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Corporate law in America might be a lot different today but for a fateful night of overindulgence 32 years ago. Bill Allen, one of six children of a Philadelphia bus driver, product of Catholic schools and a scholarship business student at NYU, planned to go on to graduate school to become a business historian. He needed to take the GRE, and he probably would have done well. He just didn’t make it on time. “I went to a frat party, and being a typical 22-year-old, I didn’t get home until 3 or 4 a.m. — probably in an inebriated state — and overslept,” the former Delaware chancellor says now. So he took the next possible exam, the Law School Admissions Test. When the results were favorable, he went to the library and got out a book on law schools. “I picked the cheapest law school in the U.S. — which happened to be the University of Texas — which turns out to be a good school, happily for me.” Happily for the legal profession as well. During his 12-year tenure as chief judge of the Delaware Chancery, William T. Allen became a force that rewove the fabric of corporate law. His decisions changed the role of corporate directors, expanding them from passive advisers to active guardians who should aid in formulating and reviewing the long-term strategic, financial and organizational goals of the corporation. Allen’s notion that a board’s role entails public responsibility is more widely embraced now than ever before. INSPIRED ARCHITECT “He’s a consummate judge and an inspired architect of corporate law,” says Ronald Gilson, a corporate governance scholar and law professor at both Stanford Law School and Columbia Law School. “Allen found himself in the right place at the right time,” Gilson says. “The hostile takeover wave of the 1980s subjected the traditional structure of corporate law to the equivalent of a stress test,” he says. “As a matter of corporate law, the challenge was to apportion decision responsibilities among directors, shareholder and courts. As a matter of social policy, the outcome would determine who governed the largest and most powerful private institutions in our society.” The examples of Allen’s architecture are all around. One recently joined company — the newly formed AOL Time Warner Inc., might not exist if not for Allen. In 1989, in a highly charged takeover contest, Allen wrote the most controversial ruling of his career, allowing Time’s directors to reject a $200-per-share hostile bid by Paramount Communications and accept a $125-per-share merger negotiated between Time and Warner. The case landed before Allen right before a vacation to London that he didn’t want to cancel. “There was a lot of time pressure,” he says. ELOQUENCE AND EFFICIENCY He filed his 79-page decision five days after the argument, a document still noted for its eloquence and legal efficiency. Martin Lipton and Theodore Mirvis, partners at Wachtell Lipton Rosen & Katz, say reading it is “a humbling experience.” “Ask yourself how long it would have taken you to draft something comparable,” they wrote in a 1997 tribute to Allen. “A few weeks? Several months? Or, for the vast majority of us, never, no matter how much time or resources we had available.” For Allen, the ruling was a test of his professionalism. “Paramount’s was the price Time shareholders wanted to take, but Time’s directors’ said, ‘We think we know more, and we think the alternative is better.’ That’s the tension between deferring to the board’s better information and shareholders rights to control the outcomes of transactions.” The effects of the decision were profound. As The Economist wrote, “Time’s bosses were free to just say no to unwanted offers. Paramount’s bid failed, Time’s shareholders lost a fortune and hostile bids all but disappeared.” Today, as director of the Center for Law and Business at New York University, which he helped create in 1997 after leaving the bench, Allen takes satisfaction in the dramatic change in ideology about how corporate boards should be structured and function. CORPORATE EVOLUTION “The world has witnessed a remarkable evolution in corporate governance over the past 15 years,” he says. Though he says that this has hardly led to “nirvana,” it has had a positive impact, with boards that are smaller, more independent, with their compensation tied more directly to the company’s performance. Today he leads several initiatives at NYU, including a program to educate foreign-trained lawyers about the U.S. financial and legal systems, to enhance the status of corporate governance around the world. At 55, Allen also continues to carve out a role as a leading governance expert, by speaking, writing and practicing. One day a week, he consults at the New York offices of Wachtell Lipton. “I come up and chat with people, read a brief if they want, answer a question or discuss a problem,” he says. “What I like about it is I’m able to keep in touch with change in the world.” Arthur Levitt, outgoing chairman of the Securities and Exchange Commission, recruited him to be the founding chairman of the Independence Standards Board, with a mission to improve the standards relating to auditor independence. “At the moment, the U.S. corporate governance system tends to be the hero in the academic finance world,” Allen says. “But we still need to broaden our concerns beyond boards to other critical governance actors — auditors, lawyers and compensation consultants.” The transition from the isolated prestige of the bench to working professional in New York has been a happy one. After nearly three decades of debilitating arthritis that made movement painful, Allen recently had successful knee surgery. “I feel better than I have in years,” he says. He says he enjoys his life at NYU, with offices at both the business and law schools there. SETTING PRECEDENTS During his tenure, he wrote more than 500 judicial opinions on a broad range of legal questions, some controversial, some the Delaware Supreme Court overturned. Many of those rulings established precedents corporations must follow, since Delaware is a center of colossal legal clout as the home to more than 300,000 corporations, including half the companies listed on the New York Stock Exchange and most of the Fortune 500. Allen’s landmark 1996 ruling concerning Caremark International Inc. laid the groundwork for more proactive boards. The case involved a corporation that pleaded guilty to a felony and agreed to pay civil and criminal fines and reimbursements totaling $250 million. Allen used the case to explore the standards governing boards of directors’ obligations to supervise or monitor corporate performance. He ruled that directors, who traditionally deal with problems as they arise, must take an active part in ensuring that a company has adequate compliance and information-gathering systems. Failure to do so, he wrote, would render a director liable for losses caused by noncompliance. For boards, the decision recast their responsibilities and spawned a cottage industry of consultants and board advisers to help corporate directors get their acts together. “Under the old system, the right thing for a person to do as a director was to be available to the CEO, to consult and respond to emergencies, but otherwise not to interfere,” Allen says. REVERSING DEFINITIONS “That was socially the right thing to do; that was how the rule was defined. Now, this social definition has evolved — almost completely reversed. Now, for outside directors, they all understand that the right thing to do is to pay attention, to monitor the board, to have reasonable assurances that there is a plan in place, that the company is meeting its goals and to be more active in the monitoring.” One by-product of the Allen years is a mushrooming number of lawsuits involving the breach of fiduciary duty by boards. “We see an increasing number of cases seeking to invoke the Caremark doctrine of duty of oversight by directors, their failure to monitor corporations and detect wrongs, in terms of compensation or auditing, for example,” says William Chandler, chief judge now of Delaware’s Court of Chancery, who praises Allen’s keen ability to translate complicated legal concepts. “Allen, along with other members of the court, helped fashion these new rules of corporate governance and takeover litigation still serving the court and M&A community today.” Says Victor Lewkow, a senior partner in M&A at Cleary, Gottlieb, Steen & Hamilton in New York, “People continue to test his opinions.” JUDGMENT AND INTELLECT When Allen graduated from UT in 1972, he became a clerk for Walter Stapleton, now a judge for the 3rd U.S. Circuit Court of Appeals. “Bill had judgment and intellect in abundance, the ability to see things in a larger perspective that integrates the present problem and solution with real life out there,” Stapleton says. Stapleton also witnessed the toll arthritis took on the young Allen. “He’s lived with pain since he came out of law school,” he says, praising Allen’s stoicism. “He’s one of the most upbeat people I’ve ever met. He expects great things from people and from life.” Stapleton and Allen have remained close friends and the judge even conducted the marriage ceremony between Allen and his wife, Ruth Horowitz, an NYU sociology professor. Allen then joined Morris, Nichols, Arsht & Tunnell, a Wilmington, Del.-based law firm, where he became a partner and practiced for 11 years, mostly business law, representing banks. But he missed writing and when the opportunity arose, he jumped at a judicial appointment. “I wanted something that had greater significance,” he says, and took a huge pay cut to do it. ENTERING THE BATTLEFIELD When he joined the Chancery in 1985, the $80,000 annual salary a judge earned was less than one-third of what he earned as a lawyer in private practice. As a judge, he also found himself in an era of takeovers where dealmakers were devising complicated defense tactics to ward off hostile bids. The court had become a battlefield, he says, partly because of a political stalemate in Washington, D.C., where Congress was at odds with the laissez-faire policies of the Reagan administration. Some of the court’s rulings rocked the dealmaking community. One involved the takeover of Interco Inc., a St. Louis furniture manufacturer, in which Allen ruled in favor of limiting the effectiveness of a poison pill as a takeover defense. At the time, Martin Lipton, the inventor of the poison pill, suggested that his clients pull out of Delaware and incorporate in another state. Today, Lipton is an Allen fan — and one of his employers. And Allen says that despite the controversy around some of his rulings, he didn’t make long-term enemies. “Judges have almost uniquely in our society a kind of respect,” he says. “People have lost cases before me, but I don’t think anyone was ever angry. If a judge presents himself as fair-minded and conscientious, people respect that.” TURNING THE TIDE Some reasons why a corporate law evolution had to take place were fairly obvious. Global markets and the growth of institutional investors, Allen says, were “two forces” that pushed in the direction of greater efficiency and greater accountability in corporate governance. In the early 1990s in particular, the U.S. was looking weak in the global picture compared to the Japanese and German systems, which featured stable long-term investors able to monitor management performance. Today, some scholars suggest Allen and his court played a role in turning the tide. In their Delaware Journal of Corporate Law article in 1997, Lipton and Mirvis noted an “increasing consensus” that the wrenching restructuring of American industry that took place in the 1980s and early 1990s led to increased competitiveness and productivity that has helped the overall American economy. They note that nations such as Japan, Germany and France — with legal systems restricting such overhauls — are economies in difficulty. “An interesting question is whether by creating rules that focused primarily on the interests of corporate shareholders rather than those of managers or other ‘constituencies,’ the Delaware courts deserve some credit for the United States’ relative economic success,” they wrote. BALANCING ACT Allen agrees. The legal system, he says, “does deserve a lot of the credit” for what has been a strong U.S. economy, even though academic studies, for the most part, don’t suggest a close link between corporate governance and corporate financial performance. “But that doesn’t mean there is no link,” he says. “It just means that corporate governance is an extraordinarily complex and diverse phenomena.” The Delaware law involves a careful balancing act, he says, in facilitating corporations’ efficient creation of wealth. One side involves allowing centralized managers broad discretion “because centralized management, the CEO, the board, has all the information and the courts don’t. And shareholders often don’t,” he says. On the other side, the law has to make directors ultimately responsive to the economic interests of equity investors, he says. “There’s no simple way to optimize these two variables.” That balancing act, he says, came into play in what remains his most controversial ruling, allowing Time’s directors to reject Paramount’s hostile bid, a premium unmatched by a deal negotiated by Time and Warner Communications, in 1989. Shareholder activist Nell Minow, for one, called the case “probably the greatest incursion in U.S. business history into the rights of shareholders.” OBJECTIVITY Today, Allen says he was influenced in that case, more than any other in his career, by what he learned from his mentor, Stapleton, who emphasized the art of objectivity. “He took extreme care with doctrine. He really wanted to make the law all coherent and consistent, and he wanted to deny himself as a judge the power to make personal choices. “I was always someone who saw judging as something inevitably where you make choices, but from him I learned to minimize those opportunities, to try and make yourself as small as possible.” By the mid-1990s, he says, the frenetic and intense pace of the court was beginning to wear him down. “I was a little tired,” he says. “I felt like I was a juggler. I could go on and do another 12 years of juggling, but I didn’t know if I would be able to bring any blinding insight beyond what I had been able to do.” BUILDING BRIDGES He chose to become an academic, he says, because he wanted to teach as well as pursue scholarship. Even during his time on the bench, he occasionally played visiting professor at the law schools of Stanford and the University of Pennsylvania. “One tension I felt as a judge is that I didn’t have the opportunity to think as deeply as I could about these problems.” Though both Harvard and Yale approached him, he decided to launch the center at NYU, which had been in the works by the law and business schools for several years. “Bill was our first draft choice,” says John Sexton, dean of the law school. “He was the obvious natural leader for it, a scholar judge who cares about ideas, not just the ‘is’ of the law, but the ‘ought’ of the law.” Today, Allen relishes the challenge of building bridges between the financial and legal worlds through NYU. The center sponsors research scholarship, classes and conferences that feature speakers from the public and private sectors, including the Chancery. “If I were czar of the universe and changing things, I would make sure that judges got basic training in finance,” he says. “The world would be a little better.” Copyright (c)2001 TDD, LLC. All rights reserved.

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