I have spent the better part of the year studying the consequences of government ownership in the private sector, see Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice. I recently had the opportunity to read a new paper from Robert Rhee that examines the issue from a different point of view, Nationalization of Corporate Governance and Purpose During a Time of Crisis, forthcoming in the 2010 George Mason Law Review.
Professor Rhee raises a number of issues in the paper which I commend to everyone interested in the bailout and how it changes corporation law. He examines the government’s pressure on Bank of America to complete the Merrill Lynch acquisition and uses it as a case study for how to understand fiduciary duties when the government and private firms become intertwined. I won’t address all of his ideas but I would like to focus on one observation he offers that I have yet to see anyone mention. He notes that Section 122(12) of the Delaware General Corporation Law grants a corporation the power to “transact any lawful business which the corporation‘s board of directors shall find to be in aid of government authority.”
At first blush, 122(12) would seem to give Board members of Bank of America, Citigroup, AIG, and all the other major TARP recipients immunity from shareholder suit alleging a violation of the duty of loyalty for trying to keep their jobs by caving to government pressure to, for instance, give cheaper loans in battleground states or re-open failing dealerships. But then again, the Court of Chancery has made it clear that powers permitted by the Delaware General Corporation Law may not be used to entrench managers or otherwise harm shareholders, see the Schnell, Blasius, Interco, and Digex cases among a variety of others. Merely because the Delaware General Corporation Law gives the Board the power to do something doesn’t mean that the Court of Chancery won’t hold a Board liable for violating their fiduciary duties in exercise of that expressly granted power.
So where does that leave us? Ed Rock and Marcel Kahan argue that Delaware avoided a challenge to the Bear Stearns merger to avoid invoking the anger of federal authorities during a time of crisis and risk increasing the odds of more federal pre-emption of state corporate law. Maybe they are right, or maybe Vice Chancellor Parsons was simply making honest use of forum precedent. Assuming Rock and Kahan have it right, as the crisis eases and the government continues to hold a controlling interest in many TARP recipients I think it’s more likely Delaware would be willing to take on this difficult issue. At that point, who knows what will happen. Unfortunately, as I mention in the Treasury Inc. piece, I fear that the government’s sovereign immunity will allow it to avoid the fiduciary duty liability that all other controlling shareholders face.