Foshee are certainly smarting from his tongue-lashing-in person he can be approachable, likeable and very smart. But this is not about the signal virtues of Leo Strine. Indeed, it's not even about the case, which Strine seems to have captured quite accurately. It is about the evolving role of Delaware and corporate law, a subject Strine has written on with great cogency in the past, and about the larger matter of effective, sensible and prudent regulation.
The truth is, folks are falling all over Strine because he called out a few of the world's favorite fat cats: Goldman Sachs and the head of an energy company. Again, it's not Strine's fault that Goldman Sachs decided to play near every role in the playbook in the El Paso-Kinder Morgan transaction. He reacted appropriately (and if he hadn't, he would stir the now-ancient meme that Delaware was in the bag for CEOs and managers). But, Goldman was a very plump target. And much of the praise comes because of an aversion to Goldman's practices that have been building for years.
Bainbridge touches on the underlying issue here. How effective is shaming? He argues that shaming is a key element of Delaware jurisprudence. And, in fact, as The Deal's own David Marcus has written, Strine has a history of shaming decisions, particularly when it comes to the embedded conflicts you often reap when you mix private equity and public companies in M&A. But shaming is a tricky matter. Travis Laster, the newest member of Chancery, suffered considerable blowback for a number of shaming episodes, including the Del Monte decision and the David Berger scolding in Nighthawk Radiology (the latter of which he apologized for), over the past year or so. Laster is relatively new as a judge, and he lacks some of Strine's penchant for tomfoolery, but his situation does indicate a home truth: If you're going to shame, pick targets that the rest of world clearly dislikes or you'll come off as arrogant or a crank. It's relevant that Strine came to Chancery from politics.
Besides, shaming may also not be the weapon it used to be in the Old Testament when sinners were summarily stoned. Davidoff handwringly wonders at the end of his piece why Goldman Sachs continues to put its reputation at such risk. Because it can? Citing conflicts in the Southern Peru case (Strine again) and the J.Crew buyout, not to say the fact that the firm promised to clean up its act in a public (and publicly derided) announcement last year, Davidoff can't understand why the firm takes such a risk for a mere $20 million fee. Because it can? Perhaps by now we should begin to understand that reputation might not be what it used to be (particularly in a world where advisory has less clout at large Wall Street firms), or that the real rep Goldman would like to offer to its clients and competitors is that it's smart enough and tough enough to extract every bit of juice from a transaction, because it can. In an arena ruled by self-interest--the kind Strine describes in El Paso--Goldman is king. That may turn out to be a shortsighted view from Goldman's perspective, but its actions speak louder than its words.
And, in fact , there are real limits to the shaming business. Strine would not step in to actually break up the El Paso-Kinder Morgan deal, fearing that it would hurt shareholders. And for all his scorn, he could not directly penalize Goldman, though the very harshness of his decision would seem to be an invitation to shareholder suits. But as Alison Frankel at Reuters suggests, even Strine admitted to limits: "Delaware law, said Delaware's leading jurist, simply leaves him powerless to right Goldman's wrongs. 'I share the plaintiffs' frustration that the traditional tools of equity may not provide the kind of fine instrument that enables optimal protection of stockholders in this context,' the chancellor wrote. 'The kind of troubling behavior exemplified here can result in substantial wealth shifts from stockholders to insiders that are hard for the litigation system to police.' "
All this helps explain the longer-term crowding of federal rule-based law, in omnibus bills like Sarbanes-Oxley and Dodd-Frank, on principle-based, precedent-driven state corporate law, embodied most successfully in Delaware and represented so well by the likes of Strine. Tactical shaming, after all, is both popular and populist. It taps the same democratic id that shapes (and reshapes) reputations and that fuels the mania for teetering towers of narrowly based rules for every imaginable behavior. The best thing about Strine, at the end of the day, is that he has principles and that he's human. That's worth preserving, even if his jokes sometimes go awry. - Robert Teitelman