J. Travis Laster, the Delaware Court of Chancery’s newest vice chancellor calls himself a “product of the Delaware bar” and says he “grew up as a lawyer in the Delaware system.” The 39-year-old corporate litigator was one half of the Wilmington-based Abrams & Laster firm prior to his confirmation in October. He will replace Vice Chancellor Stephen Lamb, who retired at the end of his 12-year tenure to become a partner in Paul, Weiss, Rifkind, Wharton & Garrison resident in the firm’s newly opened Wilmington office.
“I believe first and foremost in the need for balance between stockholders and directors,” Laster says. “The director-centric model works well. Directors make decisions, and stockholders have the right to ‘toss the bums out’ if they’re unhappy. Of course the law needs to protect stockholders in that regard.”
Lamb was the judge Laster says he appeared before most often during the 13 years he practiced corporate law in the Chancery Court. “He was a fantastic judge,” Laster says of his one-time mentor. “He was knowledgeable, consistent, always prepared, and he’s a tough act to follow.”
Lamb, who spoke at Laster’s investiture, describes the litigator as experienced on both the plaintiff and defense sides. “I’m very happy that Travis has been chosen to serve on the court. He has appeared before me and other members of the court often, and he’s highly regarded, well known to lawyers around the country. This is very positive for the courts and for Delaware, and there’s no doubt in my mind that Travis will do an outstanding job.”
As for the characteristics Laster brings to the court, Lamb says he has “intelligence, experience, care, and energy.”
Delaware employs what Laster describes as a unique merit selection process that begins with a judicial nominating commission made up of attorneys and lay persons. They screen and interview applicants, ultimately sending recommendations to the governor. Following more interviews, the governor sends a nominee to the Senate, which holds a hearing and votes on whether to confirm. All in all, Laster says, it’s a “more merit-driven, less politicized process” than other jurisdictions.
Laster says he has long aspired to public service. Both of his parents are teachers who taught overseas and his wife is a social worker. “We always knew that at some point in my career I would do public service or work for a nonprofit,” he says, noting that the community around the Delaware bar is “close knit.” Laster says he began to allow himself to think of the possibility of submitting his application as soon as word leaked out that Lamb would not seek reappointment at the conclusion of his 12-year term, which ended in July.
The Delaware Senate confirmed Laster, who was nominated by Governor Jack Markell. Although Markell is a Democrat, he was required to appoint a Republican to fill the position left vacant by Lamb, also a Republican. Delaware’s constitution requires a party balance on the bench of the Chancery Court; the court is a key reason that 60 percent of U.S. corporations opt to incorporate in Delaware, and its decisions are often used as guidance by courts in other states.
Professor Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance, says he has known Laster for years. As a counselor, Elson points out, Laster worked for both the plaintiff and defense sides: “He’s low key, intellectually intense, and legally quite sophisticated. Because of his experience, he really can see all sides of an issue.”
What follows is an edited transcript of Directorship’s first interview with Laster.
Directors are both concerned about the increasing cost of liability (D&O) as well as the burden —too many cases are not being brought for gross negligence and they are uniformly settled with the activists demanding director personal liability. Is there any remedy to the apparent lack of distinction between a company whose board tried unsuccessfully to prevent failure versus a board that failed the company?
We don’t look at things from an after-the-fact perspective. We believe that independent directors should be making good-faith decisions in the best interests of the companies on whose boards they serve. If they do that, a Delaware court will respect their decision. A charge of “failure to protect the company” in our law falls under the duty of oversight. To be liable under that test, you must have acted in bad faith. We understand that corporations are risk-taking entities and that sometimes, even when you make decisions to maximize value, those decisions don’t work out. As a stockholder, that’s the risk you take.
Does Delaware law provide sufficient guidance to directors on their limits and responsibilities in such a way that it can guide beneficial behavior?
Yes, but part of the challenge is [the law] is always evolving. Delaware has given guidance and will continue to give guidance, but that guidance is always being applied to new areas. What Delaware has always required directors to do is think and make judgments. We are not the SEC. We are not giving them a list of regulations to follow. What we want is for independent directors to be thinking, asking questions, and making decisions.
As a vice chancellor, it’s been noted that you are taking a bit of a cut in pay. [The annual salary for a vice chancellor is just south of $175,000.] How do you believe the CEOs of our nation’s public companies should be compensated?
Compensation is a difficult problem and one where I see both sides of the issue. When someone is doing a great job, you need to pay for performance. When they’re delivering value, they need to be compensated. At the same time, when wages for average workers have not improved since the mid 1980s, and when the multiple by which CEO compensation exceeds average worker compensation has expanded significantly, people have a right to be asking questions. It is a tough issue and most of the fascinating issues are tough. What we don’t want is for the Delaware courts to become a national compensation committee. That would be the wrong approach. The right solution for directors, as the decision makers, is to step up to the challenge. I believe in the combination of independent directors and the incentives of meaningful equity ownership — in the form of actual shares, not options. Those two things result in directors who have skin in the game to negotiate hard with the CEO. I would like to see more directors standing up to the CEO, just like they stand up to the negotiators for the unions and the line employees. I do not subscribe to the cult of the CEO, and I would like to see outside directors armed with their own compensation consultants having meaningful negotiations with CEOs based on multiple inputs, not just the goal of compensating them at 70 percent of their peers. If that happened, you would see better results.
What will the litigation fallout be over compensation?
You will see more of it. In the Citigroup decision in February, the chancellor allowed a waste claim to go forward over [former CEO and Chairman] Chuck Prince and his severance agreement. Waste has been a tough standard, but his severance agreement was one that was eyebrow-raising. It’s not clear whether a waste claim will win. At the end of the day, Prince and defendants could prevail once the full record is in, but it’s a shot across the bow. I think you will see more waste claims.