October 13, 2008
The Financial Crisis and Delaware
Posted by Gordon Smith

After reading the headlines today, are you wondering, "What financial crisis?" If so, you need to get some perspective. Last week was awfully scary, but unless you pulled all of your money out of the market (and if you did that, what were you thinking!!!), you still have a long row to hoe. Even if we assume that credit markets "unfreeze" and stock markets stabilize or increase, Mike Guttentag is right: "One of the consequences of the subprime meltdown and subsequent stock market decline this past week is certain: there will be a regulatory response." And he is not talking just about the bailout.

Inevitably, this raises the question: what about Delaware? Marcia Coyle asked me an several others that question and wrote up the story for the National Law Journal. By way of notice for younger audiences, this story contains the F-word ("federalization"). Here is Charles M. Elson, director of the University of Delaware Corporate Governance Center:

"The possibility of federalization is greater today because of this crisis. The storm clouds are there and they have come together to make this much more possible than even two months ago."

And yours truly:

"What Delaware should be most worried about is if people begin to associate the financial crisis with executive misconduct. If people really believe this crisis was caused by greed or failure of oversight, well, Delaware, by and large, regulates those through its fiduciary law."

This may not be entirely clear from the article, but I do not believe that the financial crisis represents a failure of Delaware law. Nevertheless, I think there is some risk that people (ahem ... John McCain) may portray it in that way. Marcia also spoke to Jay Brown of the University of Denver Sturm College of Law, who said that the "'single biggest failing' in the bailout plan was the absence of measures to address what he calls the Delaware issue — the responsibility of the board of directors for overseeing companies to ensure they don't get into trouble." Jay asked, "Why weren't the board of directors on top of this excessive risk-taking? — that's the issue again not entirely addressed."

Will the next Congress turn to this question? Larry Hamermesh thinks Jay's view is "unsupported" and Larry sees no reason for Congress to elevate corporate governance to the top of the pile. I agree with Larry regarding both of those sentiments, but I am not so sanguine about Congress' ability to craft an appropriate regulatory response or to refrain from messing with Delaware. As I told Marcia, "I suspect we're going to get a pretty big look from Congress at the current regulatory system, and who knows what will be the end result."

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