March 13, 2017

Activism: Has Chief Justice Strine Become “Wolfsbane”?

According to this CNBC article, Leo Strine – Delaware’s “secretly powerful” Chief Justice – says that hedge funds are “wolves” who damage ordinary investors. Here’s an excerpt:

Strine’s main argument is that the “current corporate governance system … gives the most voice and the most power to those whose perspectives and incentives are least aligned with that of ordinary Americans.”

That has allowed such investors to act and manipulate decisions by corporations that often are not in the long-term best interest of average shareholders, he said. He points to the “continuing creep toward direct stock market control of public corporations,” which he says bears no accountability toward human investors.

Strine’s ideas are laid out in an upcoming Yale Law Journal article, and are consistent with his prior writings expressing concern about whether financial intermediaries appropriately represent the interests of the people whose money they invest.

The Chief Justice’s hedge fund critics have responded to his most recent volley by saying that a justice should not be on the record “condemning a group of people who tend to litigate in his court and the lower Delaware courts,” and that he doesn’t offer much in terms of a fix for what he sees as a flawed system. None of these critics would agree to be quoted – “fearing retribution from Strine.”

Strine doesn’t condemn all hedge funds – his argument is a little more nuanced than that, and focuses on the need to take consider the impact of short-term activist strategies on the lives of the human beings institutions purport to represent. He also speaks well of an alternative approach that at least one leading hedge fund has already adopted:

Evidence suggests that hedge fund activism is perhaps most valuable when it involves a somewhat rougher form of relationship investing of the kind for which Warren Buffet is known. The activist may need to knock a bit loudly, but once let in, assumes the duties and economic consequences of becoming a genuine fiduciary with duties to other stockholders and of holding its position for a period of five to ten years, during which it is a constructive participant in helping the rest of the board and management improve a lagging company. Nelson Peltz and his Trian Fund Management might be thought of in this manner.

Chief Justice Strine’s an intimidating guy – but he’s hardly the first Delaware judge to use his position as a “bully pulpit.” Members of the Chancery Court have often written and spoken outside of the courtroom during their tenure – including current Vice Chancellor Travis Laster & former Chancellor William Allen. That’s just how they roll in Delaware. Other litigants don’t appear to have been too daunted by the scholarship of these “secretly powerful” figures.

John Jenkins