America - Andrew Stephen on why Lord Black won't be whipped

In favouring a corporate board against Conrad Black, a mere individual, Delaware, "the corporate sta

I bumped into a friend at the ice rink the other day - not literally, I should add - and was surprised at the subject he immediately chose to bring up. "The Conrad Black case - it couldn't have happened to a nicer man," he said in a conspiratorial manner, sotto voce. I was taken aback, because my friend is in the oil business and I would not have expected him to be interested in the events that have made Lord Black a "loathsome laughing stock" (not my words - those of a lawsuit brought by Black) elsewhere. But what about the Hollinger International board of directors, too, I asked? "Couldn't be happening," he replied in exactly the same way, "to a nicer bunch of people."

I wasn't anticipating such an exchange because the Black scandal is hardly household news here, but the ice-rink conversation showed me just how closely big-time businessmen follow what is going on in the courts of Delaware. It was there that Judge Leo Strine pronounced that Black had misrepresented facts to the Hollinger International board, that he had breached his fiduciary and contractual duties persistently and seriously, that he was evasive and unreliable, that his explanations for what had gone wrong in his empire did not have the ring of truth, and that it had become "impossible for me to credit his word".

It took a court in Delaware - not one in New York, Los Angeles or Toronto - to block the sale of Black's empire to the Barclay brothers with such stinging conclusions.

Why Delaware? Why should the state, named after Lord de la Warr following its capture by the English in 1664, have such great power in the Black case? The answer is that ever since it became the first state to ratify the US constitution in 1787, Delaware has been virtually a one-industry state: it deals almost exclusively in setting up corporations and being the legal home to them, in much the same way that Nevada specialises in gambling and quickie marriages and divorces. If I want to set up my own company, I can do so in Delaware by fax, online or even simply by dialling a freephone number; in ten minutes or so, I can have my very own company, incorporated in Delaware.

The reason is that Delaware (on the north-eastern coast of America, about 175 miles south of New York) is such a tiny state - the second-smallest in the country and only half the size of Los Angeles County. Its founders quickly realised that, in order to survive and to raise enough revenue to be viable and to compete with its vastly bigger neighbours such as Pennsylvania and New Jersey, it would need its own revenue-raising speciality; so it invented itself as a corporate-friendly state, where the courts and the legislature could be relied upon to be sympathetic to corporations and to any little legal difficulties in which they might find themselves. In finding against Black, the Delaware court last month duly upheld the case of the parent company and its board of directors.

My good friend Nell Minow, who is one of the country's leading experts on how corporations are run, says that as a result Delaware "has the best judiciary in the world in terms of understanding finance and corporate law. It has a very knowledgeable judiciary, and any lawyers who want to work on company law need to be admitted to the bar in Delaware."

More than half of the country's Fortune 500 companies (including several major insurance companies) are incorporated in Delaware, though it has largely managed to escape responsibility for the financial scandals of imploded companies such as Enron, Tyco and Global Crossing (fortunately for Delaware, they chose "offshore" places such as Bermuda to incorporate themselves).

Countless thousands of American companies, giant and tiny - at the latest count, more than 170,000 of them - are thus legally born in a small building in the state's capital, Dover (population: 30,000). Two-thirds of the state's people live in mostly wealthy, mostly suburban communities; 80 per cent of the state is white. Its highly hands-off, company-friendly laws led Ralph Nader's "Raiders" to call Delaware "the corporate state" in 1973. Its laws made it easier, naturally, to incorporate huge corporate tax revenues. It was one of the few states to escape the effects of the recession in the 1980s and early 1990s, mostly as a result.

Minow believes, incidentally, that the Conrad Black case is "outrageous and atrocious". The shareholders, she says, "have been horribly abused . . . Lord Black was trying to have the best of both worlds, access to the capital of a public company and control of a private company. His board should have been extra cautious in making sure corporate governance protections were in place." We will be hearing of many more lawsuits in the Delaware courts over the fate of Hollinger, she predicts.

The overwhelming importance of Delaware in this field was fortified by the dominance since the early 19th century of the du Pont family, still probably the richest dynasty in the country. Taking advantage of the already loose company restrictions, Eleuthere Irenee du Pont, the son of a French immigrant, set up a gunpowder mill on the banks of Brandywine Creek in 1802. A monopoly was established, and a munitions and chemical giant grew over seven generations to become the international conglomerate it is today in banking, media, land and chemicals.

The du Ponts were so wealthy that in the first half of the 20th century, they decided they wanted to control General Motors, which they did for three decades; latterly they have given us nylon, cellophane, Teflon and Kevlar, besides many medications (including Coumadin, a blood-thinner that I take).

Thus, in Delaware, we have a tiny state of 2,044 square miles that has practically no pollution and plenty of lucrative jobs. It received something of a shell shock in the 1970s: in a lawsuit against a company called Trans Union, the Delaware courts were so appalled that even they came out against its board of directors. Such was the state's resulting trauma that it decided it would not, in future, come out with measures or decisions which would harm corporations. Bureaucratic and legal paradise was thus confirmed for those 170,000-plus companies incorporated in Delaware.

But not, it has to be said, for wayward newspaper proprietors and chairmen of boards, such as Lord Black of Crossharbour. In the words of Judge Strine again, Black "has repeatedly behaved in a manner inconsistent with the duty of loyalty he owed the company". Traumatising though it is for Delaware to come up with such a case and not take the side of the supposed boss, the state court behaved consistently by siding with the board rather than with one man whose "explanations . . . do not have the ring of truth".

In so much trouble with the courts of Delaware - and with the US Securities and Exchange Commission investigating what else has been going on between him and Hollinger - Black has one tiny consolation: he will not be publicly whipped, whatever else may happen to him. In 1972, Delaware became the last state in the country to abolish its whipping post (although it had not been used for 20 years).

Conrad, dear fellow, I thought, in such difficult times, that this news might offer a little much-needed solace.

Next Article