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How Delaware courts made Wall St. back off on M&A

When shareholders sue, Chancery looks to independent directors, and their advisers

"97 percent of deals attracted a lawsuit last year, so deal-making has become a regulated process," writes Steven Davidoff Solomon in the New York Times here.

Noting that something like 60% of publicly-traded U.S. companies are incorporated under Delaware law -- which means business and shareholder disputes are heard by the state's appointed Court of Chancery and appeals court judges -- Solomon lists a string of recent cases where investment bankers (including Goldman Sachs) were punished with hundreds of millions of dollars in payments for putting their own interests above those of client companies and shareholders.

He writes that Delaware judges aren't splitting hairs over whether a particular offer is, or is not, the best deal; instead, they are pushing for independent directors to be well-advised, so they can make well-informed choices, in hopes these will benefit shareholders. Recent decisions have intimidated investment banks into ending the practice of "staple" financing, or lucrative deal loans linked to a bank's merger advice, Solomon adds.

Excerpt: "Boards receive wide latitude in Delaware as long as they can demonstrate independence... The Delaware way is to ensure conflict-free advice but not evaluate the substance of the transaction.

"And while they are willing to hold banks liable, the courts have yet to hold directors liable for similar mistakes, leading some to complain that Delaware is choosing sides.

"Still, as long as the advice and the directors are free of conflict, a deal will most likely pass muster in Delaware. Of course, that means shareholders have to trust their directors to do the right thing. Delaware says so."