Tag Archives | law

What Would Proxy Access Look Like if Done Right?

The Business Roundtable and Chamber of Commerce made their case and the Court found the SEC rulemaking on proxy access arbitrary and capricious “for having failed once again… to adequately assess the economic effects of a new rule.”

The SEC rules certainly didn’t come out the way Les Greenberg and I envisioned when we petitioned back in the summer of 2002. Ours was a simple proposal, summed up in one sentence:

The intended effect of the suggested modifications is that the solicitation of proxies for all nominees for Director positions, who meet the other legal requirements, be required to be included in the Company’s proxy materials.

I didn’t realize Just how bad the actual language is that got adopted until I read an illuminating paper by Jill E. Fisch of the University of Pennsylvania, The Destructive Ambiguity of Federal Proxy Access. I urge everyone who cares about this critical issue to read Fisch’s paper.  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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WSJ Reports Inaccurately on SLAPP Suits

Jessica Holzer, writing for The Wall Street Journal informs readers this morning, Firms Try New Tack Against Gadflies: Corporations Look to Block Shareholder Activists’ Proposals by Challenging the Size of Their Stakes – WSJ.com.

Companies have long viewed shareholder activist John Chevedden as a pain. The retired aerospace worker and his network of like-minded activists are behind more than 100 proposed changes in corporate governance filed each year for other shareholders.

Two companies have found a new way to block his proposals: They successfully sued Mr. Chevedden, arguing he had no right to offer shareholder proposals because he hadn’t proved ownership of enough of their stock.

While Ms. Holzer did some degree of minimal background work in preparing her article, her reporting is neither fair nor balanced. She certainly did not dig beneath the surface. If companies really think RAM Trust Services is falsely reporting Mr. Chevedden’s ownership, why don’t they sue Continue Reading →

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Ouch! Don't Sue Me

Bob Verdun, the former publisher of the Elmira Independent has been ordered to pay $650,000 as a result of a defamation suit.

In 2004, Verdun alleged Robert Astley’s involvement with the Clarica Life Insurance Company and its role in the development of a controversial recreation complex made him unfit for the board of BMO Financial Services.

After denouncing Astley at shareholders’ meetings and in emails to BMO executives — among other places — things turned about as bad as they could for Verdun, the recipient of a prestigious Michener Award for meritorious public service journalism in 1990.

The jury found Verdun acted with malice.

via Bank director wins $650,000 in defamation suit against shareholder activist – Toronto Star, 5/31/2011.

Ouch! To borrow from Abraham Lincoln, concerning whatever statements I make on the CorpGov.net blog, I now adopt the following policy:

With malice toward none, with charity for all, let us strive to finish the work we are in, … to do all which may achieve and cherish a just and lasting form of corporate governance.

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SEC Adopts Whistleblower Rules

Last week the SEC adopted final rules to reward whistleblowers who provide information leading to successful enforcement of securities law violations. In an attempt to address objections from many business groups, the final version included an incentive to report through mechanisms internal to their own company but also expanded from 90 Continue Reading →

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India: Class Action, Insider Trading & CSR

Companies Bill 2009 proposes to introduce the concept of class action suits for the first time in India, which would empower investors to sue a company for “oppression and mismanagement” and claim damages.

Among other things, it also proposes to tighten the laws for raising money from the public and seeks to prohibit insider trading by company directors or key managerial personnel by treating such activities as a criminal offense.

Further, the UPA report said that voluntary guidelines on corporate social responsibility were released to promote socially and environmentally responsible business practices in the Indian corporate sector.

via New companies bill to encourage ‘responsible corp behaviour’ – Economic Times, 5/22/2011.

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Kinetic Concepts: Victory for Shareowners!

I was about to sit down this morning and write another scathing post on Kinetic Concepts when I learned of their press release announcing they will gradually declassify their board. They gave no reason as to why they took this action just ahead of their annual meeting. Perhaps they looked again at their guiding principles,

We act with integrity and honesty above all, in all that we do.

I e-mailed them to ask why but they have not answered. A more probable cause was the likelihood that shareowners would oust board members currently up for election. The whole episode shows that persistant shareowners can hold board members accountable.

As readers of CorpGov.net may recall, shareowner John Chevedden submitted a proposal to Kinetic Concepts to declassify their board and have all members up for annual election. Kinetic Concepts filed for a no-action letter from the SEC on the grounds that Chevedden had provided insufficient evidence that he owned Kinetic stock. The SEC’s March 21 denial was in line with previous denials at Hain Celestial, Union Pacific, Devon Energy, Prudential, and News Corp where companies had  not met the burden of 14a-8(g). They had not demonstrated they are entitled to exclude these proposals.

Despite denial of their no-action request, Kinetic Concepts sent an April 5 letter to the SEC putting them on notice they would mail their proxy without Mr. Chevedden’s proposal, despite the SEC’s refusal to grant their no-action request.

As justification, Kinetic pointed to a flawed court decision from a suit brought against Mr. Chevedden by KBR. Even a quick glance at page 6 (2011-04-04 KBR Chevedden Docket 24 – Memorandum and Order https://www.corpgov.net/wp-content/uploads/2011/04/2011-04-04-KBR-Chevedden-Docket-24-Memorandum-and-Order.pdf) reveals the judge didn’t base her decision on what is required in order to show evidence of ownership for a 14a-8 proposal. Instead, she based her decision on evidence of ownership requirements adopted in 14a-11, the provisions for placing shareowner director nominees on the proxy. Aside from being on a completely different subject, these rules are not even in effect, but have been stayed because of the lawsuit on the SEC’s proxy access rules.

They made no attempt to exhaust legal remedies. Kinetic simply pointed to the flawed court decision and essentially said, our case is like that case, so we’re not including the proposal from Chevedden.

I wrote several articles warning of dire consequences if Kinetic Concepts was allowed to get away with simply ignoring the law. (SEC: Time to Remove the Gag; Texas Secession Led by Apache, KRB and Kinetic Concepts; Take Action: Sixty Years of ShareOwner Rights at Risk; and Go Directly to Court, Do Not Pass SEC, Prepare to Spend Thousands). Some of these posts also appeared at Shareowners.org and Accountability Central. I also contacted several large funds, unions, proxy advisors and, of course, the SEC.

My experience with the SEC was frustrating. Although I got a sympathetic ear at Corporation Finance, they claimed the case was out of their jurisdiction. I needed to contact Enforcement. Enforcement has no public phone number and the internet forms are not set up to handle complaints on shareowner rights.

It was like writing into a black hole. In my direct experience, nothing seems to come out of Enforcement. As a brief aside, note Broc Romanek’s recent posts at theCorporateCounsel.net: The SEC’s Whistleblower Office Does Not Want To Talk To You and The Bigger Picture: Why Doesn’t the SEC’s Enforcement Division Provide a Phone Number? It turns out that due to a lack of funding the whistleblower office doesn’t exist and the Enforcement Division doesn’t want to talke to anyone.

I don’t know if the SEC took any action at all. However, I do know funds that investigated the issues and spoke to people at Kinetics. The big break for shareowners probably came when ISS and Glass Lewis both recommended voting against board members. The following are extensive quotes from ISS’ advisory:

In this case, while the company cites precedent cases as a reason for excluding the proposal, the company has not received correspondence from the SEC or a ruling from the US District Court stating that the company may exclude Mr. Chevedden’s proposal. Furthermore, the company has not filed a case to the court with regarding this proposal and as such has not fully exhausted its legal remedies in seeking a no action ruling from the SEC. In this instance the company has taken upon itself the role that is reserved for the SEC and the courts and in doing so, has denied shareholders an opportunity to vote on an important issue without the force of law…

ISS also notes that the company is ignoring a proposal to declassify the board, which is a well-accepted governance reform that regularly receives high levels of shareholder support. For instance, in 2010, such shareholder proposals filed at U.S. public companies received an average of 61.1-percent support from votes cast for and against. Furthermore, studies have shown a negative correlation between the existence of a classified board and a company’s value. ISS believes that all directors should be accountable on an annual basis and that a staggered board can entrench management and effectively preclude takeover bids or proxy contests…

By omitting this item despite the SEC’s correspondence stating that it should be included, the company has disenfranchised its shareholders from one of their key entitlements. As owners of the company, shareholders should have the right to judge a shareholder proposal which could affect the governance structure of the company. In this case, by directly disregarding the SEC’s statement confirming that the shareholder proposal should appear on the ballot, the company has intentionally disenfranchised its shareholders and as such, ISS recommends that shareholders WITHHOLD votes from the entire class of directors standing for election at this annual meeting.

Soon after Kinetic Concepts issued their press release indicating they would move to declassify their board, both ISS and Glass Lewis revised their voting recommendations to include voting in favor of all incumbents.

Lesson: Vigilance pays. Had we done nothing, shareowner rights would have been trampled. Thanks to our many readers who took action.

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Confusion About Proxy Access Suit

Readers may have noted the WSJ’s lead editorial of last Saturday, Proxies vs. Profits, railing against the pending proxy access rules and supporting the appeal taken to the D.C. Circuit by the U.S. Chamber of Commerce and Business Roundtable.

However, the editorial misses the fundamental point of the issue: the pending rules do not guaranty anyone a board seat. All they do is allow ballot access. It is up to the minority holder seeking a seat to persuade enough other holders that their election will be beneficial to the corporation. If the rules served to guaranty anyone a seat, the WSJ points as to overriding of shareholder will, would be well taken, but this is simply not the case. By enhancing ballot access, the rules bolster shareholder choice; it is up to them how it is exercised.

The WSJ’s derisive tone toward the shareholdings or views of labor union pension funds is also curious coming from an organization with such conservative leanings. This view disregards the fact Continue Reading →

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Review: Risk Management and Corporate Governance

Risk Management and Corporate Governance: Interconnections in Law, Accounting and Tax by Marijn Van Daelen (Editor), Christoph Van Der Elst (Editor)

After the recent financial crisis more and more pension and other funds are adjusting their portfolios for risk. This book offers a fascinating look at the juxtaposition of corporate governance and risk analysis. Bob Tricker has often proclaimed the 19th century the entrepreneur’s, 20th century management’s, and 21st that of governance. It could also be the century when risk and probability finally enter everyday consciousness and is finally taught in grade school.

The law of probabilities defined by Fermat and Pascal in 1654 started us down the road. Authors represented in this small volume bring us up-to-date regarding how far we have come on the journey from passive prisoners of providence to attempting to measure and manage all possible events.

In the 17th century the Dutch East India Company was forced by shareowners to publish balance sheet statements and profit and loss statements. Today, shareowners call on Starbucks to “Adopt a Comprehensive Recycling Strategy for Beverage Containers.” Talk about drilling down. The London city directory mentioned 11 accountants in 1799; we’ve come a long way.  The authors provide a brief tour of history, which includes a wide variety of risk models, such as Value at Continue Reading →

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Cambridge Launches Masters Degree in Corporate Law

The University of Cambridge has announced its first entirely new degree in Law since the 19th century with the launch of a Master’s degree in Corporate Law (the MCL).

The MCL will begin in the academic year 2012-13 and will operate as a full-time nine-month programme, offering students the opportunity to engage in a detailed study of the legal and regulatory framework in which companies are governed and financed.

The MCL will cover key fields such as corporate governance, the regulation of financial markets and pensions, offering a wider and more diverse range of corporate courses than a typical Masters degree programme.

The course, in addition to offering in depth analysis of legal rules, will provide students with the opportunity to understand how “real world” corporate deals are structured and run.

The MCL will be taught by the Cambridge Law Faculty’s team of corporate lawyers, widely recognised as one of the strongest in the field. The intake will be approximately 25 students per year.

Applications will be accepted from September 2011. Further information is available on the MCL webpage on the Law Faculty’s website. Wow, corporate governance is helping Cambridge move from the 19th to the 21st century. With their help, maybe this will be the century we shift focus to governance. Bob Tricker has often proclaimed the 19th century the entrepreneur’s, 20th century management’s, and 21st that of governance.

We certainly see focus swinging to questions of legitimacy and effectiveness in wielding power worldwide. By the time the 22nd century dawns, corporate power may actually be exercised “in a way that ensures both the effective performance and appropriate social accountability and responsibility… rooted in rigorous and replicable research,” as Tricker envisions. We should all welcome University of Cambridge’s new program.

Activism is an attractive alternative to takeovers as a way to push through corporate change. Two out of three mergers fail to make money for the buyer, and the failures can be spectacular, as seen with AOL Time Warner or the purchase of ABN Amro. The disaster that followed the ABN Amro takeover makes contested takeovers especially unlikely in the financial services industry, leaving activism as the only avenue for change. (Forget corporate governance – vive la révolution, Financial News, 2/14/2011)

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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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Law Professors Submit Amicus Brief in Proxy Access

A group of 36 law professors — including Harvard Law School Professors Victor Brudney and John Coates — joined an amicus brief responding to the arguments advanced by plaintiffs in the case (Business Roundtable and Chamber Of Commerce v. SEC). As the brief notes, the law professors do not hold the same views on the merits of or underlying policies behind Rule 14a-11, and differ on many issues concerning corporate governance and corporate law and policy. But the law professors are in agreement that Rule 14a-11 does not violate the First Amendment.

Among other things, the law professors’ brief points out that all of the First Amendment arguments advanced by plaintiffs would argue against the constitutionality of the SEC’s long-standing Rule 14a-8, which the Business Roundtable and Chamber of Commerce specifically chose not to challenge. More substantively, the brief emphasizes, shareholders are not “outsiders” or “third parties” to a corporation, but play a crucial role in a corporation’s “internal governance.” Shareholders would have undisputed rights to speak at a shareholder meeting — which the proxy rules attempt to reproduce for companies with widely dispersed shareholders. Perhaps most importantly, the Congress and the SEC have for over 70 years regulated securities by requiring disclosure. To subject the federal securities laws to strict First Amendment scrutiny would eviscerate the capital markets and impede capital formation at a moment when the nation’s economy most needs new investment.

via Law Professors Submit Amicus Brief in Proxy Access Case — The Harvard Law School Forum on Corporate Governance and Financial Regulation.

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Indian Conference Seeks Enforcement of Competition

The recent two day International Conference on Competition Law that concluded in New Delhi found that governments that work too close to big business protect old technology and prolong recession. In times of recession businesses plead for protective measures to cushion them from aggressive competition. Receding demand forces them to cut jobs and add to the burgeoning unemployed figures. Protectionist measures create entry barriers, starve new technology start ups and prevent job creation, thus setting in motion a vicious cycle that prolongs recession. Free and open competition helps radicals to lead the charge to creative destruction in which only the best survive.

The experts advocated development of a National Competition Policy to precede industrial policy providing  clarity, cohesiveness and direction to the competition laws. It would help create a buy-in among various sectors and define roles and expectations of state and non-state actors, thus making  enforcement of competition law easier and more effective. The experts that had come from all over the world, including chairmen of competition authorities, found Indian Competition Act 2002 a perfect ideal for inclusive growth, but rusting because of non-use.  They were surprised that while the Indian Competition Act provided the toughest penalties for cartels, India  has the lowest capture rate because of  inadequately trained staff,  lack of  training in modern investigation techniques and lack of political will. The conference concluded

cartels are a conspiracy against the common man and its pernicious effect is visiting on rising food prices. There needs to be a national campaign against cartels. In regard to detection, today’s technology can be a great ally. Best way to catch is dawn raids not for discovering  sacks of gold but grabbing all computer equipment. The hard disc will tell all. What is needed  is the will to carry out search and seizure.

In his inaugural address Dr Veerappa Moily, the Law Minister  of India called for vigorous application of competition laws.  He advocated national legislation to extend the scope of the completion law to prevent  anti-competitive conduct in professions, farmers, and rural cooperatives. He said the law should be used not just to promote free competition but also to protect small players and cottage industries to bring about a truly level playing field.

In his keynote address Mr  Salman Khurshid, Minister for Corporate Affairs, asserted  that the competition policy and law should aim to provide socio economic justice. It should harmonise the twin objectives of protection and free enterprise. Competition policy should promote good corporate governance and bring about boardroom reform.

Madhav Mehra

In his theme address Dr Madhav Mehra the founder president International Academy of Law and the driving force behind the event warned,

India’s growth narrative is linked to the dreams and hopes of its youth. With average age of an Indian under 26 years, India is one of world’s most aspirational economies.   This has potentially catastrophic consequences . If Indian youth does not find jobs, it becomes  an  easy target for  terror groups. Terror from within is far more lethal than terror from outside. By protecting intellectual property, regulating mergers, curbing cartels and abuse of dominance widens the economic base and unleashes corporate energy triggering  an explosion of innovations that enables new technology radicals to overthrow  incumbents and  drive inclusive growth. History of modern industrialization has revealed that no real innovation has come from dominant industry. It has always been from the outside. The upstarts and radicals have succeeded after protracted battles. He said closeness of the businesses with government militates against innovation and inclusive growth. What we need  is fast, fearless  and furious enforcement for fair and open competition regime with proactive participation from  executive, legislative and judiciary.

Earlier Justice Pasayat, chairman competition appellate tribunal said “An overriding aim of competition law  is to promote economic justice. Justice is the only weapon that can secure stability to society and provide sustainability to business. As Pope Paul VI said “If you want peace, work for justice.” Competition law is essentially an instrument that helps us achieve that elusive goal.”

The valedictory address was delivered by Justice Altamash Kabir of Supreme Court of India. He said competition law in India is a public policy challenge and not just a legal argument. It needed understanding of both law and the socio-economic context. “We need to use competition law to remove entry barriers to allow innovators and free enterprise to succeed and redeem the aspirations and dreams of our youth.”

The Conference was organized jointly by the International Academy of Law and the UK based World Council for Corporate Governance in association with the Law Society of UK and the Competition Appellate Tribunal of India. Eminent speakers included several cabinet ministers such as Dr M Veerappa Moily, Minister of Law & Justice, Shri Salman Khurshid, Minister for Corporate Affairs, Prof K V Thomas, Minister for Consumer Affairs , other luminaries such as Mr Arun Maira Member Planning Commission,  Justice Altamas Kabir, Judge Supreme Court of India, Mr. Fali S. Nariman, an international authority on jurisprudence and Justice Pasayat  Competition Appellate Tribunal of India who was also the chairman of the steering committee. Overseas experts and law firms included Sir Christopher Bellamy of Linklaters,  Chairman of UK’s Competition Appeal Tribunal and judge EU General Court, William Blumenthal of Clifford Chance and a former General Counsel, Fair Trade Commission of USA and several Chairmen of Competition authorities worldwide.

The publisher of CorpGov.net will be in Kolkata, India in mid to late December and may have some availability for meetings. Contact James McRitchie.

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Corporate Governance Legal Requirements

Morgan, Lewis & Bockius LLP produced a good legal primer, Corporate Governance: An Overview of Public Company Requirements, last month. Read it now before it is out of date. Covers Sarbanes-Oxley, Dodd-Frank, and listing requirements in eleven sections:

  1. Director Independence
  2. Audit Committees
  3. Compensation Committees
  4. Nominating Committees
  5. Compensation
  6. Codes of Conduct
  7. Certifications
  8. Directors/Officers
  9. Disclosure
  10. Foreign Issuers
  11. Miscellaneous

Great resource for any corporate governance library. Hat tip to long-time stakeholder Ralph Ward and his Boardroom Insider for bringing to our attention myCorporateResource.com, which compiles client alerts.

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Placing Corporate Law Within a Political Context

The Corporation as Imperfect Society by Brian M. McCall articulates a corporate metaphysics rooted in the political philosophy of Aristotle. The dominant models of corporate law and philosophy are rooted in the realm of private law, especially contract, agency and property law. Corporations are viewed as a nexus of contracts or as vehicles for joint ownership of a private pool of economic assets. The result has been entrenchment of the principle of shareowner wealth maximization.

By viewing them in the context of public law, not private ordering, corporations are seen as a constituent part of larger societies whose operation must be harmonized to the common good.  McCall goes on to show that while his vision differs from current commentary, corporate law practices are actually more consistent with his vision than the shareholder wealth maximization standard. While this later point reinforces the veracity of his argument, it also leaves at least this reader wondering, “if we embrace McCall’s philosophy of corporate law, what difference will it make?”

Don’t get me wrong, I enjoyed McCall’s trip from Aristotle’s definition of community, to recognition by Medieval jurists of the quasi-political nature of the corporate form, and the incorporation of the Averdeen Harbor Board in 1126, arguably the first profit making business. His critique of contract law and stakeholder theory were also persuasive. I’m convinced that a constitutional understanding of the nature of a corporation better explains the results of corporate law cases than a shareowner wealth maximization model rooted in contract or property law. We leave the paper with better alignment between theory and practice but shouldn’t a change in theory result in a change of practice? We only get hints of how that project might proceed.

According to McCall, “the nation has the competence and the right to restrain corporations when in pursuit of their imperfect end they harm the common good of the nation.” In pursuit of their own ends, corporations will create externalities that should be regulated. Directors and managers must be mindful and consider the larger public good in their decisions. Secondly, directors and managers must also consider the common good of the entire corporate community. “No decision should merely advance the particular good or harm of a group. Also cost should not be disproportionally inflicted out of proportion to the common good on one group in particular.”

With respect to the assertion that nations have the competence and the right to restrain corporations, is that really true? Multinational corporations owe no allegiance to any one country. Are individual nations really competent to regulate them, especially given constraints like the decision in Citizens United, which seems to give corporations undue influence over the political sphere? With respect to determining the common good within the corporate community, how do we ensure the views within that community are known by and represented by directors and managers? We don’t seem to even know the boundaries of the corporate community, let alone having common best practices with regard to internal governance structures guaranteeing any real degree of representation. We’ve had enormous difficulty just trying to move from self-perpetuating boards to giving shareowners direct input into nominating up to a quarter of the boar through proxy access, how do we ensure the interests of employees and others are also represented?

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Corporate Rescue Law

With the growing number of bankruptcies in industries ranging from financial, manufacturing, to retail, what could be more timely than Corporate Rescue Law – an Anglo-American Perspective? Gerard McCormak’s review of practices in the two countries concludes there is more convergence than is generally recognized. the us moving is in a UK direction with regard to disposal of profitable components, rather than carrying on through the bankrupt corporate entity.

Both shareowners and creditors generally come out ahead when debt is restructured privately, rather than through Chapter 11. Such private restructuring is more likely to succeed when commercial banks or other sophisticated investors are involved and is facilitated when debt is concentrated, as through trading by vulture funds who are advantaged by private settlement, rather than going to court, which tends to be a more costly and time-consuming process.

McCormak provides an overview of recent law and legal thought, explaining the fundamental features in both the US and UK, entry routes to changes in corporate control, moratoriums on creditor enforcement actions, mechanisms to address financing difficulties, the role of employees, and restructuring plans themselves.

The US debtor has more rights to formulate a reorganization plan, has more prescriptive rights with regard to dividing creditors into classes, has cram down capability in exceptional circumstances to force acceptance by creditors, and has traditionally focused on getting the corporate vehicle in working order.

However, McCormak finds that a growing number of bankruptcies, at least among larger companies, have been essentially pre-packaged deals involving going-concern sales of company components blessed by the court to ensure conduct that brings the highest price. in contrast, the UK approach largely leaves matters to creditors, respecting the values of “simplicity and economic self-determination.”

Economics Of Corporate Governance and Mergers

This is a wide-ranging reader, with theory and empirical studies, domestic and international well represented. For example, one paper casts doubt on the frequent assertion that common law countries have better shareowner protection than civil law countries. Another examines the role of directors and the question of emphasis (monitoring vs. participants in management). Central to corporate governance are issues of mergers and acquisitions. If internal governance mechanisms are ineffective, which I have argued for decades, hostile takeovers can act as the avenue of last resort to discipline managers, although this all too often comes at the expense of acquiring shareowners.

Stephen Martin looks at five waves of mergers and finds irrational exuberance often plays a crucial role, concluding that although reasons for such waves may vary, results do not generally benefit shareowners. Another paper by Mike Scherer provides evidence that mergers do not generally increase productivity, despite glowing predictions by management. As the editors note, the findings of accounting data contrast sharply with those of the finance literature, short-term stock market event studies. Rises in merger activity are likely attributable to empire building by managers.

Examining Japanese mergers, Hiroyuki Odagiri finds mergers generally hurt relative profitability. A UK study finds that acquisitions, after implementation of the Cadbury Code, experience better long-run returns but the driver remains CEO ownership. Gerhard Clemenz creates a theoretical model to study the impact of vertical mergers between producers and retailers, finding that integrated firms should be better able to monopolize markets and drive up retail prices. A study of 13 indicators on competition for 29 countries finds economic performance best predicted by the degree of competition.

Not all the authors take a shareholder maximization of value view of the firm. Branston, Cowling and Sugden, for example, explore redesign of company laws based on wider membership and creation of more democratic forms. In “Corporate Governance and the Public Interest,” they call for greater participation by the public in strategic decision-making, especially mergers in the financial, IT, and communication sectors. Here, I found convincing arguments that an educated and participatory democracy can only be obtained with a communication revolution, since advertizing revenue now allocates coverage and interest.

The editors conclude that “corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance” and “there is an important relationship between corporate governance structures and the quality of firm decision making,” especially with regard to mergers and acquisitions. Since most are suboptimal for both shareowners and society, “the suspicion remains that corporate governance systems and mechanisms are not yet optimal.” Masters of understatement but the volume includes a good collection of important reading and commentary.

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Corporate Governance: Law, Theory, And Policy

Joo-CGCorporate Governance: Law, Theory and Policy, edited by Thomas W. Joo (Carolina Academic Press 2004), this excellent reader on corporate governance presents a cross section of mostly academic perspectives on important current issues, including: the role of the corporation, balancing interests, state and federal law, shareholder litigation, criminal and regulatory law, shareholder voice, board composition, director duties in corporate takeovers, executive compensation, and corporate lawyers as gatekeepers.

Many of the articles are modern classics by authors well know to readers of CorpGov.Net, such as Margaret Blair and Lynn Stout, Marleen O’Connor, Stephen Bainbridge, Edward Rock, Roberta Romano, John Coffee, Mark Roe, Continue Reading →

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