In a post the other day on Delaware's dominance of corporation law, I noted:
A recent news headline sums it up pretty well: "Beware Delaware." The article went on to argue that "the Delaware Supreme Court has [recently] issued at least five decisions of great concern to the corporate bar. Each was remarkable not only because it found against directors and in favor of shareholders, but also because it reversed a lower court ruling that went the other way."
One of the potential competitors Delaware must fend off, of course, is the federal government. Every so often there is a threat to create a federal corporation law, which would preempt Delaware's law and, accordingly, end Delaware's profitable dominance of the market for incorporations. In the post-Enron environment, Delaware again faced a risk of federal preemption. A cynic might think that threat explained the string of cases noted above.
If so, we've got another example. Delaware Chancellor William Chandler refused to dismiss a shareholder derivative lawsuit against insiders of eBay Inc. for accepting hot IPO stock offerings from eBay's investment banker, Goldman Sachs Group Inc. Chandler found that Goldman Sachs offered the insiders access to the IPOs so as to secure business from eBay. The WSJ ($) reports that:
In rejecting the motion to dismiss, Judge Chandler said, "No one can seriously argue that this conduct did not place the insider defendants in a position of conflict with their duties to the corporation. One can realistically characterize these IPO allocations as a form of commercial discount or rebate for past or future investment-banking services."
The lawsuit raised "a reasonable inference that the insider directors accepted a commission or gratuity that rightfully belonged to eBay but that was improperly diverted to them," Judge Chandler said. They "were not free to accept this consideration from a company, Goldman Sachs, that was doing significant business with eBay and which arguably intended the consideration as an inducement to maintaining the business relationship in the future."
What's interesting about this case is not the legal issues, which are well-settled, but rather their application to this fact pattern. What Goldman Sachs did is called "pay for play." It is an incredibly important phenomenon by which investment banks offer access to hot IPO stocks in return for future business. Everybody knows this goes on, but until recently nobody cared. In the post-Enron era, however, it has become another ill-gotten gain for corporate fatcats. Given a chance to demonstrate Delaware's commitment to good corporate governance, Chancellor Chandler jumped on it. It's the right result, so only a cynic would think that fending off federal preemption had anything to do with Delaware's sudden desire to be a poster child for good corporate governance.
