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Delaware's Chancery Court could play role AT&T-Time Warner merger

The $85 billion no-bid deal to merge Time Warner with AT&T is bound to prompt litigation from shareholders who say the corporate executives failed to shop around for a better price.

But Time Warner shareholders may have a hard time winning that case in Delaware’s Chancery Court.

Time Warner shareholders who don’t think corporate executives got the best deal with AT&T will have to take their case to Delaware’s Court of Chancery. And some people say that works out well for Time Warner. 

“The Delaware courts are pretty biased in favor of corporate management,” said Nell Minow, Vice-Chair of ValueEdge Advisors, which is a corporate governance consulting firm. “Delaware courts generally find a way to rule in favor of executives. And you couldn’t have a better bad example than the last time Time Warner went to court, which was about the merger of Time and Warner.” 

She says Time Warner and other Fortune 500 companies incorporate in Delaware specifically because they know litigation will go to the state’s Court of Chancery.

Minow says shareholders got a fair shake in Delaware courts until they scored a big win the 1985 case of Smith v. Van Gorkom.

“The result of that however is that the corporations threatened to leave Delaware and incorporate elsewhere. And that, I think, has scared the Delaware courts out of ruling in favor of shareholders. And, generally speaking, they have not,“ said Minow.

But, not everyone agrees.

“The suggestion that Delaware and the Court of Chancery in particular are hostile to shareholder litigation is an unfortunate myth,” said Lawrence Hamermesh, Director of the Widener Institute of Delaware Corporate and Business Law.  “I think it’s a mistake to call the Court of Chancery dogmatically anti-shareholder.”

He says the courts in Delaware aren’t hostile to shareholders. They’re hostile to lawyers trying a case just to rack up fees.

“The court has a difficult job to do to balance the retention and promotion of worthwhile litigation and at the same time try to discourage litigation that’s intended to achieve lawyers fees and nothing for the stockholders.” 

Hamermesh says recent state legislation and state Supreme Court rulings have helped Chancery achieve this balance. Although, he concedes, it’s difficult for the court to separate the proverbial wheat from the chaff with 100 percent accuracy.

And that will always leave it open for criticism.

Both Hamermesh and Minow agree, however, that Time Warner may just decide to settle any litigation outside of court in a high-profile case like this.