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Wednesday, October 21, 2009

When Uncle Sam's in business court, judges better 'duck': report

"Delaware judges should discreetly 'duck' any shareholder suits that claim the U.S. government has misused its new role as controlling stockholder of companies such as General Motors and Citigroup that it has bailed out of bankruptcy," warned Prof. Edward Rock of the University of Pennsylvania Law School, in the annual Pileggi Lecture before Wilmington's corporate bar, according to a report by Thomson Reuters' Andrews Delaware Litigation Reporter.

"The state could quickly lose its lucrative but tenuous position as king of the corporate corporate hill if its courts get caught in the middle of a turf war" in investor lawsuits against government-controlled companies, the report added.

"Shareholder activists already see Delaware as overly protective of officers and directors who wrecked their companies in a quest for short-term subprime profits, Rock said, and there is mounting pressure on the Obama administration to federalize" state business laws. "That controversy will be magnified" when angry shareholders "sue in Delaware and name the Treasury and the dirctors it appointed" as defendants, creating "an awkward, no-win battle with the federal government" unless Delaware judges find ways to dodge individual cases.

The speech is sponsored yearly by veteran Delaware County lawyer Francis G. Pileggi, whose kids include Pennsylvania State Sen. Dominic Pileggi, R-Delaware, who recently beat back Gov. Rendell's attempted tax hike, and Francis G.X. Pileggi, partner in the Philadelphia-based law firm Fox Rothchild LLP, among others.

Delaware has reason to fear retaliation, Francis G.X. told me. As much as 40% of the state's yearly budget is paid from corporate taxes, unclaimed corporate property, and taxes paid by the specialized lawyers, accountants, trust banks, incorporation firms and office furniture companies who service the state's business law sector. "There's always been efforts to scale back Delaware's special role."

With fewer companies and funds forming and suing each other, there have been layoffs in some Delaware law offices, but Pileggi says the state's bankruptcy and trust lawyers are extra busy, and the business-friendly Chancery court that tries big shareholder lawsuits for the majority of New York Stock Exchange companies incorporated here has been cranking out decisions on limited-liability companies and other corporte entities which have the effect of forcing more companies to update their governing documents, using Delaware lawyers.

"Delaware court decisions are more like the Sermon on the Mount than the Ten Commandments," Pileggi adds, citing Rock's earlier research: "They sometimes give room for interpretation." And that's a good thing, he adds.

 
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About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
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