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Tuesday, March 31, 2009

Lyondell Chemical Co. v. Ryan and Delaware's (Counter-)Cyclical Jurisprudence

Larry Cunningham has posted on the recent Lyondell Chemical Co. v. Ryan opinion from the Delaware Supreme Court.  (The title of his post reminds me of this.) He calls the opinion "refreshingly lucid and terse" and states that "for now, Lyondell puts the notion of good faith in something of a coma. Not dead, but nary alive."

There has been lots of great commentary on the opinion: I'll crib from Larry and point you to Steve Bainbridge; Jeff Lipshaw; Gordon Smith; and Andrew Lund's paper on the subject.  There's one angle that I haven't yet seen mentioned, however, and that's the counter-cyclical nature of the opinion.

There's a standard meme in corporate law that Delaware courts are worried about encroachment from federal law, and so their jurists are motivated to shape the law in accordance with the prevailing political winds.  As the abstract for Mark Roe's Delaware's Competition explains:

Delaware's chief competitive pressure comes not from other states but from the federal government. When the issue is big, the federal government takes the issue or threatens to do so. Delaware players are conscious that if they mis-step, federal authorities could step in. These possibilities of ouster, threat, and consciousness have conditioned Delaware's behavior.

The Disney case is often held up as an example of this, as sketched (in simplified form) by this timeline:

  • 1998 [pre-Enron]: Chancery Court dismisses claims

  • 2000 [pre-Enron]: Supreme Court affirms as to most counts, but remands for dismissal without prejudice

  • 2003 [post-Enron]: Chancery Court finds good faith claim has been stated and rejects motions to dismiss

  • 2005 [post-post-Enron]: Chancery Court criticizes Eisner but finds no violation of good faith

  • 2006 [post-post-Enron]: Supreme Court affirms

Of course, this simplification does no justice to the actual opinions and their complexities.  But it is an illustration of the (cynical) explanation of Delaware's relationship with D.C.: Delaware judges do what they need to do to satisfy the feds but no more.

Recent cases from the Chancery Court have been somewhat in harmony with this thesis.  In the AIG case, Vice Chancellor Strine called AIG a "criminal enterprise" (under the facts as alleged in the complaint) and allowed the case to move forward.  In Citigroup, Chancellor Chandler dismissed the Caremark claims but did allow a excessive compensation-waste claim to go forward - a fairly unusual event.  (But cf. Jay Brown's criticisms of Citigroup here.) 

However, Lyondell seems like a pretty clear victory for the deregulatory side.  It cuts back on the fiduciary duty of good faith in straightforward and dramatic terms, using adverbs like "completely" and "utterly" that provide little wiggle room.  Moreover, this near-elimination of good faith was arguably unnecessary to the resolution of the case.  (See Andrew Lund's comment here.)  Given the regulatory mood in Washington and across the country, Lyondell seems to be radically out of step with the prevailing political winds.

So does this mean that the "federal competition" explanation of Delaware jurisprudence is wrong?  Maybe it was right before but the equilibrium has changed?  Or is this case just an exception?

Posted by Matt Bodie on March 31, 2009 at 12:40 PM in Corporate | Permalink

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