INTERVIEW-Delaware judge sees “symbiotic” relations with U.S. government on corporate law

October 16, 2009

By Tom Hals
WILMINGTON, Del., Oct 16 (Reuters) – Delaware will preserve its “symbiotic” relationship with the federal government on corporate law, even as Washington takes an activist role on American business, said the newest member of the state’s corporate law court.

J. Travis Laster, who just started his 12-year term as vice chancellor on the country’s premiere business court, told Reuters that Delaware will continue to take care of corporate regulation on a case-by-case basis while Washington sets disclosure or labor regulation.

“What Delaware has always done is have what I think is a very positive symbiotic relationship with the federal government,” said Laster on Thursday. “Delaware is not going to get in the way of that.”

The state is the corporate home to 60 percent of the Fortune 500 companies, in part due to the deep legal precedent of the Court of Chancery.

The list of Delaware corporations includes many in which the federal government has become a major shareholder, such as Citigroup Inc <C.N> and American International Group Inc <AIG.N>.

Delaware law specialists have argued that cases against Delaware corporations with big federal interests could end up in Chancery Court, but Laster disagreed.

“There is a forum for those type of conflicts, and that is the federal courts.”

Laster, 39, joined the court after 13 years in private practice before it. He replaces Stephen Lamb, who ruled last year that the Hexion unit of Apollo Management was prohibited from terminating its merger deal with rival Huntsman Corp.

Laster’s arrival follows the worst financial crisis in generations, which has sparked demands for more stringent corporate regulation at the federal level, adding to the state-federal tension.

The state’s lawyers have watched with concern as Washington has encroached on areas of corporate governance traditionally left to states, such as procedures for appointing directors.

Delaware changed its corporate laws this year to allow shareholders greater ease in nominating directors; the move came as the U.S. Securities and Exchange Commission was considering similar changes.

He said the state’s procedure offers greater stability than the blanket approach of regulation. “To adopt a one-size-fits in a moment that’s perceived to be a crisis and then potentially to never revisit it is something we think people could be reasonably be concerned about.”

He pointed to one case in particular in which the court avoided succumbing to political demands.

Earlier this year the court dismissed a shareholder suit against the directors of Citigroup, which suffered billions of dollars in losses and was rescued by the government.

Chancellor William Chandler found that the Citigroup board did not violate its fiduciary duty through the poor outcome from its decisions.

“With the crash in the banking system still ringing loud in everyone’s ears,” said Laster. “If there was ever a moment where a politically sensitive Delaware judiciary might have reached out to change Delaware law, that was it. Oversight law is not going to change for a moment-specific reason.”

He pointed out that shareholders were pushing for companies to take on more leverage and to focus on short-term results, and directors responded.

“I don’t think it’s fair to say about the financial crisis that directors weren’t trying to do a good job. Directors were trying to do a good job,” he said.

“Now it is always nice after the fact to try to find someone else to hold the bag, but I think it critically important we not to judge these things in hindsight. The core question for us is always: At the time the decision was made, what were the directors thinking?”

The hot-button issue of executive pay deserves attention from corporate boards, he said.

“Is it really a good idea to have such a divergence between CEO pay and worker pay? At the end of the day I think directors are now looking harder at that, and I think they need to look harder at that.”

One solution would be to widen the pool of directors beyond fellow chief executives, Laster said. “If it’s all CEOs, it’s not likely they will say anything about the divergence because they are all getting same stuff.”

(Editing by Gerald E. McCormick) ((; 1-302-993-6283; Reuters Messaging Keywords: DELAWARE/CHANCERYCOURT

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