Tag Archives | Delaware

CII Fall 2014 Conference: Part 3

CIIThis is first time I’ve attended a Council of Institutional Investors (CII) semi-annual conference. Already posted are CII Fall 2014 Conference: Part 1 and CII Fall 2014 Conference: Part 2. In part 3 a panel of experts discusses several legal developments during 2014 and Tim Koller, with McKinsey, discusses how to create growth for the long-term. Warning: I’m not an attorney or full-time consultant. Don’t depend on this post for an accurate account. My primary motive is to get you thinking, and checking out other resources as well, on the subject of corporate governance. Continue Reading →

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Review: Corporate Governance: Cases and Materials

This comprehensive case book sheds light on the complicated regulatory framework and the dynamic nature of laws on corporate governance in the United States. Chapters typically cover regulations promulgated by federal, state, and self-regulatory organizations. Corporate governance is examined through case law with ample discussion to provide context concerning evolving practices and normative concerns. In that regard, the authors give voice to a wide variety of perspectives, including their own. Corporate Governance: Cases and Materialsby J. Robert Brown, Jr., Professor of Law, University of Denver Sturm College of Law; Lisa L. Casey, Associate Professor of Law, Notre Dame Law School. Continue Reading →

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Will UNFI Go Virtual-Only Again? Not if Shareowners Just Say No

Ever since ownership and management diverged, owners have met with those to whom they entrust their business. They do so at least annually to learn how the business is doing, to communicate, and to exercise their rights as owners. Last year United Natural Foods, one of the companies in my portfolio, announced they were breaking from this tradition of meeting face to face with owners. Instead, they held a virtual-only meeting on December 16, 2010. Will they do it again? Not if shareowners protest. We expect an announcement in late October or early November.

Four centuries ago, Isaac Le Maire’s submitted the first recorded expression of shareowner advocacy at a publicly traded corporation. The corporation was the Dutch East India Company. His concerns are familiar:

How badly the company’s assets are being managed, and how every day needless and unnecessary expenses are being made, of great interest Continue Reading →

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Strine as Chancellor

The Delaware Senate confirmed the governor’s appointment of Leo Strine, Jr. as the new Chancellor of the Delaware Court of Chancery. Strine has been a vice chancellor on the court for more than 12 years. I think he would have been anyone’s reasonable choice.  (Delaware Senate Confirms Strine as Chancellor., Delaware Corporate & Commercial Litigation Blog, 6/22/2011)

For my take on Strine, who leans somewhat against giving more power to shareowners, see my event coverage, Strine Rocks Stanford.

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University of Delaware: Fellowship & Online Course for Directors

The Weinberg Center for Corporate Governance has won funding to begin a yearlong fellowship for research into such issues as CEO pay and has created an online training course for board directors.

The Edgar Woolard Fellowship (funded by the Investor Responsibility Research Center) — named in honor of the former DuPont Co. CEO — will fund the research of 21-year-old university senior Craig Ferrere, a finance major who is looking to find better ways of matching executive pay with performance.

Ferrere said he aims to find analytical tools that measure an executive’s worth more objectively and more accurately than peer comparisons, which has been a primary cause of escalating pay.

Earlier this year, Charles Elson, director of the Weinberg Center, helped put together an Internet multimedia course on the complex legal and philosophical dynamics of being a board member.  “How to Be(come) a Director” was commissioned by the National Association of Corporate Directors, with the goal of teaching the essentials of board governance: ethics, accountability and competence.

The self-paced course costs $395, and includes video presentations from Elson and other experts. In today’s corporate world, a savvy, capable board is critical, Elson said, but directors can come to the role without adequate appreciation for the balancing act they’ll be expected to pull off.

via University of Delaware fellowship funds research on corporate governance | The News Journal | delawareonline.com.

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Are Proxy Access Bylaws Legal?

The highly respected California attorney Keith Paul Bishop seems to think it could be argued, depending on the state of incorporation (Are Proxy Access Bylaws Legal?, Corporate and Securities Law, 12/8/2011). Most need no reminder that in 2009 Delaware enacted legislation, H.B. 19, 145th Gen. Assem. (Del. 2009), to explicitly authorize proxy access bylaws.  Tit. 8, Del. Code § 112.

However, Bishop says that “California, in contrast, has enacted no such provision.  The current General Corporation Law would seem to rule out discriminatory bylaws.”  Indeed, at least two statutes mandate equality.  Section 400(b) provides:

All shares of any one class shall have the same voting, conversion and redemption rights and other rights, preferences, privileges and restrictions, unless the class is divided into series.

Further, Bishop points to Section 203, which provides:

Except as specified in the articles or in any shareholders’ agreement, no distinction shall exist between classes or series of shares or the holders thereof.

So, does that mean SEC Rule 14a-8 does not apply to corporations incorporated in California because it grants one set of shareowners (14a-8 holders) rights that differ from other shareowners? What about other SEC provisions that require disclosure of the disposition of director nominations for 5% shareowners?

Do the provisions cited by Bishop conflict with other provisions. For example, Section 211 of the California Corporations Code? That sections confers the authority to adopt, amend or repeal bylaws on the shareowners and on the board. The required vote of the shareholders is a majority of the shares entitled to vote. In addition, the articles of incorporation or bylaws may restrict or eliminate the power of the board to adopt, amend or repeal bylaws. Only the shareholders can change a bylaw changing the number of directors or the range of directors.

Bishop previously noted:

the ability of stockholders to bypass the board of directors and directly adopt bylaw amendments will be a function of state law. Nevada, for example, permits the articles of incorporation to include a provision that grants the authority to adopt, amend or repeal bylaws exclusively to the directors. NRS 78.120(2).

(see comment at bottom of this linked post) It looks to me that shareowners in Nevada can adopt bylaws but those bylaws can be overturned by the directors.

If proxy access really doesn’t apply to California corporations, why didn’t Bishop comment on the SEC rulemaking? Perhaps I missed it, or he missed his opportunity at that time.  As I recall, there have been thirteen proxy access proposals filed so far… seven as precatory measures, six as bylaw amendments. I haven’t checked to determine if any were corporations incorporated in California.



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Staggered Boards Tend to Reduce Firm Value: More Evidence

Bebchuk, Lucian A., Cohen, Alma and Wang, Charles C. Y., Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment (November 2010). Available at SSRN. Abstract follows:

While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards’ either bringing about or merely being the product of the tendency of low-value firms to have staggered boards. In this paper, we use a natural experiment setting to identify how market participants view the effect of staggered boards on firm value. In a recent and not-fully-anticipated recent ruling, the Delaware Chancery Court approved the legality of a shareholder-adopted bylaw that shortened the tenure of directors whose replacement was precluded by a staggered board by moving the company’s annual meeting up from August to January. We find that the decision was accompanied by abnormal and economically meaningful positive stock returns to firms with a staggered board, relative to firms without a staggered board.

The identified positive stock returns were especially pronounced for firms likely to be impacted by the decisions, because (i) their past annual election took place in later months of the calendar year, (ii) they are incorporated in Delaware or (iii) do not have supermajority voting requirements that make it difficult for shareholders to amend the bylaws. The identified positive stock returns were also especially pronounced for firms for which control contests are especially relevant because of their (i) below-industry return on assets, (ii) relatively small firm size, and (iii) absence of supermajority voting requirements making a merger of the company difficult.

Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. They are thus consistent with the policies of leading institutional investors in favor of proposals to repeal classified boards, and with the view that continuation of the ongoing process of board declassification by many public firms will enhance shareholder value.

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End to Forum Shopping?

The always creative Joe Grundfest, a Stanford Law School professor and former SEC commissioner, proposes that public companies adopt charter provisions to select in advance the forum where shareholder litigation would occur… Delaware, in most cases. He argues:

Forum selection clauses are common in commercial agreements. They are also broadly respected and readily enforced, even when characterized as contracts of adhesion. In contrast, forum selection clauses in charters and bylaws governing intra-corporate disputes are exceedingly rare. This presentation, which accompanied the 2010 Pileggi Lecture at the University of Delaware, documents the incidence and evolution of forum selection clauses in publicly traded entities. It analyzes the specific language used in these provisions, observes that these provisions tend to arise in distinct clusters, and suggests that the incidence of these provisions has increased dramatically (though off a small base) since the recent Revlon decision in Chancery. It also explores the causes of the divergence in incidence, and considers whether forum selection clauses are likely to be enforced by the courts. The analysis concludes that forum selection clauses should be enforceable whether included in a charter or bylaw, and should bind all shareholders, without regard to whether they were adopted pursuant to a shareholder vote or whether the shareholder acquired stock before or after adoption of the provision.

Privately held firms might best adopt elective forum selection provisions prior to an IPO, and publicly traded firms can adopt forum selection provisions in their charters or bylaws. Obtaining majority shareholder support for a charter amendment may be easier than some observers expect. If a corporation determines that it prefers not to amend its charter, board action is sufficient to amend the bylaws, as recently demonstrated by Chevron. The benefits of adopting a forum selection provision will likely exceed the costs for most entities. If this calculus is correct, there should be a large increase in the incidence of intra-corporate charter or bylaw forum selection provisions in coming years.

Read further discussion of the concept by Steven M. Davidoff (A Litigation Plan That Would Favor Delaware, NYTimes, 10/26/2010) who clarifies the provision would only be effective for state law claims, such as those  involving breaches of fiduciary duty, not federal claims such as securities fraud charges. Watch for the number of companies with such provisions to quickly spike well beyond the current 23 companies. This move is likely to cut down the incidence of litigation; will shareowners still be protected? For additional background, see Are Delaware Courts “Losing” Cases on Delaware Corporate Law Filed Elsewhere, Delaware Corporate and Commercial Litigation Blog, 4/27/2010.

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Review: Rethinking the Board's Duty to Monitor

In “Rethinking the Board’s Duty to Monitor: A Critical Assessment of the Delaware Doctrine,” to be published in 2011 in the Florida State University Law Review (current version available ssrn.com), Prof. Eric Pan of the Cardozo Law School substantially advances the discussion of how corporate governance needs to be improved in order to minimize the macroeconomic impact of poor decision-making at the firm level and the need for costly bailouts. Moving beyond the recent “hot” topics of maximizing director independence, enhancing minority shareholder proxy access and improving the executive compensation process, he focuses on considerations directly impacting the outcome of board deliberations.

This is an essential complement to such topics in that it addresses actual board performance in consideration of issues of business policy – that is, once directors are installed, we need to ensure that they do a good job in addressing company business. Prof. Pan recognizes that the problem of board performance is not solved once we get the “right” people in place.

He correctly observes that to the extent that present Delaware law addresses director performance in its management oversight role at all, it does so by focusing on failure to “monitor” management in order to prevent major legal violations, and almost entirely absolves directors from any responsibility for adverse business outcomes, no matter how disastrous for the single firm or for the economy, so long as appropriate process was utilized. The implications of the Caremark and Citigroup decisions for the former and latter propositions, respectively, are well described. The implications of poor oversight by the Citigroup board for that firm and our economy need no further description. Prof. Pan argues quite persuasively that we need to expand the board’s duty to monitor created in Caremark to encompass management decisions leading to poor business outcomes, even if no laws are violated, irrespective of the process which is utilized.

Rather, boards should be held responsible for business as well as legal outcomes. Courts should shift the burden onto directors to show they made an effort to be informed and to respond to developments leading to such outcomes.

This reviewer has argued in “Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance,” 48 Duquesne Law Review 33, reviewed on this site in an April 22, 2010 post, that fixing this gap in corporate law with such burden shifting in order to avoid disastrous decisions by our largest firms is a fundamental but overlooked step in the financial reform overhaul currently in process.

Like this reviewer, Prof. Pan argues for a regimen where directors have some – in his view, seemingly undefined – financial responsibility when their firms suffer major losses as a result of management decisions which are not meaningfully challenged by the board, even where there is no legal violation. Presumably, this would apply to situations requiring public bailouts such as the recent financial industry debacles. Prof. Pan would enhance his case by attempting to enumerate specific circumstances, such as a need for governmental assistance, in which such responsibility should attach.

As contemplated in Prof. Pan’s article, the new responsibilities would apply to all firms (or at least to all publicly traded ones). This reviewer strongly disagrees with such breadth.

In that all concerned, including Prof. Pan, agree that such a change would likely reduce business risk-taking, we need to apply it only in cases involving companies of sufficient size and interconnectedness and events of sufficient magnitude, where poor decisions can have significant external effects for the broader economy.

A third concern is that the duty to monitor as advocated in this paper, will usurp the board’s discretion in determining the appropriate degree of monitoring and inhibit risk-taking. We do not want the duty to monitor to prevent corporations from conducting certain activities which may actually be beneficial to the company and its shareholders. In other words, the board may conclude that it is in the best interest of the corporation for it to expose itself to extreme amounts of business risk.

The Citigroup court correctly notes that the present business judgment rule is intended to permit entrepreneurial activity – i.e. risk-taking. While it obviously worked too well for Citigroup, especially today when we face a nascent economic recovery, we should not inhibit risk-taking – and often employment – any more than necessary. There are many large public (and private) companies where the consequences of a poor decision will be limited to that firm and its shareholders without any material ramifications for the economy.

The situation addressed by the Delaware Supreme Court in upholding under the business judgment rule, the actions of Disney’s directors despite their signing off on a wasteful compensation and severance package for a former President illustrate where the current regimen of deference to director business judgment is working effectively. Even though this decision turned out to be a very poor one for Disney, it had no implications elsewhere.
In any event, as Prof. Pan notes in his discussion of how as a result of resistance at the state level, recent innovations in corporate law have largely been under the guise of the federal securities laws, it will be difficult to implement any of the changes he suggests. As such, what is proposed should be as narrow as possible in order to increase the likelihood of its enactment.

Prof. Pan makes a major contribution to the corporate governance discussion by focusing on actual governance issues as opposed to process, compensation and board composition issues, and his ideas should be heeded by those considering changes in this area. However, it is preferable for those ideas to be refined to ensure that they are properly targeted (by firm and event) so as to cause as little disruption to business risk-taking as is possible.

Publisher’s Note: Thanks to guest reviewer Martin B. Robins, an adjunct professor in the Law School of Northwestern University. He is presently, and for the past 10 years has been, the principal of the Law Office of Martin B. Robins where his practice emphasizes acquisitions and financings, technology procurement and licensing, executive employment and business start-ups. The firm represents clients of all sizes, from multinational corporations to medium sized businesses to start-ups and individuals.

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The Race Out of Delaware

Whether a race to the top or a race to the bottom, Delaware has long been the leading “brand” in attracting incorporations. However, researchers John Armour, Bernard Black and Brian Cheffins now find that over the past decade the proportion of corporate suits involving Delaware public companies filed in Delaware has dropped markedly. Since one of the major attractions of incorporating in Delaware is their deep experience in case law, the state is now in danger of losing its status as the dominant locus for corporate law for U.S. public companies. (Is Delaware Losing Its Cases? @ SSRN)

Three datasets were used: (i) corporate law cases arising between 1995-2009 where directors of public companies were named as defendants and the case generated one or more judicial opinions on Lexis, Westlaw, or the Delaware Chancery Court website (ii) lawsuits arising under corporate law from leveraged buyouts taking place between 1999-2009 and (iii) lawsuits arising under corporate law from allegations of options backdating. All three datasets tell a consistent story; Delaware is losing its own cases.

The authors review a number of possible reasons for the exodus and conclude that since plaintiff lawyers are often the real parties in interest in shareholder lawsuits, they have a strong incentive to take case elsewhere if they anticipate lower fee awards in Delaware.

Of course, the best way to find out why Delaware is losing cases is probably to ask those plaintiff lawyers and they hope to do so as their research continues. Meanwhile, Delaware corporations could follow a recommendation made by Ted Mirvis in 2007 by including a provision in their charter or bylaws selecting Delaware as the exclusive forum for litigation of shareholder claims for breach of fiduciary duty, although such provisions have not been tested at court.

The authors discuss at least two options for Delaware but conclude,

If Delaware judges yield to the temptation to tilt the playing field so as to ensure the bulk of corporate litigation proceeds in Delaware courts, the reputation they have built up for service and even-handedness could be greatly compromised.

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CorpGov Bites

TheCorporateCouncil.net posted a transcript of a recent Webcast on the SEC’s new Proxy Disclosure requirement. Like always, they do an excellent job of sorting out issues for those getting into the weeds.

RMG reports “The wave of new federal securities lawsuits related to the global credit crisis has finally subsided, down 7-24% depending on whose data you use. The largest category of 2009 cases were those that arose from the credit crisis. (Investors File Fewer Lawsuits in 2009, 1/6/10)

theRacetotheBottom.org has covered a raft of issues lately that are worth a read. These include: Executive Compensation at Goldman Sachs, Executive Compensation, Delaware’s Top Five Worst Shareholder Decisions of 2009 and the need for reinstating Glass-Steagall.

Bowing to pressure from shareholders of On2 Technologies, 11.5% of whom voted they share through MoxyVote.com, Google raised its offer  to  $132 million, up from $106.5 million. (Shazam! Google raises its offer price for On2, 2/7/10)

Study finds Private Investments in Public Equity (PIPEs) announcement returns decrease almost linearly across the first six PIPE transactions, going from positive to negative. Firms that issue multiple PIPEs have high cash levels, and a majority make acquisitions. Successive PIPE transactions delay accessing of public markets while keeping institutional ownership low. Hence, they are greeted skeptically by the market as maintaining managerial entrenchment. (Are Private Placement Announcement Returns Really Positive? On the Information Content of Repeated PIPE Offerings, Ioannis V. Floros and Travis Sapp, SSRN, 1/7/2010)

Small ESOPs, those controlling less than 5% of outstanding shares, benefit both workers and shareholders, implying positive productivity gains. However, the effects of large ESOPs on worker compensation and shareholder value are more or less neutral, suggesting little productivity gains. These differential effects appear to be due to two non-value-creating motives specific to large ESOPS: (1) Management-worker alliances to thwart hostile takeover threats and (2) To substitute wages with ESOP shares by cash constrained firms. Worker compensation increases when firms under takeover threats adopt large ESOPs, but only if the firm operates in a non-competitive industry. (“Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership”, Kim and Ouimet, SSRN, 12/1/09)

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The Failure of Corporate Law

The Failure of Corporate LawKent Greenfield’s The Failure of Corporate Law: Fundamental Flaws and Progressive Possibilities posits that corporation law shouldn’t be thought of as “private” law, which governs the relationships of individuals, but as a branch of “public” law, such as constitutional, tax, or environmental law. Corporations are sanctioned by the state and our goals for them should include more than just maximizing profits for shareowners.

Corporate laws determine the rules for some of the largest most powerful entities in the world and America is exporting our model abroad. I’ve warned audiences around the world not to adopt our regulatory scheme wholesale. While my advice has been vindicated by the latest financial meltdown, it is good to see an extraordinary legal scholar pushing for thoughtful change. Continue Reading →

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