Professor Bainbridge...on law, politics, religion, culture & food

Shareholder Access and American Exceptionalism

Jay Brown approvingly quotes former SEC Chairman Arthur Levitt:

All 40 of the largest markets outside of our own give shareholders the ability to nominate and remove directors. By reversing its decision from last year, this new SEC will make it very clear that it is not only at full strength, but strongly on the side of investors. It will show the world that the U.S. takes shareholder democracy seriously, strengthening our markets’ standing as the world’s best. More important, it will reinvigorate accountability, restoring trust in a system badly in need of support.

And if 39 other countries jumped off a bridge would you do it too?

More seriously, albeit in the same vein, in an essay challenging “declinism” political science professor Robert Lieber recently argued that:

The overall size and dynamism of the economy remains unmatched, and America continues to lead the rest of the world in measures of competitiveness, technology, and innovation. Here, higher education and science count as an enormous asset. America’s major research universities lead the world in stature and rankings, occupying seventeen of the top twenty slots. Broad demographic trends also favor the United States, whereas countries typically mentioned as peer competitors sag under the weight of aging populations. This is not only true for Russia, Europe, and Japan, but also for China, whose long-standing one-child policy has had an anticipated effect.

In the realm of “hard power,” while the army and Marines have been stretched by the wars in Iraq and Afghanistan, the fact is that no other country possesses anything like the capacity of the United States to project power around the globe. American military technology and sheer might remain unmatched—no other country can compete in the arenas of land, sea, or air warfare.

In corporate governance, as in much else, America is exceptional. More so than that of any other country with which I am familiar, our corporate law enshrines the principle I call “director primacy.” In my essay Director v. Shareholder Primacy in the Convergence Debate, for example, I wrote that:

Although the question of whether international corporate governance is converging on the U.S. model remains contested, there is general agreement as to the nature of that U.S. model. Specifically, virtually all participants in the convergence debate assume that U.S. corporate law is based on a norm of shareholder primacy. This assumption is wrong. U.S. corporate law is far more accurately described as a system of director primacy than one of shareholder primacy. In this essay, the author argues that the comparative corporate governance literature’s erroneous understanding of the U.S. model distorts both the positive and normative aspects of the convergence debate. On the positive side, if we use the extent of shareholder primacy as our metric, we end up with a distorted estimate of the extent to which systems have converged. On the normative side, corporate governance is a potentially important instrument by which to increase the economy’s efficiency. In recent years, elite U.S. corporate law scholars have played a significant role in “reforming” the corporate laws of transition economies. If the goal is to export the U.S. model, on the assumption of its superiority, we do those economies no good - and may do much harm - by exporting the wrong model. Hence, we are constrained to examine the normative question: Does it matter? Is director primacy superior to shareholder primacy? This essay acknowledges that investor participation in corporate governance has economic benefits, but argues that director primacy is preferable on balance.

Our system of director primacy has helped produce the most powerful economy in history, which supports the most powerful military in history, which has made the USA the world’s only hyperpower. Why we would want to trade that system for the mess of pottage called shareholder democracy is something of a mystery to me.

Free Enterprise Fund v. PCAOB

Jay Brown has been blogging extensively on the Free Enterprise Fund’s lawsuit challenging the constitutionality of the Public Company Accounting Oversight Board. His latest post is the ninth (!) in the series.

I wrote about the suit for TCS in my column Peekaboo, the Constitution Doesn’t See You, in which I argued that the Fund’s Appointment Clause argument was correct and concluded that:

The Fund thus has a very strong case that the provisions of Sarbanes-Oxley creating the PCAOB are unconstitutional. Because Congress in its rush to adopt SOX failed to include a clear severability provision, moreover, the Fund may well be able to persuade a reviewing court that the entire Sarbanes-Oxley law must be thrown out.

Diversity at UC Irvine

Brian Leiter:

Chemerinsky Settles Into Irvine.... here, while the rumor mills buzz about who will be on the founding faculty, beyond those already reported on this blog.  The way things are shaping up it looks like the most striking fact about the new UC Irvine law faculty is that it may be the most diverse in terms of race/ethnicity and gender of any major law faculty in the country.  We should have more details soon…

But how about intellectual diversity? Will there be any people of faith? Will there be anybody who believes in free markets? Will there be anybody who belongs to the Federalist Society?

Remedies under Delaware State Law for Breaches of the Duty of Disclosure

The other day, I noted Chancellor William Chandler’s recent decision in Transkaryotic Therapies, in which he granted summary judgment to defendants with respect to a claim arising out of the so-called fiduciary duty of disclosure on grounds that too much time had lapsed since the vote allegedly affected by the disclosure violations:

The solicitation of proxies for the shareholder vote approving the merger of Shire and Transkaryotic occurred over three years ago. The merger has happened; “the metaphorical merger eggs have been scrambled.” An injunctive order requiring supplemental, corrective disclosures at this stage would be an exercise in futility and frivolity. Indeed, there are no longer shareholders of Transkaryotic from whom to solicit proxies.

I observed that:

This makes sense to me. The point of a fiduciary duty of disclosure ought to be limtied to ex ante remedies designed to ensure that the corporate governance mechanisms under state law are validly followed. As a practical matter, ex post relief long after the transaction in question has been effected is more properly the province of federal proxy litigation. As a legal matter, such a claim might well not fall within the scope of the Delaware exemption to the PSLRA/SLUSA regime.

In Wayne County Employees’ Retirement System v, Corti (HT: Pileggi), Chandler elaborates on why he thinks ex ante relief is generally the preferred state law solution:

A preliminary injunction motion is, however, the appropriate mechanism by which to challenge alleged disclosure violations. The right at issue in this case and in all disclosure cases is “the right to receive fair disclosure of the material facts necessary to cast a fully informed vote,” and that right, if infringed, can only be truly remedied by a specific, injunctive order mandating the appropriate disclosure before the shareholders are required to vote.

Will you see the case in our casebook? I’ve run it up the flag pole to see if Bill or Mark salutes. The facts are sort of sexy, in that they involve a merger of a video game company (Activision), which is always a plus in our book. We like good facts. The statement of the law is concise, which we also like a lot. Finally, there’s a detailed application of the law to the facts, which we really like.

On the other hand, while Transkaryotic Therapies had to much law for our purposes, this case may have too little. There’s no discussion of Lynch or Malone or any of the other cases that would put the duty of disclosure in historical conext; nor any discussion of the parameters of that duty. If only we could get Chandler to edit down the historical section of Transkaryotic and include it here.

Plus, I’m afraid that the opening and closing paragraphs of the opinion are just too far over the top on the cuteness scale:

World of Warcraft, the market-leading massively multiplayer online role playing game, entices millions of paying subscribers to immerse themselves in a virtual online world. These subscribers create their own characters, and through these avatars they interact with other players, develop skills, create a unique jargon, join guilds and alliances, engage in battles, and embark on quests. . . . In some ways, perhaps, the world of Mergers and Acquisitions is a massively multiplayer role playing game as well. Like in World of Warcraft and other games, the participants in the M&A field take on certain roles, interact in their own community, hone specialized skills, and even develop a unique, somewhat curious vernacular. One particular quest in the world of M&A is disclosure litigation. In the instance of disclosure litigation presently pending before this Court, the world of M&A meets the World of Warcraft. ...

In the role-playing game that is this disclosure litigation, both sides have played their respective roles well. ... Like any game, this one has rules, and the most essential rule of disclosure is materiality. Because the plaintiff could not establish the materiality of its final three disclosure claims, the motion for a preliminary injunction is denied. . . .GAME OVER.

A plus or a minus?

Classified Boards in Transition

Gordon Smith offers an interesting and, to my mind, correct interpretation of the Delaware code provisions governing the dispute between InBev and Anheuser-Busch over whether the latter’s directors can be removed without cause. He links to posts by others reaching different results.

Has Chancellor Chandler Embraced Director Primacy?

In his recent decision in In re TRANSKARYOTIC THERAPIES, INC., Delaware Chancellor William Chandler offers his court’s latest word on the “somewhat nebulous” “fiduciary duty of disclosure.” Chandler undertakes a lengthy and very helpful review of the development of the law relating to disclosure claims characterzied as arising out of fiduciary obligations rather than out of fraud. This is almost certain to end up in many casebooks. Bill and Mark will never go for it, however, as they are firm against the sort of long recitations of legal evolution on which I would dote were it not for their constant vigilance, so users of our case book probably won’t see it.

Interestingly, Chandler ends up granting summary judgment to the defendants because it would be futile:

The solicitation of proxies for the shareholder vote approving the merger of Shire and Transkaryotic occurred over three years ago. The merger has happened; “the metaphorical merger eggs have been scrambled.” An injunctive order requiring supplemental, corrective disclosures at this stage would be an exercise in futility and frivolity. Indeed, there are no longer shareholders of Transkaryotic from whom to solicit proxies.

This makes sense to me. The point of a fiduciary duty of disclosure ought to be limtied to ex ante remedies designed to ensure that the corporate governance mechanisms under state law are validly followed. As a practical matter, ex post relief long after the transaction in question has been effected is more properly the province of federal proxy litigation. As a legal matter, such a claim might well not fall within the scope of the Delaware exemption to the PSLRA/SLUSA regime.

There is also a useful and extended analysis of the independence and disinterestedness of the outside directors. Bill and Mark might go for this section, as it’s very fact intensive and provides an excellent example of the nature of the inquiry into these critical issues. (Interestingly, Strine’s Oracle opinion is not cited, suggesting to me that Oracle is in fact limited to the special case of demand excused cases.)

In the course of that section of the opinion, Chandler says something very interesting:

the law requires and encourages director involvement. FN 94

FN 94. See, e.g.,8 Del. C. § 141(a); Hollinger Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 374 (Del. Ch.2004) (“[T]he director-centered nature of our law [ ... ] leaves directors with wide managerial freedom subject to the strictures of equity, including entire fairness review of interested transactions. It is through this centralized management that stockholder wealth is largely created, or so much thinking goes.”); cf., Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U.L. REV. 547, 605 (2003) (concluding that “the board of directors is not a mere agent of the shareholders, but rather is a sort of Platonic guardian serving as the nexus of the various contracts making up the corporation.”).

Is Chancellor Chandler endorsing director primacy? If so, it could not be more timely, since my book on director primacy is due for release on July 28th.

BTW, the passage Chandler quotes from Leo Strine’s Hollinger decision is followed by a footnote in which Strine wrote that:

FN39. One of the articulate advocates of this view of our law is Stephen Bainbridge. See, e.g., Stephen M. Bainbridge, Director Primacy in Corporate Takeovers: Preliminary Reflections, 55 STAN. L.REV. 791 (2002).

Director primacy. Catch the wave.

HT: Francis Pileggi, who analyses some of the case’s other key points.

The Beatles and Me

My blog has been cited in the same number of judicial opinions as Beatles songs. Interesting.

The CSX Proxy Contest

A Reuters article on the controversial CSX shareholder meeting quotes your truly:

U.S. railroad CSX Corp’s unusual decision to postpone releasing results of a shareholder vote looked to some like a desperate attempt to delay the inevitable appointment of several dissident nominees to its board.

But the company has bought itself a month before it has to announce whether any of the five dissident nominees of activist hedge funds The Children’s Investment Fund (TCI) and 3G Capital Partners made it onto the board—the two funds claim they won four seats on the 12-member board—giving it time to rethink its strategy, and perhaps alter the vote.

“A delay is in the interest of the incumbents as it gives them continued control of the corporate machinery to seek fresh options,” said Stephen Bainbridge, a professor of law at UCLA. “(CSX) may have lost narrowly and will need to go back out there to persuade select shareholders to change their vote.”

If that were the case, the Jacksonville, Florida-based railroad’s rarely used strategy to put off publishing the vote results until July 25 would look more like a shrewd move than a desperate gamble. ...

... law professors say that as Ward adjourned the meeting rather than ending it, the meeting is still in session and votes could still be changed or added. This provides CSX with time and room to maneuver, but also opens up the risk of lawsuits from TCI and 3G over the delay.

I am reminded here of State of Wisconsin Investment Board v. Peerless Systems Corp., 2000 WL 1805376 (Del. Ch.), in which Peerless sought shareholder approval of amendments to its stock option plan, referred to as Proposal 2, which plan benefited its directors. SWIB opposed Proposal 2 and solicited proxies against it. At the annual shareholder meeting, the proposal did not pass. The chairman closed the polls with respect to two other proposals, but adjourned the meeting for 30 days without closing the polls with respect to Proposal 2. During the adjournment period, Peerless selectively solicited shareholders. When the meeting resumed, Proposal 2 passed. SWIB sued.

Because the Peerless board acted for the “primary purpose” of interfering with the free exercise of the shareholder franchise, the Blasius Indus. v. Atlas Corp. standard applies. Under that standard, the board must demonstrate that there was a “compelling justification” for its actions.

The chancery court drew a number of unfavorable parallels between Peerless’s conduct with respect to Proposal 2 and its handling of other votes. Peerless claimed it adjourned the meeting due to low turnout, for example, but the turnout at a recent special meeting to vote on an acquisition had been even lower but there had been no adjournment. The selective solicitations and absence of general disclosures were also inconsistent with Peerless’s claimed reasons. The court concluded that management adjourned the meeting solely because it was dissatisfied with the result of the voting.

The court evaluated no fewer than six alleged “compelling justifications” proffered by Peerless. At the end of that process, the court expressed doubt as to whether the defendant would be able to establish any of them at trial, but concluded that the state of the record does not allow summary judgment for either side. I believe the case thereafter settled.

Blasius has always been controversial and Vice Chancellor Leo Strine recently suggested scrapping the Blasius standard in favor of one based on Unocal. If CSX does try a selective resolicitation and litigation results, this high profile proxy contest could present the Delaware courts with an opportunity to recast Blasius.