Delaware judges will need to find a way to avoid ruling in corporate cases involving government-controlled companies like American International Group Inc if they are to protect the state's corporate law, a law professor said on Friday.

The federal government has acquired controlling stakes in a number of Delaware-incorporated financial service companies, as well as in General Motors Co [GM.UL]. Those stakes were acquired through hastily drafted and largely untested legislation, said Edward Rock, a professor of business law at the University of Pennsylvania.

The result could be a suit filed in Delaware's Chancery Court that forces the judges to address issues that could threaten Delaware's corporate law, which is a national and international treasure, said Rock.

Delivering the annual Francis G. Pileggi lecture to an audience that included Chancery Court judges, Rock said avoiding such a confrontation is vital.

He described a courtroom clash that brought chuckles from the audience: Leo Strine, a Chancery judge and considered one of the state's best legal minds, squaring off against Barney Frank, the sarcastic and witty Massachusetts congressman.

Frank helped draft much of the financial rescue legislation that has contributed to Washington acquiring controlling stakes in Fannie Mae and Freddie Mac, two of the largest providers of home loan finance, as well Citigroup Inc and insurer AIG.

Would Delaware want such a case? asked Rock. Delaware needs a theory of 'the duck:' How to avoid a confrontation at the same time avoiding messing up Delaware corporate law.

A majority of large U.S. companies have incorporated in Delaware, providing fees for the state's budget, and those companies come in part due to the depth of the state's corporate law.

Legal professionals in the state have watched with concern as Washington takes on issues once left to states, such as the rights of shareholders to nominate directors to corporate boards.

Rock laid out a legal strategy using Court of Chancery law and said a case involving the government-supported acquisition of Bear Stearns by JPMorgan Chase & Co provided an example. Delaware's Chancery Court allowed that case to be heard in a New York court.

Such a procedural duck provides a way to dodge a bullet, a confrontation with Washington that is created by this peculiar intervention, he said. (Editing by Gerald E. McCormick)

Pennsylvania U.S.