How to Prevent Hard Cases from Making Bad Law: Bear Stearns, Delaware and the Strategic Use of Comity

Abstract:     
The Bear Stearns/JP Morgan Chase merger placed Delaware between a rock and a hard place. On the one hand, the deal's unprecedented deal protection measures - especially the 39.5% share exchange agreement - were probably invalid under current Delaware doctrine because they rendered the Bear Stearns shareholders' approval rights entirely illusory. On the other hand, if a Delaware court were to enjoin a deal pushed by the Federal Reserve and the Treasury and arguably necessary to prevent a collapse of the international financial system, it would invite just the sort of federal intervention that would undermine Delaware's role as the de facto provider of U.S. corporate law.

Faced with a choice between undermining the delicate and subtle balance struck between managers and shareholders and standing in the way of the imperatives of national and international economic policy, Delaware found a third way that avoided both horns of the dilemma: it took advantage of a pending New York action to stay the Delaware action and avoid making any decision at all. In this article, we tell this story, analyzing the doctrinal issues under Delaware corporate and procedural law, and discussing the implications of this episode for our understanding of the landscape of US corporate law making.

Keywords: corporate takeovers, Federal Reserve, Treasury Department, intervention, deal protection measures, Delaware courts, corporations, Delaware corporate and procedural law, conflict of laws, financial collapse, mergers and acquisitions, corporate charter competition

JEL Classifications: G15, G18, G21, G28, G34, K22

Working Paper Series