Commenting on Delaware Chancellor Strine’s El Paso opinion (here) seemed to be obligatory in the bizlaw blogosphere this week, so far be it for me not to follow marching orders. In case you’ve missed out on the underlying facts, Alison Frankel provides an overview here (HT: Steve Bainbridge). Among other things, she notes that:
Chancellor Leo Strine of Delaware Chancery Court is thoroughly sick of what he perceives as Goldman Sachs' disregard for the M&A rules everyone else plays by. His 34-page decision Wednesday in a shareholder challenge to Kinder Morgan's $21.1 billion acquisition of El Paso Corp is filled with scorn for Goldman's eagerness to remain an adviser to longtime client El Paso even though Goldman held a $4 billion stake and two board seats at Kinder Morgan. Writing four months after he took Goldman to task for manipulating valuations in the Southern Peru Copper case, Strine used works like "tainted," "furtive," and "troubling" to describe the investment bank's continuing influence on El Paso CEO Douglas Foshee, even after it was supposed to be walled off from the Kinder deal.
However, the Chancellor denied plaintiffs' request for an injunction and suggested it would be nearly impossible for shareholders to hold Goldman accountable. It is also unlikely that anyone else will have to reach into their own pocket for their “sins.” Again, I quote Frankel from her post linked to above: “I should note that if the deal goes through as expected, Kinder Morgan will likely indemnify El Paso for any payments to shareholders; [El Paso CEO] Foshee is surely covered by D&O insurance, although he could meet resistance from his insurer if he's found to have breached his duty.” (I reference “sins” as per Bainbridge (here): “Like the minor prophets of old, Delaware judges call out sinners among the rich and powerful and hold them up as examples of what not to do.”).
Thus, much of the focus of the discussion has been on the effectiveness of shaming, since that may well be the only “pain” the primary bad actors in this case experience. Again, I quote Bainbridge:
[S]ingling out the sinners for opprobrium serves as a sanction and deterrent. This function invokes the controversial question of whether shaming is an appropriate sanction in corporate law. It is an issue on which I have frankly waffled over the years. There are good arguments on both sides and, at least for present purposes, I shall therefore take an agnostic position.
Personally, I think many of those at the top of the corporate food chain simply love the fact that so many of us apparently think that shaming, standing alone, serves any sort of an effective punishment/deterrent role. As I have blogged previously (here):
I have been unimpressed by the idea of shaming as an effective form of deterrence or punishment ever since I heard the comments of a Big Corp board member effectively affirming what I had long believed to be true: That at least for the top execs, they'll gladly take your shame all the way to the bank. They don't live in the same circles as the rest of us and they are about as impacted by our scorn as I would be by the disapproval of my cat …. Ultimately, this is an empirical question. And I am certainly willing to be convinced that shaming has an effective role to play in the punishment of corporate offenders (both as to the corporate entity and the individuals who run it). But for now, if more punishment is actually warranted I'd prefer to see more jail time or fines.
I should amend the last part of that quote to read: “fines the wrongdoers have to pay out of their personal assets without any form of indemnification.”
Regardless, perhaps we will get some sort of empirical evidence as this case unfolds. Frankel writes in a separate post (here):
Thanks to those [shaming] opinions, plaintiffs' lawyers are much better situated in settlement negotiations than they would have been without expedited discovery and injunction hearings. For the purposes of eventually requesting fees, it's also a lot easier to quantify the benefit you've earned for shareholders through money damages than through an injunction, especially in a single-bidder scenario.
But again, I remain skeptical of shaming as sanction if no individual is reaching into their own pocket to pay for these wrongs. In fact, Robert Teitelman notes (here) that:
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.
However, Frankel notes that disgorgement remains a possibility, at least as per a related case ruled on by Vice Chancellor Sam Glasscock (opinion here): “Glasscock was even more explicit about monetary relief in the Delphi ruling than Strine was in El Paso; he said he could simply order Rosenkranz to disgorge the premium he's slated to receive, giving Class A and Class B shareholders the same price per share.” We shall see.