Leo Strine’s balancing act
By Rick Schmidt
From the Penn Law Journal Summer 2012 issue.
On a chilly December morning, a week before Christmas, Leo Strine L’88, the top judge on the Delaware Court of Chancery, is in a giving mood.
A group of lawyers that won a $1.26 billion award in a dispute over the acquisition of a mining company has returned to court seeking a large fee for services rendered. At a hearing, the buyer’s lawyer, Stephen Jenkins, derides the request as a potential windfall, and quickly finds himself on the defensive.
“Well, what’s a windfall?” Strine asks. “A windfall is, someone else bought a [winning] Powerball ticket, and the wind blew it and it fell in someone’s lap.”
A windfall, the judge says, is when companies settle nuisance suits that yield a lot of money to shareholder lawyers and “bupkes, zero, nada, nothing” for their clients. Strine tells Jenkins that he and other defense lawyers “have shaped a world of windfalls.”
“I just actually think there are a lot of actual people who would say ‘if my lawyer hits a grand slam for me, I’m okay with him getting one or two of the runs,’ ” he says.
Indeed, by day’s end, the plaintiffs’ lawyers have scored. Strine grants them a fee of $285 million, a stunning sum equal to about $35,000 an hour, by far the largest in Delaware history. “I don’t think there’s anything about this that is a windfall,” he concludes. “Nothing fell into the laps of the plaintiffs.”
Back in chambers, during lunch, a conversation with a visitor turns to another passion. Strine is a huge music fan. Two posters of singer-songwriter James Taylor hang on the wall over his desk. A CD collection on his book shelf spans from the classics to the Ramones. He finds his groove writing judicial opinions to Coltrane.
“You want to hear a truly magical performance?” he asks, with a conspiratorial smile. He pops in a CD of singer Johnny “Bowtie” Barstow, an obscure artist who has a decidedly nontraditional take on the holiday classics. A hilarious, cringe-inducing version of “Joy to the World” soon fills the air.
The 48-year-old jurist has impressed people with his own kind of offbeat performance, and earned a reputation as one of the nation’s leading figures in corporate law, a probing, thoughtful judge, with an unusually disarming and outspoken style.
Over the years, he has shaped the corporate legal landscape, calling out greedy executives and feckless directors, blocking management-led buyouts, and ordering reluctant merger partners to the altar. He has turned out scores of opinions, many precedent-setting, and more than two dozen law review articles. He has lectured on three continents, and taught at four law schools, including Harvard and Penn, where he has established a close association with his alma mater Penn Law School and its Institute for Law and Economics. He recently delivered the Distinguished Jurist lecture to a big audience that included a large contingent of Penn Law graduates who are considered some of the nation’s most respected corporate lawyers. He also teaches a seminar on corporate law with Penn Law professor Michael Wachter, and the Chancery Court has hired many of their students as clerks.
Strine’s writing is erudite, encyclopedic, and more often than not, highly entertaining, laced with personal asides and allusions to pop culture. Paris Hilton once showed up in a Strine opinion addressing the duties of corporate boards to shop their companies for the best price when faced with a takeover offer.
His courtroom, enlivened by his wit and in-your-face directness, makes for a good reality show. He pushes back hard when lawyers make arguments he sees as weak or file papers he sees as over-the-top. But he saves some of the most withering criticism for himself. The day of the big fee case, he took aim at the institution of marriage, college football bowl games, and his hair (or lack of it).
In short, to use a word in his own vocabulary, he is an important and interesting dude. Last June, he was named to the top position of Chancellor, succeeding William B. Chandler III, who had held the post since 1997, giving him an even bigger pulpit.
“Leo has a very creative and fertile mind,” Chandler, now a partner in the Georgetown, Del., office of Wilson, Sonsini, Goodrich & Rosati, says in an interview. “He will be a fantastic leader.”
That mind is now the custodian of a judicial system whose work product is the state’s most significant export. A majority of the Fortune 500 are incorporated in Delaware, and the Chancery Court is a major draw, because of its unusual focus on business cases, and track record of resolving disputes in a timely, principled way.
Cases are heard before judges rather than juries. And much of the work is done on the fly; the court is often asked to issue quick rulings because of a pending shareholder vote or other exigencies.
But its preeminence is also being tested. Delaware companies are increasingly being sued in other states, some recent studies indicate, and that threatens to dilute the influence of the court; if fewer companies start calling Delaware home, that could undermine the state’s budget, which depends heavily on the taxes they pay. Congress has also been invading the turf of Delaware and other states, enacting pro-shareholder and other corporate law measures, in response to scandals like the Enron mess.
Defending the home field, Strine has butted heads with judges in other states over the right to hear suits against Delaware firms, once issuing an order blocking a proposed buyout of the Topps trading card company after a New York judge had already asserted jurisdiction. He reasoned that the Topps merger was part of a newly emerging wave of going-private deals that was raising new and subtle issues that Delaware as the state of incorporation had a strong interest in addressing.
He has been the point man for the judiciary advising the governor and the state’s congressional delegation on shaping federal reform measures. He has written that, by empowering shareholders as a check on managements, Congress has paradoxically sown the seeds of future crises, by fueling an already-intense drive for profits.
In the courtroom, if he plays against type of the cautious, inscrutable judge, that is a conscious strategy, so lawyers know where he stands on issues and have a fair shot at changing his mind. “I find interaction between intelligent human beings one of the best things about being a lawyer or a judge,” he says.
“Am I every one’s cup of tea? I am sure I am not.”
In his office, beyond musical icons, there’s a photo of Brooks Robinson, a childhood hero from Baltimore, where he was born to teenage parents, who understood the leavening effect of education. (Strine’s brother, Michael, holds a Ph.D. in political science from Johns Hopkins, and is currently executive vice president and chief operating officer at the University of Virginia.)
The gallery includes a former boss, U.S. Sen. Tom Carper, who Strine first came to know as a student campaign organizer at the University of Delaware. When Carper became governor in 1993, Strine, by then working in the Wilmington office of Skadden, Arps, Slate, Meagher & Flom, with two judicial clerkships under his belt, gave up the corporate law firm life to become his legal adviser. The job included selling a skeptical legislature on his boss’ reform-minded agenda.
“Leo was my spear carrier,” Carper says in an interview. Carper nominated Strine to the Chancery Court in 1998, and after a politically charged debate, in which critics said he lacked experience and temperament, he was narrowly confirmed, a few days before his wife, Carrie, an occupational therapist, gave birth to the first of their two boys.
At 34, Strine was the brash new kid on the bench, in contrast to Chandler, the quintessential southern gentleman. But the men developed a mutual affection and a close working rapport. “Leo was someone who was very gracious, willing to roll up his sleeves and help,” Chandler recalls.
“There was no learning curve,” he adds. “He hit the ground running. I gave him very significant, heavy duty corporate law cases and he just knocked them right out of the stadium.”
Strine first attracted attention in 2001, when he ordered up what was in effect a shotgun wedding between Tyson Foods Inc. and meatpacking company IBP Inc. Tyson tried to pull out of the $3.2 billion deal saying that IBP had hidden adverse financial information. But Strine found that the information was part of the normal ebb and flow of the beef business, and ordered the chicken firm to the altar.
In 2004, he ruled that Conrad Black, the Canadian press baron, had breached his fiduciary and contractual duties “persistently and seriously” in connection with a proposed sale of Hollinger International Inc., the publishing firm Black then controlled.
Later, when Hollinger’s board proposed selling the Daily Telegraph, the company’s flagship asset, Strine threw out a lawsuit by Black seeking to block the sale.
“The Telegraph sale does not strike at International’s heart or soul, if that corporation can be thought to have either one,” he wrote, adding that the legal test for determining whether the sale had to be put to a vote was the economic value of the newspaper “not how cool it would be” to be its publisher.
Strine sees corporate law as a kind of democracy in action, where at least in theory, there are checks and balances, such as boards getting their legitimacy from the election process. The challenge for the courts, he says, is to create ground rules that business people trust and to keep judges out of the middle of things as much as possible.
Lecturing at the Institute for Law and Economics in February, Strine decried a trend of judges who “make stuff up” to achieve “case specific justice” rather than sticking to existing standards of review or other principles.
But he also has not hesitated to speak up when he sees flaws in existing precedents. Strine has been highly suspicious of transactions initiated by controlling shareholders. But he has also been an advocate of deferring to the corporate decision-makers once certain safeguards are in place, such as where an independent board committee negotiates a deal or where it requires approval from a majority of minority shareholders.
The Delaware Supreme Court, which hears appeals from his court, has a different view, ruling in a 1994 case known as Kahn v. Lynch that all mergers with controlling stockholders were subject to judicial review.
Strine thinks that leads to a kind of legal extortion: plaintiffs’ lawyers racing to the courthouse to attack buyouts with little or no proof of improper conduct, knowing that companies are incentivized to settle quickly to get on with their deals.
“Lynch has generated perverse incentives for both defense and plaintiffs’ counsel,” Strine opined in a 2005 shareholder suit attacking a buyout of Cox Communications Inc.
As part of a settlement, Cox had agreed to pay the plaintiffs’ lawyers $4.9 million in fees to go away. Calling the suits “hastily drafted throwaways,” Strine said the lawyers had contributed little or nothing to final terms of the buyout, and in a move that jolted the plaintiffs’ bar, cut the fee by more than two-thirds.
But he also thinks that lawyers should be amply rewarded where they take genuine risks and succeed, such as in the mining company flap.
That case involved allegations that Grupo Mexico forced a publicly held subsidiary, Southern Peru Copper Corp., to overpay for a third company, a Mexican mining firm that Grupo owned.
Strine found that the New York investment firm, Goldman Sachs, which advised Southern Peru, was effectively a tool of the parent, and that a special board committee set up to evaluate the deal had conducted a tainted analysis. Southern Peru had issued stock to Grupo Mexico for the third company. Strine ordered that the parent return stock worth about a third of the purchase price plus interest – a total of nearly $1.9 billion.
Plaintiffs’ lawyers requested a fee of 22.5 percent, or $428 million, a percentage well within the range of other cases. The defense argued, however, the fee was excessive, noting in court papers that it was worth on an hourly basis what the median American household made in a year. Jenkins also argued that the fee should be reduced because the return of stock did not by itself increase the earnings or value of Southern Peru.
Strine discovered that Southern Peru’s board had been spending millions to buy back its stock in recent years. He said it was inconsistent for the company to argue that the buyback benefitted the company but that the forced return of shares as part of the lawsuit did not.
“I’m not seeing the Emersonian non-foolish inconsistency. I just don’t have that level of genius to hold the incompatible ideas in the mind,” he said at the December hearing. “It’s clear when Southern Peru does it, it’s a proper fiduciary thing that’s good for the company and its stockholders, but if you get it through litigation, it’s not? I’m going to leave that to higher order brains to resolve.”
He trimmed the request to 15 percent of the judgment because the case had languished for years before the plaintiffs’ lawyers took any action. The company has appealed.
He is clearly proud of the court as an institution, collegial and hard-working, and feels a great responsibility to uphold its traditions. And it rankles him when people suggest the court does not give litigants a fair shake.
In November, at a conference on the future of the court at Columbia Law School in New York, a morning panel focused on the competition from other jurisdictions.
Northwestern law professor Bernard Black cited data showing a big drop in the percentage of corporate-law cases being filed in Delaware. He suggested that it reflected a feeling among plaintiffs’ attorneys that judges in the Chancery Court were becoming more critical of fee requests.
Another panelist, Stuart Grant, himself a successful Wilmington plaintiffs’ lawyer, said the exodus reflected a belief that it had become harder to get an expedited hearing in the court.
Strine, who had been sitting in the audience as Black and Grant spoke, seemed annoyed, people in the room say. At lunch, where he was the featured speaker, he prefaced his prepared remarks with an impromptu survey, asking a series of questions, including how many in the audience were then involved in expedited proceedings and how many had won fees of at least $1 million in a single case.
Dozens of lawyers scrambled to their feet, in response to the questions. Strine continued to raise the bar, finally asking how many of the lawyers had won fees over $20 million more than once.
Grant, the court critic, ended up being the last lawyer standing. The crowd laughed. Strine had made his point.
“When people suggest that somehow we are closed for business it has to be answered,” Strine says. A month later, he answered it emphatically in the Southern Peru case.
“Being in our job you have to get used to defense lawyers saying, ‘Oh, you are holding corporate directors to unrealistic standards. Nobody is going to want to serve as a director.’ Then you have the plaintiffs saying, ‘Oh, you are too hard on plaintiffs. You don’t give stockholders a fair chance,’” Strine says. “Delaware is the only state where both sides complain. That’s because this is a neutral forum where the only consideration is doing corporate law fairly and well.”